The Green Investment Bank - Environmental Audit Committee Contents

Examination of Witnesses (Question Numbers 106-133)

David Paterson, Ben Warren and Ingrid Holmes

1 December 2010

Q106   Chair: I welcome you, especially on such a cold day, for coming in to give evidence before what we think is a really important inquiry. We don't usually give people before our Committee an opportunity to launch into a statement, but if you want to introduce yourselves, perhaps with just a sentence on why you feel this inquiry is important and what you'd like to see come out of it, that might be helpful for us to get the perspective that you have in terms of the starting places that you come from. Mr Paterson?

David Paterson: Thank you, Chair. I'm David Paterson. I'm Head of Corporate Governance at the National Association of Pension Funds. The NAPF is the trade body that represents the interests of company-sponsored pension schemes, and I'm here because we regard the initiative that has been taken with the Green Investment Bank as important to pension schemes, but it's also very important that this Committee understands the objectives pension schemes have for their members and, frankly, some of the limitations around what funds can be expected to do.

  Chair: That's very helpful, thank you. Ingrid Holmes?

Ingrid Holmes: Hello. I'm Ingrid Holmes. I'm the Programme Leader at E3G, which is an environmental NGO with a global focus. I'm here because we believe the Green Investment Bank is the key missing part of the architecture framework that will be needed to shift the UK to a low-carbon economy. It will play an analogous role to the Committee on Climate Change as a critical friend to Government in helping to design bankable policy frameworks and deliver the overarching strategy that hopefully will emerge from work by Infrastructure UK and the Treasury.

  Chair: Thank you. And last but not least, Mr Warren?

Ben Warren: Thank you. Good afternoon. My name is Ben Warren. I head up Ernst & Young's energy and environmental infrastructure practice, which employs about 70 people here in London, advising clients essentially on raising capital for energy and environmental infrastructure projects. Echoing Ingrid's words about the importance of the Green Investment Bank, I think what we've experienced in the UK is a rather slow uptake of investment in renewable energy. We're certainly lagging behind a lot of our foreign counterparts in relation to a dynamic green economy, and a dynamic and, importantly, sustainable green economy. I think the Green Investment Bank has the potential, really, to leverage a lot more capital into the UK sector. On that point—the point why that is important—we estimate that the UK energy sector is short of about £340 billion between now and 2025. That's a very substantial amount of money. If that money is not invested, we will not decarbonise our energy sector. We will continue to remain very energy-dependent on fossil fuels, which we do not produce indigenously in the UK, and our lights will go out. I think the Green Investment Bank has a very important pivotal role to play in enabling capital to flow.

Q107   Chair: Thank you. I think that leads us straight into our first question. We all have a copy of the Green Investment Bank Commission's report, which sets out various barriers to raising the scale of finance that's actually needed for the green infrastructure. We were wondering if you agree with the Commission's assessment on that and if not whether you have any suggestions of your own as to how, once operational, there could be, if you like, ways of overcoming those barriers to investment?

David Paterson: I think that the Commission is right to identify the problems around barriers to investment. To our mind, the way to resolve those barriers, or to begin to resolve those barriers, is to structure any bonds or other investment offerings to compete directly with the more plain vanilla investment offerings in the marketplace. There is very little premium—I think there's no premium, in fact—for something labelled green. There is a premium for something that carries a strong Government guarantee or Government backing and, in my world at least, there is a significant shortage of long­dated index­linked securities that pension funds can buy and hold to maturity. There is a gap in the market at that end, which, frankly, the Government currently are not filling.

Ingrid Holmes: Yes, I would absolutely agree with the Commission. There are three critical barriers. The first is the scale of the investment that we need to move over a very short time period, something between around £750 billion and £1 trillion over the next 15 years. This is happening just at a time when the markets are constrained and also quite risk-averse, so there are issues about recycling capital investments and issues about how we bring in the institutional investor capital. We need to move this money just at a time when there's lots of risk aversion, as I said, but also we're looking to invest in lots of low-carbon technology, some of which we understand, others which we don't fully understand and which can have quite a high risk perception. Markets traditionally aren't that brilliant at handling a huge amount of risk, so if we want to move at the pace we need to meet our carbon targets, I think there you have your case for targeted public funds to invest alongside the private sector.

