The Green Investment Bank - Environmental Audit Committee Contents

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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