Written evidence submitted by the Carlyle
The Carlyle Group agrees that a Green Investment
Bank (GIB) needs to be established. The scale of the investment
in new technologies, new infrastructure assets and supply chains
required to meet the UK's legally binding climate change and renewable
energy targets is enormous.
There are, however, a number of market failures and
investment barriers in financing low carbon infrastructure and
unless they are addressed, the UK's emissions targets will not
be achieved. A massive injection of private sector investment
is a prerequisite for the UK meeting its legal obligations.
The government should move to establish the GIB without
delay, in order to provide investors in low carbon technologies
with the clarity and certainty about the policy environment that
they need. There is a risk that continued delay and uncertainty
will deter investment.
The GIB should be self-funding, giving priority to
the longest-life projects with the largest carbon savings and
the highest speed to market.
The GIB should be established by an Act of Parliament,
with ministers setting the overall priorities of the bank and
a board of directors setting strategy and investment decisions.
The GIB should contain a bank that is regulated by the Financial
Services Authority and complies with relevant FSA/Bank of England
The GIB would need to raise three forms of funding
to ensure that it is able to sustain its operations: government
funding for disbursement of grants (ie existing quangos and funds);
financing for ongoing activities and "commercial" investment;
and initial Bank capitalisation and funding.
1. About The Carlyle Group
1.1 The Carlyle Group is one of the world's largest
private equity firms. It has $81.1 billion under management and
current investments in more than 200 companies.
1.2 Carlyle was established in Europe in 1997
and today manages 14 billion in dedicated European funds.
1.3 Carlyle portfolio companies have 360,000
employees globally, including over 46,000 across Europe.
1.4 In the UK companies in which we have invested
include household names like Britax. Other firms include companies
such as Ensus (a bio-refinery in Teeside), Mill Digital Media
(post-production and video distribution services for television)
and Talaris (a global provider of cash handling technology solutions).
1.5 The Carlyle Group has become one of the world's
most successful private equity firms through its consistent application
a conservative investment approach in industries
investing for the medium and long term;
employing the best business management talent in
the world to support our portfolio companies; and
aligning our interests with our investors by investing
our own money alongside theirs;
1.6 The breadth and depth of our portfolio means
Carlyle has valuable insights into the elements that are important
for business growth.
1.7 Our international reach also means we have
wide-ranging experience of the support and assistance provided
to business by governments, and the factors that make a country
an attractive place to invest.
2. The significance of any barriers or "market
failures" requiring the establishment of a Green Investment
Bank, and any risks of not getting this done quickly
2.1 The Climate Change Act 2008 sets a legally
binding target to reduce the UK's greenhouse gas emissions by
80% (off a 1990 baseline) by the year 2050. The carbon budgets
established under the Act set, in effect, an interim target for
2020 to reduce emissions by 34%. The UK's targets for using renewable
energy are no less ambitious. Under the EU Renewable Energy Directive,
this country is committed to sourcing 15% of all energy from renewable
sources by the year 2020. This compares with a figure of 3% in
2.2 The scale of the investment in new technologies,
new infrastructure assets and supply chains required to meet the
UK's climate change and renewable energy targets is enormous.
Estimates of the investment needed between now and 2020 range
from £200 billion (as suggested by Ofgem) to £550 billion
(Dieter Helm, for Policy Exchange). Given the state of the public
finances, funding the transition to a low carbon economy vastly
exceeds the capability of the public sector. As a result, a massive
injection of private sector investment is a prerequisite for the
UK meeting its legal obligations.
2.3 There are, however, a number of market failures
and investment barriers in financing low carbon infrastructure
and unless they are addressed, the UK's emissions targets will
not be achieved. The Green Investment Bank Commission has concluded
that the pools of capital available from long-term debt and equity
finance are neither large nor long enough. Further, with uncertain
energy demand, higher borrowing costs and the need to protect
their credit ratings, utilities do not have the balance sheet
capacity to fund these investments.
2.4 Markets for low carbon technologies are reliant
on various forms of government intervention to drive returns.
Where political and regulatory certainty is essential, there has
been a history of policy changes.
2.5 Entrepreneurs pursuing the new technologies
face a number of challenges: technology risks; difficulties in
attracting capital from equity investors because of uncertainties
surrounding the policy framework, including the timetable, role
and structure of the Green Investment Bank.
2.6 Institutional investors (who could provide
a significant proportion of the funds needed) will need to earn
adequate risk-adjusted returns from large numbers of small, low
carbon investments. The appropriate market structures will need
to be in place in order to access this capital.