The final issue I think is also the aggregation challenge. We traditionally focus on very large investments. There's lots of talk about offshore wind, but actually there's a huge amount of low-carbon acquisition we could do around energy efficiency, community energy—small little projects, very fragmented, high transaction costs. Traditionally, the big market players won't tackle those because they can't make a big enough return. Building on that, it is not a coincidence that if you look at development banks across Europe, there's always a strong focus on the housing sector, energy efficiency, SMEs. I think that encapsulates the big issues. If we don't use a bank, the alternative is to ramp up rewards to investors, which is not only expensive, but it's not going to get us there at the scale we need it to and as quickly as we need it to.

Ben Warren: Finally, to avoid repeating, you asked about what the GIB could be doing operationally in this space. The report talks about the GIB focusing on lowering risk in terms of the investments in the low-carbon sector. We would totally agree with that point of view. I think for far too long Government policies tried to address problems through reward­based mechanisms, whether that be carbon price, renewable obligation certificates or feed­in tariffs. They go some way, but at the end of the day this is about getting risk and reward in the right place. I think the GIB operationally could do a lot around providing risk­based products to reduce the inherent risk in investments and, therefore, enabling more private sector capital to flow than can currently.

Q108   Chair: Just to play devil's advocate, if we are going to get this Green Investment Bank it will be, if you like, policy that has been created by Government. Isn't that in some way interfering with the market? Would there need to be any changes, whether in regulation or in other aspects, that might make, for example, pension investments go in that direction? Do you see what I'm saying? What are the risks of actually doing that and, if the Government change perceptions, what are the corresponding changes that would be needed as well?

Ben Warren: Do you mind if I lead on that?

David Paterson: Yes, do.

Ben Warren: I think, very importantly, the Green Investment Bank shouldn't be competing with current sources of private capital. It shouldn't necessarily be investing alongside sources of private capital or competing for deal flow with those sources of capital, but rather enabling those sources of capital to get into investments. I think the key question here is around the role of the Green Investment Bank. What role does it perform? Does it perform as an investor or does it perform as an institution providing risk mitigation products that enable private sector capital?

Q109   Chair: But I am just wondering in terms of pension funds and so on, won't it perhaps make certain long-term policies that you have slightly irrelevant if it's going to change the whole value that is put on different investments?

David Paterson: I think they go back to the basic premise, which is that any offering from the Green Investment Bank has to stand up to scrutiny against other investment opportunities that are presented to pension funds. I don't think there's a real danger of crowding out, if you like. The risk at the moment, I think, is of the credibility of the Green Investment Bank's offering as a new entity with a slightly unknown—well, at this point completely unknown—track record that investors can come to rely on. Building that track record, building that confidence in the bank and the way in which it goes about its business is a very important part of what the challenge represents.

Ingrid Holmes: I would also make the point that we already interfere in the markets. That's what a renewables obligation certificate is, or a feed­in tariff, or any other kind of incentive. In terms of crowding in or crowding out private sector capital, I don't think we've got a problem at the moment. There isn't that much investment going on, full stop. But I think the way you manage that is through a strong governance structure that sets out where the Green Investment Bank steps in or not. The investment has to be additional and it has to be alongside the private sector. I think there's also a perception that somehow the Green Bank will finance all of energy efficiency, or all offshore wind or all other infrastructure. That's not the case. I think it's more that we want it to invest in the first few gigawatts so that things go from being unproven to proven. CCS is a great example. Once you actually see operational assets, I think the markets take a very different view of whether something is risky or not. There's a great saying, "Investment banks will be first in line to finance your second project". That's what we need the bank for—to go first on those riskier areas.

David Paterson: Chair, could I just add one further observation? I think we have to remember that investors are now international and, therefore, in thinking about the market for Green Investment Bank products we've got to think globally. If I talk about my particular sector, we're not anything like big enough to do what is wanted. On the other hand, if the offerings are structured in the right way, you will bring in Dutch pension funds, the sovereign wealth funds and others. The bank has to have international credibility. It's very important in order to raise the money you want to raise.

  Chair: Thank you.

Q110   Dr Whitehead: A number of people have been informing us that green bonds are a particularly good way for institutional investors to invest in Green Bank. Indeed, Ingrid, I believe you wrote a little while ago, "We believe that a series of targeted bonds with their proceeds ring-fenced for investment in tangible green infrastructure could capture investors' attention, whether they are individuals or institutions such as pension funds looking for financial return over many years". Do you think green bonds are one of the key ways of securing investment and, if so, what would they look like? How would they differ from more conventional bonds?

Ingrid Holmes: Shall I do the layman's version and then we can move to the technical? I think when we first started talking about green bonds it was largely the political construct—to just kind of shine a light on the fact that so little money is going into low carbon at the moment, and yet vast volumes of capital are needed, which would be great for these guys if we could get the investment opportunities there.

