4 Testing the design of the Green
Investment Bank
122. The design stage of the Green Investment
Bank is crucial to ensure that the Bank is set up in the best
possible way to tackle the market failures limiting investment
in green infrastructure. The Green Investment Bank Commission
suggested setting up a 'shadow' board that would be responsible
for laying the groundwork for the new Bank, and that a further
period of analysis would be needed where the Government considered
the Commission's conclusions.[196]
123. The Government has told us that it is undertaking
that design work and is examining evidence that market and institutional
failures and constraints can limit the availability of finance
needed to deliver the scale and pace of investment required. It
is considering different models for the how the Green Investment
Bank could operate in future and have as great an impact as possible.[197]
Ben Warren from Ernst and Young supported starting the design
process with a proper assessment of the market failures:
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 [...] 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 [...] I'd say first and
foremost that the Government need some real clarity on what the
barriers are and what the market failures are.[198]
124. BIS's Business plan 2011-2015 sets a target
to design the business and operating model of the new Bank by
May 2011, and that it will continue to conduct market testing
of the new Bank until December 2011, ready for it to become operational
in September 2012.
125. The Government has stated that the Green
Investment Bank's design will be subject to three tests of 'effectiveness,
affordability and transparency'.[199]
We questioned Peter Schofield in BIS on the 'effectiveness test',
and he explained that:
[...] the test is whether this is leveraging additional
private sector funding, and one of the things we need to avoid
is crowding out private sector funding that would already be there.
So, getting this right is absolutely crucial to the effectiveness
test.[200]
In other areas, there was less clarity.[201]
126. We recommend that before
its announcement in May on the favoured model for the Bank, ideally
in this month's Budget, the Government defines precisely its three
tests of effectiveness, affordability and transparency. We also
recommend that the full results of these tests are then 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.
127. Ben Warren from Ernst and Young told us
of the need for a proper assessment of the market's appetite to
invest, as well as an assessment of the sorts of instruments that
pension funds and other potential investors would like to invest
in.[202] The BT Pension
Scheme, the largest corporate pension scheme in the UK, cautioned
against the Government adopting a 'siloed' approach in the market
testing exercise:
We would encourage an iterative process for designing
the [Bank] which includes all significant potential consumers
of its products or services rather than one which is created in
a silo by Whitehall officials and their advisers and then announced
in May 2011.[203]
128. Witnesses have told us, however, that so
far the Government's planning for the Green Investment Bank has
been opaque. Ingrid Holmes from E3G told us in December:
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 [Green Investment
Bank] bonds, for example.[204]
[see paragraph 34].
129. The National Association of Pension Funds,
a trade association representing pension providers with combined
assets of £800 billion, told us also in December:
[The Government] have been in contact with one or
two [of our members]—not many, frankly. But they have had
conversations with our largest scheme, which is the BT Pension
Scheme [...] But there is more work to be done there […]
there's a need to talk to investors, which we'd be happy to facilitate.[205]
130. Investors are many and varied. It is important
that the Government engages with a wide cross-section of investors
in an open and transparent way to ensure that the Green Investment
Bank is set up understanding the needs of investors. We
recommend that the Government, in undertaking the remainder of
its market testing work, engages with all classes of investors
and undertakes a thorough and transparent consultation exercise
with them.
131. Ben Warren from Ernst and Young detailed
the importance of not focusing completely on big investors when
designing the Green Investment Bank, because there was a need
for engaging with citizens:
[...] 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 […] 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.[206]
132. We recommend that the Government
conducts a brief public consultation on the proposals to be announced
by the Government in May.
196 Q73 Back
197
Ev133;Q331 Back
198
Q121 Back
199
Ev133 Back
200
Q 236 Back
201
Qq 234, 235 Back
202
Q 121 Back
203
Ev w75 Back
204
Q 121 Back
205
Q 122 Back
206
Q 128 Back
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