Written evidence submitted by the Association
of Greater Manchester Authorities and the Business Leadership
Council
SUMMARY
The establishment of the GIB is critical if UK plc
is to capture its share of the global market in low carbon goods
and services as well as meet legally binding carbon emission targets.
The key aim of the GIB should be to provide public
sector finance which will promote the facilitation of private
sector finance thereby encouraging institutional investment.
It needs to have a clear remit and focus that simplifies
and strengthens low carbon financing in the UK.
It needs to create a clear framework that manages
risk and therefore generates opportunity.
Its investments need to be prioritised and structured
in a way that maximises cost effectiveness as well as creating
jobs and growth.
It will need to be transparent and independent and
most importantly be adequately financed to meet the levels and
scale of investment required.
1.0 INTRODUCTION
1.1 The achievement of carbon targets for 2020
presents a major financing challenge for the UK economy. Whether
the current restraints on public sector finance prevail or not
it is clear that given the sums involved the majority of this
finance will need to come from the private sector. It is widely
accepted that the size of investment in the low carbon agenda
is likely to reach £550 billion by 2020 with the right level
of risk mitigation. Analysis we have undertaken suggests that
Greater Manchester's share could be £10 billion over the
next five years. Achieving these levels however is dependent upon
mitigating the risk to investors.
1.2 The mechanisms employed for financing investment
in this sector have thus far only been able to achieve incremental
changes. An approach that uses public sector finance to fund the
riskier elements of projects and thereby mitigate private sector
risk within a single financial institution has the potential to
substantially accelerate the UK's market share of the low carbon
economy.
1.3 Whilst the most striking benefit will be
that of generating economic growth the establishment of the GIB
will secure a range of additional social, economic and environmental
benefits. The investments made will help protect consumers, either
businesses or households from energy price shocks as well as help
achieve legally binding carbon reduction targets.
1.4 Any decision to establish the GIB must be
one based on cost effectiveness. The basis of this should be that
an approach to lower the overall capital costs by using public
sector finance to "de-risk" private sector investment
needs to be set against the traditional approach of raising the
rewards to investors through subsidies, which increases the cost
of energy to the consumer.
1.5 However, we suggest that further criteria
should be added to this in terms of how the GIB can contribute
towards meeting legally binding carbon targets, productivity which
promotes savings in national and local budgets, local creation
of jobs, building a more balanced economy, stimulating growth
amongst the sector and delivering a more even distribution of
wealth. It could also make a significant contribution towards
the Big Society in terms of empowering communities to meet their
own energy needs.
2.0 SIGNIFICANCE
OF BARRIERS
REQUIRING THE
ESTABLISHMENT OF
THE GREEN
INVESTMENT BANK
2.1 The significance and nature of the barriers
are such that unless they are removed there is a very high risk
that the UK will not capitalise on the economic opportunities
presented by the low carbon economy and will fail in its ability
to meet legally binding climate change targets. The findings of
the GIB Commission set up by the Chancellor identified the following
barriers, which make the establishment of the GIB critical:
insufficient capacity in the debt capital markets;
lack of a clear robust policy framework;
barriers around the roll out of new technologies;
and
the impractical nature of financing large numbers
of smaller projects.
2.2 The Government's approach to the deficit
reduction and the impending rebalancing of fiscal spend which
will be outlined in the Comprehensive Spending Review coupled
with the sheer scale of investment needed make the need to attract
private sector investment clear. However, we should not be put
off by these challenges. There are numerous examples from other
countries where productive public private sector finance partnerships
can work effectively to generate high levels of investment.
2.3 The sheer number of organisations whose remit
is to support the development of the low carbon economy and a
historical lack of a comprehensive and co-ordinated approach has
meant public sector money has been spread thinly across a wide
range of initiatives making it increasingly difficult to lever
in private sector finance. This has in part been responsible for
the UK lagging behind many of its competitors in this sphere.
Given the Government's approach to reducing the number of organisations,
the establishment of the GIB would represent a unique opportunity
to create a more coherent approach by creating a single entity
with a single aim whose objectives would ensure it did not crowd
out private sector finance.