In terms of what they actually are, they need to be bonds—regular bonds that basically have the proceeds ring­fenced for green projects. Then you need to think about what the pension funds, the insurance companies, look for when you're structuring a green bond, and it is really this plain vanilla thing. Correct me if I'm wrong: an investor will look at who's issuing it, what the rating is, the price, the tenor of it, how long it will be around, and how much liquidity there is. There are different views on these—what's desirable and what's not—but fundamentally those are the factors that you need to be thinking about fulfilling when you're designing your policies that, ultimately, you will fund through the bond markets. I guess I'd say that what you take home from that is this: if you want to access this future green bond market, we need to be thinking now about how we design our policy frameworks to create low­risk investments that can then be securitised or whatever else is needed.

There is also a split. There will be green bonds issued by green institutions. A Green Bank bond will probably be a quasi-Government sort of debt. Then there are the market-based green bonds, and I think that's where you want to get to. That's where the big volumes will ultimately be. But I don't think we're going to get market­based green bonds until the Green Bank starts to get some of these activities going, which means you need to raise your Green Bank green bonds first to kick-start the market.

Q111   Dr Whitehead: It needs to be a proper, fully functioning bank?

Ingrid Holmes: Yes. You need enough money to buy assets and reactivate things like the asset­backed security market that has suffered so badly from sub­prime mortgages, collateralised debt obligation and investors' fingers getting burnt. Once you can kick-start that as an honest broker, I think these markets will take off on their own, but I just don't believe they're going to happen on their own.

Q112   Dr Whitehead: What sort of size would that market be if that were to be successful?

Ingrid Holmes: I think there are different views. We talked to a number of fund managers who said you could start, for example, with Green Bank bonds with a fairly modest issuance of a few billion pounds. The important thing is that you have an ongoing pipeline to deliver this liquidity. Nobody wants a few Green Bank bonds that are stuck on its books if the whole thing goes wrong, which we absolutely hope it won't. It's this commitment to long­term bond issuance that will be important, so you create this liquidity, because all pension funds need to be able to trade those bonds and you can only trade if you've got that volume.

Q113   Dr Whitehead: Allegedly, a member of the Green Investment Bank Commission spoke recently in response to certain people who appear to be opposed to the idea of the Green Investment Bank operating either as a proper fully fledged bank or issuing bonds. He was alleged to have said, "Frankly, if it doesn't—that is, if it doesn't issue Government­backed bonds—there's no point in it existing. If we were only ever going to do one thing, the green bond is the thing we need to do". Would you agree with that statement?

Ingrid Holmes: I guess I would say that if we needed a fund we would have been asking for a fund. We don't need a fund. We've done funds to death. There are lots of different Government funds out there. We need something that is a platform that can provide a variety of tools to back policy and to de­risk so that we can get private capital in. That means you need to be able to do equity; you need to be able to do debt; you need to be able to do securitisation; you need to be able to provide technical assistance. These things can't be provided by a carbon trust-plus—a quango—and it can't be provided by a Treasury­run fund.

I think this issue about whether the GIB issues bonds is probably linked into public balance sheet management and a number of other issues. We have to be taking a long­term view on this. I think we can get to a place where a Green Bank can be off balance sheet and raising its GIB bonds ring­fenced from the public balance sheet, but we're going to need to do some early investment bringing this stuff on balance sheet in the early days to build out to that place where we can have an independent bank. I think some Treasury officials may have some issues around the Green Bank issuing its own debt. I think those are absolutely manageable. There are safeguards you can put in place. Plenty of other countries have done this and I think we have the competency to do it here, too.

  Chair: Mr Warren, I think you wanted to come in, and then I'll bring in Sheryll.

Ben Warren: Thank you. Our estimates are that the pension and insurance funds markets, annuity funds with defined benefits, and pension schemes that are mostly likely to want long­term, low risk, low yield investment returns could probably contribute something like £40 billion to £60 billion to the UK low-carbon sector over the next 10 years or so. If the hypothesis is that that's the sort of money we're trying to attract into the UK energy sector and low-carbon sector, then bonds are a very suitable, efficient, convenient way to attract that capital. Green or not green, it doesn't really matter; they're no different from any other bond.

Q114   Sheryll Murray: I just want to go back to the UK's accounting policies, which obviously might prevent the Treasury from allowing the Green Investment Bank to raise its own funds. Do you have any advice for Government on how to set up green bonds so as to minimise their impact on the national accounts?

