The UK has a legal commitment to reduce its carbon emissions by 2050, and also to generate a higher percentage of energy from renewable sources by 2020. The Committee on Climate Change and others have called for a 'step change' to deliver the new low carbon infrastructure required to meet these targets. The scale of investment needed is unprecedented: most estimates range between £200 billion and £1 trillion over the next 10-20 years. Traditional sources of capital for investment in green infrastructure can only provide £50 to £80 billion up to 2025, leaving a funding gap running into hundreds of billions of pounds.
The Government's top priority is to cut the deficit, so investment will have to come predominately from the private sector. To bring in this investment, there are a number of market failures and investment barriers that require urgent remedial action. A Green Investment Bank will be an essential means of unlocking the enormous scale of private sector investment needed.
In June 2010, the Green Investment Bank Commission recommended that a Green Investment Bank be set up by the end of 2010. The Government is currently still considering and market testing options, and has said that it will make an announcement on the business model for the Bank in May this year. It expects the Bank to be operational in late 2012. A key issue has been whether the new body will be a 'bank' or a 'fund', which in turn hinges on the National Accounts treatment of the Bank. There have been persistent reports of disagreement within government about whether the Bank will be able to raise money from the finance markets, due to such classification issues. We welcome the Business Secretary's ambition for the Green Investment Bank to be "a lot more than a fund", being able to lend and borrow, but the Government must deliver swiftly, and in full, on that ambition. The Bank must to be able to start making investments within 12 months.
The Green Investment Bank must not be just another 'fund' to disburse Government money, but a 'bank' able to raise its own finance and fill a gap in the market for government-backed bonds, bring in banking expertise and offer a range of commercially-driven interventionsloans, equity and risk-reduction finance. Capitalising it with £1 billion, as the Government plan to do in 2013-14, plus unknown and unspecified proceeds from the future sale of government assets, will only be enough to start to lever in the scale of private sector finance required if it is able to operate as a 'bank'. The Government must keep the level of capitalisation under review, and be ready to increase it as soon as the fiscal position allows. In the meantime, investing the proceeds from the sale of government assets will not count as an impact on the public sector fiscal position, and offers the Government a useful way of building up the Bank's capital which it should fully utilise.
Setting up a Green Investment Bank able to raise its own finance is complicated by its possible classification in the National Accounts, which will affect the Government's deficit reduction plans. If the Bank is classified by the Office for National Statistics (ONS) as being within the public sector, then its borrowing will be included on the Government's balance sheet, thus working against measures to reduce the deficit. The ONS will make its decision on the basis of the overall extent of government control over the Bank.
The Government's primary policy objective is reducing the deficit. The Government also expects green growth to be a major future driver of the economy, generating jobs and helping to transform the UK to a low carbon economy. That 'step change' needed makes this an urgent agenda. If it has not already done so, the Department for Business, Innovation and Skills (BIS) should raise with the Treasury the scope for a 'temporary and extraordinary' exclusion of a public sector Green Investment Bank from the strictures of the Government's fiscal controls. If, however, the Treasury's deficit reduction strategy prohibits such adjustment, and the Treasury can only support a Green Investment Bank that does not sit on the Government balance sheet, then compromises in the ideal Green Investment Bank set-up may have to be contemplated. A red-line, however, should be that the Green Investment Bank is a 'bank', explicitly charged with a specific green investment purpose and backed by government, able to operate commercially and attract private sector investors, rather than a relatively small un-leveraged 'fund'.
Provided that the wider fiscal question can be resolved, the Government will need to address particular aspects of the Bank's governance and remit. In particular:
- While the Bank could offer government-guaranteed green bonds to raise much of the finance it will need, green ISAs should also play their part. They could provide up to £2 billion per year of finance for a Green Investment Bank and a symbolic way of enabling individuals to contribute to the low carbon transition, linking savings with tangible things that help people, society and the planet. It is disappointing that the Government sees green ISAs as only a longer term proposal. Instead, the Government should encourage the Green Investment Bank to offer green ISAs and tailor these to the types of investments that different groups of potential customers wish to invest in.
- To attract private sector investment, the Bank must be seen to be operating commercially, making sound investment decisions free from day-to-day control. The Government should not interfere in the Bank's day-to-day management and individual investment decisions. The Green Investment Bank Commission recommended particular priority areas for the Bank, including offshore wind. Nevertheless, there are other areas that the Bank could support, and existing carbon budgets might provide a useful tool to enable the Bank to prioritise its investments.