2.4 Greater Manchester is well advanced in terms
of developing a low carbon investment programme across a wide
ranging portfolio of technologies and applications. These range
from the development of renewable energy sources, such as deep
geothermal heat, installation of a comprehensive district heat
network that includes the offtake of heat from a new build power
station into the city centre and the retrofitting of large swathes
of the residential sector. However, the fundamental barrier that
is holding back progress in the development of these programmes
is the ability to secure low cost capital at the pace and scale
required. Fundamentally, the lack of mezzanine finance, which
coupled with the long payback periods, makes investment expensive
which reduces investment opportunity.
2.5 The knock-on effect of this for Greater Manchester
is that our global comparator cities show greater competitiveness
where their national governments have established mechanisms to
overcome these barriers, such as in Denmark (wind) and Germany
(solar). Without intervention this will over time have an increasing
impact on the growth and prosperity of the conurbation. Indeed
the UK is already ranked below its competitors such as the US,
China, Germany and India in terms of an attractive location for
renewable energy investments.
2.6 If Greater Manchester captures its share
of this investment, based on its current share of the global economy,
investment in the low carbon sector could rise to £870 million
per annum. However, without the establishment of the GIB the ability
to secure these levels of investment will be severely hampered
as investor confidence is eroded away.
3.0 OBJECTIVES
AND ROLES
3.1 The primary purpose of the GIB must be to
unlock the private sector investment required to finance low carbon
technologies and infrastructure projects. This means it needs
to be able to deliver investment products that reduce some of
the policy and construction risks, but with a clear instruction
not to crowd out private capital.
3.2 In achieving this purpose it needs to be
clear about its objectives. It should not simply be about pumping
more money into the sector overall, this will run the risk of
under-deploying its capital. Rather it needs to target resources,
which will help mobilise institutional investment. It is clear
from our experience in Greater Manchester that there is increasing
interest amongst institutional investors in financing low carbon
infrastructure, however certain technologies and projects are
more capable of being financed than others.
3.3 It is critical that the GIB avoids adding
an additional layer to a system of finance and prioritisation
that marginalises environmental outcomes. Ultimately, its success
should be measured when its existence is no longer required, in
other words when the market has corrected itself. The work being
undertaken by Greater Manchester to create a single pot of finance
where priorities are integrated within an investment framework
is we believe the right approach.
3.4 Based upon the purpose outlined above it
our view in Greater Manchester that the GIB needs to focus its
objectives in the following areas:
Large scale infrastructure projects that are either
of national significance or contribute towards the growth and
prosperity of our big cities.
Focus investments on sectors which with a little
support have the potential to be an important source of jobs,
investment and enterprise and in so doing position itself alongside
other financial providers to best accelerate these newer, less
proven, investment opportunities.
Consolidate the myriad of small, disparate and unco-ordinated
sources of public sector funding for low carbon technologies within
a single institution, including those offered by the Carbon Trust,
Technologies Strategy Board and UK Innovation Investment Fund.
This simplifies things from a commercial viewpoint as well improving
the overall cost effectiveness of the public sector.
Stimulate and provide support for entreupenership,
innovation and enterprise.
3.5 The vast majority of institutional investor
interest is coming from overseas as opposed to those in the UK;
one objective of the GIB must be to raise the level of activity
in this field amongst UK based institutions.
3.6 Given the above the GIB, with its focus on
innovative risk mitigation, will send a strong signal to investors
that the UK is serious about its low carbon transformation. By
unlocking major new streams of investment the GIB will give greater
certainty of meeting the UK's climate change targets and give
better value for money to taxpayers and energy consumers
4.0 INVESTMENT
PRIORITIES
4.1 The GIB needs to establish a transparent
and clear investment framework that reflects cost effectiveness
but also wealth creation, business growth and an ability to meet
legally binding carbon emission targets.
4.2 Low carbon technologies and infrastructure
represent profit making opportunities but climate change is a
systematic risk that severely threatens the value of their assets
across the economy. To mobilise these funds, we must ensure that
appropriate public policy mechanisms are in place and are of sufficient
scale. Many low carbon investments are too small to be of commercial
interest to mainstream private sector financial institutions.
Above all investments need to be competitive and capable of delivering
stable, long term returns.
4.3 Given the context above investment decisions
of the GIB should be determined by three priorities sustainable
economic growth, reduction of carbon emissions and the likelihood
of attracting private sector finance.
4.4 Greater Manchester has been working with
government departments on helping to accelerate low carbon growth
opportunities in the built environment. This builds upon our unique
strengths in terms of research and innovation capabilities, delivering
large scale regeneration programmes and an established governance
structure between ten local authorities, which has the support,
and contribution of high level business.