Ingrid Holmes: I think in the first instance—

  Chair: Sorry, I think we were just—

  Sheryll Murray: Sorry, I thought this was relevant, bearing in mind that they've just spoken about it.

  Chair: That's fine, yes.

Ingrid Holmes: To be clear, if you want to hit mainstream investors, a bank issuing bonds without any track record and without any rating will struggle to get people interested unless you have a Government guarantee in the first instance. I don't think you need to provide a statutory guarantee to the bank so that everything it does is guaranteed, but those first tranches need to be guaranteed. I think you need to see it as a marketing PR kind of splash—that the Government are fully behind this institution and fully committed to the low-carbon agenda. As a track record is built up and the investment team is proven to be savvy and you have assets on your books, you could move to a place where you have an implicit guarantee or no guarantee, and then you don't have any impact on the Government balance sheet. But I think it's a short-term hit for a long-term gain.

The other thing to remember is that this is not like spending on welfare. This is spending on an institution that will then invest in assets, so there is additional value there. I think people understand that, and I think people understand that that is also how you deliver your growth agenda. It's through that investment in assets infrastructure that we deliver growth. I think we need to broaden that debate out from the pure balance sheet impact discussion to what role this plays in delivering growth in the UK under the low-carbon banner.

Ben Warren: As the only accountant on the desk, I think what I would say is that Government accounting in terms of balance sheet treatment is very complex. It's not the bonds or necessarily the instruments or the investments that the bank makes itself that are going to impact Government balance sheet. It's the way the bank is capitalised and what support the Government provide behind that in terms of capital contributions, or in terms of guarantees, that is going to impact its underlying balance sheet treatment. But I would certainly echo the view that, I think, the key question here is: do we want a long-term, secure, decarbonised energy sector with lights on when we want to switch them on, or do we want to minimise HMRC deficit?

David Paterson: One small point from the pension funds perspective: I agree with what Ingrid has been saying, but I want to emphasise that pension funds in the UK are now essentially in a sort of de-risking mode. So they're tending to be selling equities and buying Government bonds or corporate bonds. Therefore, I absolutely support what she said about looking for something that contains with it robust Government support or a guarantee at the outset. Any institution needs that. Over time credibility will be built and over time it can move into a self­sustaining, self­supporting structure.

Q115   Caroline Lucas: I wanted to do one quick follow-up on something that Ingrid said. You were talking about short-term hit in terms of the balance sheet. What does short term mean, roughly speaking, in this context? Because on many of the pieces of evidence we've heard this has been a real sticking point, so it would be nice to probe that a bit more.

Ingrid Holmes: The honest answer is that we don't know. I think some of the longer term estimates are around 10 years, but it could be less than that. It depends on what the bank does. If the bank buys operational assets that it can then refinance quite quickly and prove itself as savvy, you can then go and get your rating and you're away. If you go for early investments in projects that need to go through planning, construction and then an operational phase—which might happen with offshore wind, for example—it could take 10 years to exit that investment. What the bank chooses to prioritise in the early years will be critical to determining how quickly that track record is established and how quickly you can establish an off balance sheet bank, because you've got all your different bits and pieces in place—your track record, your governance structures, your statutes if you're going for that, and equity capitalisation.

David Paterson: I think, frankly, you could take a line from other banks such as the EBRD, which after all faced huge challenges when it started, and yet quite quickly gained real credibility.

Q116   Caroline Lucas: I think those precedents are quite useful, because when we've been talking to Ministers before that has been an issue. The question I actually wanted to raise was on risk, because it has been put to us that green infrastructure investments can be higher risk, and that that has hampered investment. Assuming that that risk can be mitigated, do you think that you're sure that green investments provide enough of a financial return to be attractive to potential investors? Is that a concern in your mind or is it completely clear that it is attractive enough?

Ben Warren: I think, historically, the green infrastructure sector has delivered returns over and above other infrastructure sectors. A large part of the historics in certain sub­sectors of the green centre has been the fact that there's been more risk in those investments, so they have to deliver more return. The challenge here—where the Green Investment Bank can make a very big difference—is to make green investments look much more like other, more vanilla infrastructure investments and thereby attract the big pools of capital that are there. The green investments themselves quite typically are, in essence, guaranteed by Government, or guaranteed indirectly through levies on the rate payer to deliver a return through the various incentives and support mechanisms that are there. The income part of investments is actually very secure for nearly all the green infrastructure.

