Examination of Witnesses (Question Numbers
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?
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.
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,
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 pointthe point why that is importantwe 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
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 premiumI think there's no premium,
in factfor 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.
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
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 energysmall 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?
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?
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
unknownwell, at this point completely unknowntrack
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
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 forto go first on those riskier
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?
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 constructto 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
In terms of what they actually are, they need to
be bondsregular 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 thesewhat's desirable and what's
notbut 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
Q111 Dr Whitehead:
It needs to be a proper, fully functioning bank?
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?
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'tthat is, if it doesn't
issue Governmentbacked bondsthere'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
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-plusa quangoand
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?
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.
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 splashthat 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
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
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.
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 phasewhich
might happen with offshore wind, for exampleit 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 placeyour track record, your governance
structures, your statutes if you're going for that, and equity
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 herewhere
the Green Investment Bank can make a very big differenceis
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.
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 riskyjust because it hasn't been
done and because the policy frameworks are newand 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
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
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?
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
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.
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?
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 itthe whole environmental, social, and governance
agendahas 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?
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
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?
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
ammunitionthe current investors, whether they be utility
companies or infrastructure fundsof 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.
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?
They've been in contact with one or twonot 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?
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?
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, actuallybroadly speaking,
it's not just pension funds, it's the people who invest for pension
funds as well, which are the asset management housesand
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?
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/Pacor 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.
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.
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.
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
I think that translates to energy efficiency in the first instance.
That's blokes in vansit'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.
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?
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
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
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
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?
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.
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 marketsactual
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 Bankbonuses,
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
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.