4.5 Our programme of work, which we have committed
seed funding for the next five years aims to build a broad retrofit
programme across the residential, non-residential sector (public
and private estates) as well as supporting new development and
critical infrastructure around energy supply. As well as creating
a demand side programme over the next five years worth upto 310
billion our aim is to upskill our workforce and support our business
growth in this sector giving them a market advantage and in so
doing help foster an increased market share for UK plc.
4.6 The density, volume and scale of our big
cities give rise to significant opportunities to achieving economic
prosperity and growth whilst contributing cost effectively to
carbon reduction. These alongside large infrastructure projects
such as mainline rail networks are likely to present the most
attractive propositions for investment. Large scale retrofit programmes
of the residential and non-residential sector, including that
relating to decentralised heat and energy networks as being piloted
in London and Manchester are starting to attract the interest
of institutional investors.
4.7 Whilst greater Manchester is able to create
low carbon infrastructure projects of scale that link to job creation
and business growth and in so doing is attracting investor interest,
the evidence would suggest that public sector money is needed
to help mobilise this investment. Our Evergreen Fund, which is
part of the EU JESSICA programme, has been developed along much
the same lines albeit on a much smaller scale to the GIB. This
approach, whilst in its early stages is showing positive signs
of attracting private sector investment.
5.0 FUNDING AND
GOVERNANCE STRUCTURES
5.1 The GIB Commission report demonstrated the
size and scale of the investment needed - £550 billion by
2020. To meet this investment the Government needs to ensure that
the GIB has the capitalisation and funding to match this figure.
5.2 Issuing bonds is a possible way to providing
the upfront capital required to support projects that have lengthy
but ultimately secure payback periods. Indeed by offering bonds
with low but stable rates of return over a 25 year period match
the life of the assets into which the funds would be invested
in.
5.3 The advantage of specific bonds is that they
can be designed to be secured against actual assets and would
be a smaller burden on public debt. More generally, bonds are
likely to become more attractive as new European regulations on
capital finance and risk management standards come into force.
5.4 The World Bank has already issued green bonds
to raise additional funding for projects that support low carbon
activities in developing countries. In the UK bonds could be linked
to specific low carbon projects so they are underpinned by tangible
assets, which would pay for the bond and interest.
5.5 Energy efficiency in the residential sector
is one area that would particularly benefit from a specialised
bond. Energy efficiency generally produces quick and reliable
returns. However, take up has been slow due to the high transaction
and disruptive costs for residents coupled with the fact that
individual projects are generally too small to be commercially
viable for investors. Large scale schemes that are financed by
bonds tied to dwellings rather than residents could produce stable
returns for both investors and householders. This would provide
cities like Manchester the opportunity to make more rapid progress
on reducing carbon emissions.
5.6 One option proposed for providing the initial
capitalisation alongside private sector capital and the amalgamation
of existing public sector funds is to utilise revenue from the
sale of emission permits under Phase 3 of the EU Emissions Trading
Scheme. Whilst this revenue will source will reduce as the economy
is decarbonised estimates suggest that it could provide upto £40
billion between 2012 and 2020.
5.7 Green ISAs also represent an effective way
of providing finance, indeed surveys would suggest that such a
produce would prove popular. Clearly, a Green ISA could take many
forms. However, they would broadly invest either in companies
innovating in low carbon technologies or in companies seeking
to reduce their carbon profile.
5.8 The role that a financial
strategy could play should not be ignored in terms of helping
to allocate capital efficiently and effectively. The responsibilities
of the trustees of pension funds should be strengthened so that
they are encouraged to have greater regard to sustainable wealth
creation and achievement of carbon targets. Indeed the Greater
Manchester Local Authority Pension Scheme, which represents one
of the largest of its type in the country, represents a significant
financial opportunity.
5.9 The Bank will need to achieve commercial
success but at the same time ensure transparency and confidence
especially as public money will be involved. As an independent
institution it will require establishment through statute, however,
this will take some time to achieve. In the short term therefore
it could be established by merging some of the existing organisations
as referenced earlier. This may provide some initial finance,
however in the longer term it needs to be a fully fledged infrastructure
bank.
5.10 The governance structure needs to have consideration
to its interaction and fit with the Committee on Climate Change,
which advises government on legally binding climate change targets
and provides financial advice to Government on climate change-related
investment issues.
15 October 2010
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