Ingrid Holmes: I'd echo a lot of that. The bank isn't going to mitigate all risk. You've got to think about this again in the context of what the policy framework is, which will highlight what your rewards are going to be, but should also mitigate as much risk as it possibly can. The bank then comes in to move the investments from being theoretical to practical and deployed. When people talk about these investments as risky, I think you need to separate out what people perceive as being risky—just because it hasn't been done and because the policy frameworks are new—and what actually is risky. Those are two very different things. Again, I think it's the role of the bank to go in as an early investor to deliver proof of concept on some of these new technologies and business models so that it can step back and the private sector steps in. Onshore wind was, once upon a time, risky. It's not risky now.

David Paterson: I think it's important to distinguish between high risk and transparency of risk. To my mind, the important thing is that the risk is transparent and that allows investors to price it properly. It's not knowing what the risk is that's the real problem. People will buy high-risk investments; they have done since time immemorial. They'll carry on doing it, but they want to know exactly what risk they're taking on.

Q117   Chair: Following on from that, could I just ask how people will know if they're buying into something which, because of the carbon issues, is probably not such a good, long­term investment? How will they know what is good and what isn't?

David Paterson: This is the skill of the investor, if you like. You look at the regulatory framework within which you're operating; you look at the potential growth and demand for the particular product, if it's technology that's being developed, and you put a price on it. It's complicated but the market will price it, and the market will price it probably quite efficiently if supplied with sufficient information.

Ben Warren: May I provide an illustration of one of the particular barriers that we face? If we take the carbon capture storage part of the market, which is a big bet being taken by Government in relation to the success of that market and the contribution that carbon capture storage will make to the overall energy mix, a lot of the entities that are out there developing projects at the moment are trying to understand the risk of carbon leakage from sub­sea storage facilities and the environmental impact of that. As is usual in business practice, they go and talk to their insurers and say, "How much does it cost us to cover off this risk?" It's not a thing that's ever been insured before, so the insurance market and the underwriters are not prepared to underwrite that risk without knowing what it is. Why should a utility do the same? And why should the utility's shareholders let its board of directors do the same? So it's taking out those unknowns. Talking about risk products that the bank could successfully provide, it's providing some time of understanding so that that risk is understood in practice, and it can then be priced by the market and the market can then deliver. At the moment, no one knows.

Ingrid Holmes: And if they can't price it, you're not going to do it. There's always the option not to invest.

Q118   Caroline Nokes: Can I move on to time scale? The Government have indicated that they wish the Green Investment Bank to be operational by September 2012, with the first investments happening some time after that. But we took evidence from the Green Investment Bank Commission, who indicated that they thought it would be beneficial to accelerate that time scale and get the thing set up as soon as possible. What are your views on whether institutional investors are ready to start investing now?

David Paterson: It is a complicated question. The climate for this sort of investment is currently better than it has been for a long time, and you can thank BP for that. Because the fact is that suddenly in the past six or nine months, environmental issues and all that goes with it—the whole environmental, social, and governance agenda—has become much more vivid in investors' minds. Therefore, I sympathise with what Bob Wigley was saying the other day, which is that the climate is actually good for us at the moment. Investors' preferences will move on inevitably, but if it can be done sooner then I think that is better. It's got to be done well, though. There's no point in going off in a half-baked way. That doubles the risk, and banks do take time to structure properly.

Q119   Caroline Nokes: Are the funds readily available for investment?

David Paterson: Yes, there are funds available from the pension fund market. There always are, but not on the scale that Ben was suggesting, because that clearly is a huge amount of money for an industry. We have £800 billion within our membership, but £220 billion of that comes from the top 20 members. There's a very long tail of very small funds for whom this, frankly, is not an investment option at present, so you're looking at the big funds who would have money today. In fact, USS have already pledged £300 million to green-type investments. USS is our second largest pension fund.

Q120   Caroline Nokes: Moving on from that, do you think there would be any knock­on effects of a Green Investment Bank channelling institutional investors' finance away from existing investments and into green infrastructure? Does that lead to a risk that funds will potentially be diverted from other environmentally beneficial projects?

David Paterson: I think if we start from the point of view that funds are not heavily invested in the area but funds are finite, then the money will move from other pockets into this one if the terms are right. I would see this as fitting into the low-risk pocket the way things are at the moment, so it's competing really with money that is currently invested in Government bonds and corporate bonds rather than equities. Provided that the terms are right, and particularly as there is a space at the long end of the market, I think they could find that there was actually capacity.