- The Green Investment Bank will need to be given a clearly defined 'green investment' mandate by the Government to help deliver the transition to a low-carbon economy, and possibly citing the objectives of the Climate Change Act for at least some of its activities. Its remit should include a requirement to consult the Committee on Climate Change and take its recommendations into account. The aim should be to stop the Bank straying into more profitable but less green investments. Nevertheless, the Government should not constrain the role of the Bank too rigidly, to allow the possibility in due course of the Bank supporting environmental protection schemes where it can be determined that these offer a commercial rate of return in the long term.
- The Bank's remit should include a requirement to invest in the UK first, even though overseas investments might provide a more cost-effective way of cutting emissions, because UK investment will be needed to deliver our carbon targets and could greatly contribute to the green economy. The Government must use the opportunity provided by its forthcoming 'Green Economy Roadmap' to set out ambitious policies to support green growth, and set out what supporting role the Bank could play.
- It is not clear how the three components necessary for the Green Deal will be made available: sufficiently low-cost financing for households, individual loans aggregated to a size attractive to large investors, and sufficiently long term loans. The Government should therefore not rule out the opportunity for the Green Investment Bank to provide additional low-cost capital to support the Green Deal.
- A fundamental role of a Green Investment Bank should be to advise the Government on low carbon and green infrastructure policy, to ensure policies are joined up across departments and to help meet investors' need for stable policy frameworks to give them the confidence and certainty to invest. The Government should therefore give the Bank a remit to monitor the Electricity Market Reform and Carbon Floor Price proposals, and other initiatives to come that will affect low-carbon investment, and to advise the Government on the need for any further policy and regulatory reforms.
- For the Bank to adopt that advisory role, it will require systems (as will the Government) to collect good quality and timely data on investment levels, the impact of new policies or regulations, any signs of 'crowding out' of other investment, and the costs and effectiveness of different types of investment.
- The Government needs to clarify the ambiguity about whether Green Investment Bank support for new nuclear would constitute a subsidy. In any case, however, it would not be appropriate for the Green Investment Bank to support nuclear, where the technology is already established.
- If the Green Investment Bank is established as a corporate body, Parliament must be given a strong role in scrutinising its initial governance and remit. If an arms-length body, Parliament must be allowed also to examine its evolving strategy and operating principles. The Government should consider how Parliament (as well as the third sector) might be represented on an 'advisory council' of the Bank.
More immediately, we recommend that the Government:
- works proactively with the ONS to ensure that the Bank can be developed in such a way as to maximise its investments, whilst minimising its impact on the fiscal position.
- engages with all classes of investors in undertaking the remainder of its market testing work, and undertakes a thorough and transparent consultation exercise with them. The Government could also conduct a brief public consultation on the proposals to be announced by the Government in May.
- starts negotiations immediately with the European Commission to ensure prior approval is secured for exemption from state aid rules, as these could otherwise be a restricting factor on what the Bank would be able to do. Getting state aid exemption approval can take up to two years, and we are surprised that the Government has not yet contacted the European Commission.
- concludes its review of existing low carbon government institutions and funds with the aim of improving efficiency and making it easier for investors to navigate access to them. The rationalisation of current institutions and funds as part of the establishment of the Green Investment Bank could be helpful in the longer term.
- sets out clear performance reporting arrangements that should include data on a range of key indicators about the Bank's performance in advancing green objectives. Monitoring of the Bank in its early years will be important to gauge its impact and assess whether it has been designed and set up in the right way. Before its announcement in May on the favoured model for the Bank, ideally in this month's Budget, the Government should also define precisely its three tests of effectiveness, affordability and transparency. The full results of those tests should then be published when the Government makes its announcement in May for each of the models considered, so that there is an opportunity for the House, potential investors and the public alike to understand the decisions that have been reached.
If the Government is going to be able to demonstrate that it is the 'greenest ever', it must take advantage of the current momentum behind the Green Investment Bank, and set up a Bank with the potential to deliver the scale of investment required, significantly helping to put us on the path to a low-carbon economy and achieving our challenging emission reduction and renewable energy targets. It is the firm view of this Committee that if the Green Investment Bank were unable to raise private finance there would be little if any prospect of the Government meeting those goals.