Q121   Peter Aldous: Should the Government be doing any market testing about what a Green Investment Bank would do to provide evidence that it should actually work? If the answer to that is yes, what should that market testing be?

Ben Warren: I would certainly say yes. I think it's imperative that the Government have a very clear understanding of the market failures that are being addressed and the barriers that are there, and get a proper appreciation from what I like to call the people with the live ammunition—the current investors, whether they be utility companies or infrastructure funds—of what the real barriers are around the breadth of the UK low-carbon economy. There are lots of technologies within that, and all those different sub­sectors have their own specific issues. I'd say first and foremost that the Government need some real clarity on what the barriers are and what the market failures are. I think then, secondly, a proper assessment of the market's appetite to invest is needed, as well as an assessment of pension and other annuity funds and other potential investors, and the sorts of instruments that they would like to invest in. Going back to the timing question, I would not, however, advocate a long consultation period to do that. I think it would be quite expedient to get an independent party to undertake that market testing on behalf of Government, that has the breadth of relationships to leverage off but, importantly, is independent. It doesn't have any money to make out of investments.

Ingrid Holmes: Adding to that, I absolutely think the process run inside Government has been incredibly opaque with very ad hoc submissions from the market. There's a tendency to say, "We've consulted with financiers", not recognising that there's a whole ecosystem out there, from venture capitalists to private equity to banks to infrastructure funds to pension funds, all of whom have different needs and different views on this. I think it should be an external facing consultation for the shortest amount of time, but with an attitude of, "Actually, this is what we're thinking of doing", and really concrete ideas to get the debate going and getting views from the market, because I think there are very different views. There are actually different views on what kind of yield institutional investors are looking for from GIB bonds, for example. There are those who are looking for AAA rated, but there are others who may be looking for a lower rating because they actually want a higher yield on it. I think we need to bottom that one out and get some financial conversations going.

Q122   Peter Aldous: Just an extra question for you, Mr Paterson: have the Government been in contact with any of your members to get their views about what a Green Investment Bank should do?

David Paterson: They've been in contact with one or two—not many, frankly. But they have had conversations with our largest scheme, which is the BT pension scheme, who have always been in the vanguard of what I would call responsible investing in the broadest sense. But there is more work to be done there. I think Ingrid and Ben are absolutely right that there's a need to talk to investors, which we'd be happy to facilitate.

Q123   Peter Aldous: When the Green Investment Bank is up and running and it's operational, is there a worry about the Government backseat driving? And do you think that might be helpful or harmful to the bank?

Ingrid Holmes: You have to lock that one down in your mandate and your governance structure. One of the live debates at the moment is whether you need a statute at the bank, and I would say absolutely, yes. I think we need to make this as separate from short­termist political intervention as possible. That's something you'll see replicated across European investment banks who have a clear governance structure that separates Government from the bank, and then you lock it down in law.

Q124   Chair: I would like to go back to what you said, Mr Paterson, about the Government having contacted very few of your members. You mentioned BT. Would you have expected the Government to have contacted more? Would you have expected there to be some kind of mechanism for that dialogue to take place, or is there a dialogue mechanism there? Is that something where perhaps more work needs to be done?

David Paterson: I think more work has to be done. Not unreasonably, the Government started with some of the largest schemes and, bearing in mind the elongated tadpole shape of our industry, that's the way they should go about it. But I think there is a need to talk to more pension funds and more investors, actually—broadly speaking, it's not just pension funds, it's the people who invest for pension funds as well, which are the asset management houses—and to explain what the opportunity is as seen by Government and to explore with these organisations what the risks are.

Q125   Chair: Is that something that you're being proactive on or are you waiting for the Government to be proactive on that?

David Paterson: I'd have to say that we would be waiting for the Government to be proactive in many ways but given our role as a representative body for company-sponsored pension schemes, we would be happy to help if we could in any way.

Q126   Simon Wright: I have some questions about how we can make the UK a world leader in this area. We heard in a previous session the view that it's important for the GIB to work internationally and to draw investment into the UK. Does the UK lose out because investment in green infrastructure is going abroad, and what are the reasons for this? Alongside a Green Investment Bank, what else is needed to keep green investment in the UK?

Ben Warren: The international picture is an interesting one. There are vast amounts of capital being invested in green technology and green infrastructure across the globe. Some numbers for you: there was $113 billion invested globally in clean energy in 2008; $32 billion in the Americas, $60 billion in EMEA, $20 billion in the Far East; and very small amounts dotted around Asia/Pac—or Australia to be more accurate. The UK at that time accounted for $4 billion of that total. I used 2008 numbers because that was before the impact of the financial crisis had really impacted the investment in this space. The financial crisis led to quite ambitious green economic stimulus programmes being launched across the globe, and I think that when we compare what the UK Government are doing compared to other Governments in terms of capital commitment, it's quite staggering. HSBC numbers: they estimate that climate stimulus disbursements for 2010 will total something like $40 billion in China and $20 billion in the US. The UK comes in behind Japan, South Korea, Germany, France, Australia and Canada. In 2009, to give you a comparison, the UK is estimated to have disbursed $390 million of its green economic stimulus package compared to $40 billion in China. For the UK to be a world leader, I think I would suggest that its ambitions need to be slightly higher from where we're seeing them right now.

Ingrid Holmes: I'd reiterate that, and say more generally that I think there's a huge amount of interest in the UK market. It is recognised that we have vast offshore resources. I think there is a lot of international investment in operational energy assets now. But we don't have a catalyst to deliver this investment, and until a bank that can help create solid, bankable policy frameworks is in place and can help manage the risk in the early projects, I just don't think we're going to see capital flow at volume. Just to add to that, we have Infrastructure UK and the Treasury looking at our national infrastructure plan, who have said, "Infrastructure investment is one of the best ways to deliver jobs and growth". We've got a question mark over where our 2.5 million private sector jobs are going to come from to meet the OBR growth forecasts. It just seems like there's a big Green Investment Bank-shaped hole waiting to be filled so we can start to see this money flow.

David Paterson: We, as investors, are indifferent as to where we invest in green technology. We will invest where we think the best opportunities are, and if those turn out to be in the US or China, so be it.

Q127   Simon Wright: What should the Government do to ensure that the GIB is actively able to tap into the international finance markets?

Ben Warren: I think, building on David's comments, that the global capital market is a global market and is competitive. Any market that is looking at itself as a destination for capital has to compete with other global markets, and that's in the context of the UK and the sovereign risk of investing in the UK. Infrastructure is a general asset class, energy is an asset class within that, and low-carbon energy is an asset class within that. If the UK is not as attractive a market to invest in onshore wind power as France is, then the money will go to France first.

David Paterson: But we are a global financial centre so we actually have enormously strong infrastructure when it comes to raising capital, which I think can be put at the disposal of this particular enterprise.

Q128   Simon Wright: Are there any areas of infrastructure investment that should be prioritised now to get the UK ahead globally?

Ben Warren: One of the key challenges for Governments, for policy setters, and for regulators is public engagement in this whole agenda. It's an agenda area that has got a huge amount of press, but at the end of the day the public have always been very disengaged in the UK, around energy particularly. And why is that? I think in the UK we see foreign­owned utilities predominant in the sector. We have limited employment opportunities, particularly in the green energy sector, and limited green collar jobs and limited investment opportunities for people as individuals to invest in the green sector. To reiterate, why is all this important? Because it's the public that have to pay for this investment. It's the public that have to pay for this investment through their tax bills or through their energy bills. If we don't get the public engaged, energy policy will continue to stumble along the way that it's stumbled along in the last 10 years. Public engagement is a key theme, and one of the priorities is areas that are going to deliver real jobs on the ground tomorrow. For me, that is a key priority.

Ingrid Holmes: I think that translates to energy efficiency in the first instance. That's blokes in vans—it's regional, and it's stuff that can happen tomorrow. Money for the green deal is one area and I think you also need to look at strategic investments like smart grid. Once we have smart grid we can start to do lots more interesting things with renewables and transport and heating technologies. The third area, I'd say, is offshore wind, simply because there's such a vast opportunity there, but we need to couple that with innovation policy to deliver a supply chain so we can actually bring real jobs to the UK.

Q129   Neil Carmichael: Well, oddly enough, you have just answered the question I was about to ask. I suppose the real question is what kind of national energy policy you think we need to give the comfort that is necessary to the Green Investment Bank. You've really been referring to that sort of thing throughout your answers.

Ingrid Holmes: Energy market reform is one of the live issues at the moment. I'm not an expert on that, but if you think this is a complicated discussion, that's about 10 times more complicated. One of the things is that you need to provide as much certainty to investors as possible, because that brings down cost of capital. Ideally, it would be good if we could move away from having the renewables lobby pitted against the nuclear lobby pitted against the heat lobby. Can we think about what we want to achieve strategically and then design a market around that? On the energy efficiency side of things, I think we're making progress, but there's still a huge number of risks and a lot more thought that needs to go into that policy, designing it with your end securitisation in mind, and we're certainly not there yet.

Q130   Neil Carmichael: We might need to be more strategic still because, of course, we've got the European dimension, which Ben has touched upon by reference to utilities and so on. How do you see that unfolding? In a European market, where would the Green Investment Bank be placed?

Ingrid Holmes: There's another issue on interconnectors and liberalised EU energy markets. I think the question there, really expanding the remit out, is how we pay for interconnections and how we compensate poorer and richer countries. That is an EU budget debate, and that's a debate that will be happening now in Europe. We then need to think about where the European Investment Bank fits in and the Green Bank fits in, but I could see a role for the European Investment Bank and EU budget funds in funding that intercountry connection, and the Green Bank focusing on our own infrastructure at home.

Ben Warren: In the UK, energy policy has always been looked at in isolation. If we compare and contrast that to a country like China, where energy policy is looked at absolutely alongside economic policy and absolutely alongside industrial policy, energy policy is put in place to drive local demand that drives local manufacturing that drives, eventually, a global export market. Because energy policy in the UK has been looked at in isolation, we haven't generated the jobs and we haven't got public engagement. I think policy around this whole area needs to be looked at strategically in that sense: how do we set energy policy that delivers jobs, makes it worth while, and puts taxpayers' pounds back into the UK purse?

Q131   Neil Carmichael: Yes, because you wouldn't need to go as far as China to find a better energy strategy than what we have; just across the Channel would probably do the trick. That's the point I'm driving at, really. I think all of you have an interest in seeing that that is—

Ben Warren: If we take a close neighbour, Germany, as an example, their state­owned bank, the KfW, provides investments into projects. It guarantees third-party debt being invested into projects and it provides export guarantees on German kits being exported outside Germany, in particular wind turbines in the UK marketplace. In a financial institution sense, there's a lot being done there to stimulate jobs, stimulate economic growth, and stimulate tax pounds for the purse. I think that's true in the US and many other markets as well.

  Neil Carmichael: Yes. Thanks.

Q132   Katy Clark: Continuing to look at the UK's attractiveness as a place to invest, a key aim of the Green Investment Bank seems to be to deliver infrastructure that will reduce emissions. Would large investors have an appetite to invest in the Green Investment Bank if they were supporting projects overseas where it might be that emission reductions were easier to achieve? How do we make sure that we get that investment when we are competing with other markets?

David Paterson: As I said before, the investor world is indifferent, I'm afraid, as to whether it is investing in green projects in the UK or in China. It will invest primarily for risk and return. If the risks are too high, it will not accept an investment in China or the UK; it will look for a reasonable return commensurate with the risk it is taking. We wouldn't, in fact, tend to look at the world through that particular lens, unfortunately. There's obviously a limit to how much money people will invest in what they perceive as politically higher-risk areas of the world, and that makes the UK attractive because it is a very safe place to invest. But the starting point must be to provide an opportunity that is seen to be attractive in competition with other kinds of investment, be they green or otherwise.

Ingrid Holmes: There's a practical issue in that the bank will start small, so I think you need to prioritise quite clearly what your investments are going to be that will deliver maximum UK benefit. That doesn't mean those overseas investments won't come later, but I think perhaps the most practical role that the bank could do is to act as an agent to disperse "fast-start" climate money. This is the successor to funds through carbon markets—actual direct country to country investment that the bank could facilitate through other development banks overseas. [Interruption.]


Q133   Chair: There is a Division in the House of Commons. We've just got one quick line of questioning, and before we go and vote we're going to have to ask you, if you wouldn't mind, to write in on this. How do we get the skills that we need for finance into the Green Bank—bonuses, expertise, etc.—combined with the more strategic role that the Green Bank would be taking in terms of the whole infrastructure? We haven't got time now and I suspect that we might have a couple of Divisions, so it's not worth prolonging our session after the vote, but we would be very interested in any comments you'd like to send back to us on that or, indeed, anything else that you feel that we didn't cover in this session before the votes in the House of Commons caught up with us.

Neil Carmichael: And also how to attract the best people to the bank both from the financial world and the green technology world and encourage them to really get going.

Chair: That would be helpful, but I would like to bring the proceedings to a close now. Thank you so much. It really has been helpful. The fact that we're all abandoning you is nothing to do with the quality of the evidence we've heard. Thank you very much indeed.

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