2.7 The Carlyle Group agrees that a Green Investment
Bank needs to be established without delay. The GIB could play
a central role in the provision of finance and in mitigating and
better managing risk - both political risk and in balancing the
risks and rewards in the financing of new technologies and funding
2.8 The concept of a Green Investment Bank has
secured unusually widespread support, including from the three
main political parties in their general election manifestos, the
Aldersgate Group, a broad-based business and environmental coalition
and financing sources, such as The Carlyle Group. Creating such
an institution would provide a clear signal that the political
will exists to build a low-carbon economy.
3. The objectives and roles the Green Investment
Bank should assume, the areas it should operate (and not operate)
in, and how its lending and investment decisions should balance
green benefits against financial risks
3.1 The Carlyle Group endorses the recommendation
of the Green Investment Bank Commission that a GIB should be established
"to support the delivery of the UK's emission reduction targets
as set by the Climate Change Act 2008" and that "the
support should be based on a public-private investment model and
address specific market failures and investment barriers in a
way that will achieve emission reductions at least cost to taxpayers
and energy consumers."
3.2 The GIB should have the following major roles:
(a) identifying and addressing market failures
limiting private investment in carbon reduction activities: increasing
the availability of capital; providing risk mitigation mechanisms
for the private sector; and developing standardised financial
products/instruments for investment in projects where a specific
market failure or funding gaps persists;
(b) providing coherence to public efforts to
support innovation in relation to climate change by rationalising
existing Government-established bodies and funds; and
(c) advising on financing issues in central and
local government policy making.
3.3 Strict principles would be needed at an operational
level to ensure the GIB does not crowd out the private sector.
The private sector should lead and execute deals wherever activity
is viable; in such cases, the GIB would co-invest in opportunities
provided by the private sector. The GIB should operate only where
its actions achieve a result that would not otherwise have been
possible and then in partnership with the private sector wherever
3.4 The Green Investment Bank should aim for
commercial rates of return on its banking operations. The GIB
should be self-funding, giving priority to the longest-life projects
with the largest carbon savings and the highest speed to market.
For early stage projects unable to secure private funding, the
GIB should run separate funding operations, potentially on non-commercial
terms. There is also a need to consolidate and simplify existing
sources of government funding for low-carbon projects.
4. The Green Investment Bank's investment
priorities, and whether and how the bank should support and foster
areas where the UK has emerging green technology strengths
4.1 The Carlyle Group submits that in its initial
phase, the Green Investment Bank should focus on supporting the
areas where the maximum impact on emissions and the fastest speed
to implementation can be achieved. For example, the scale up of
investment in proven energy efficiency projects that can lower
the overall development need of renewable energy sources; investment
in enabling technology, such as smart grids, that reduce the cost
for other low carbon investments; and support of both proven and
high impact third-round offshore wind, should all be priorities.
4.2 The types of product that the GIB could develop
include the following:
early stage grants for pre-commercial propositions
- aggregating the grant payments that are currently made to a
range of quangos for low carbon innovation, to achieve greater
private sector leverage and higher rates of deployment;
equity co-investment - most likely, in situations
where the availability of private capital is limited;
mezzanine funding - for proven technologies that
can secure workable levels of project finance debt but not at
gearing levels sufficient to provide equity investors with the
necessary rate of return;
offering to buy completed renewables assets;
purchase and securitisation of project finance loans
- until an improvement in bank balance sheets can provide the
capital needed for green infrastructure like offshore wind;
insurance products - for example extreme events insurance
and contingent loan facilities;
long-term carbon price underwriting - given that
the EU ETS has limited price visibility beyond 2014 and the EUA
price may give insufficient incentives for investments in long-term
clean energy assets.
4.3 The GIB should be prepared to underwrite
the decisions of investors when they are based on an assumption
that particular policies will remain in place. In other words,
investors should be compensated in the event that there is a change
of policy later on.
5. The funding and governance structures required
to create an effective and accountable body, including the role
of "green bonds"
5.1 One of the principal challenges in establishing
the Green Investment Bank will be to ensure that a body with the
power to invest public money and borrow with government guarantee
is accountable to parliament and reflects the overall policy priorities
of the government, whilst ensuring that the GIB enjoys sufficient
operational independence from ministers to be credible with the
markets. There is an inherent tension between the position in
the public sector and its need to be operated on a commercial
5.2 The Carlyle Group submits that both objectives
can be achieved by:
establishing the Green Investment Bank by an Act
charging ministers with setting the overall priorities
of the bank and with appointing the non-executive chairman and
ensuring that the bank is not accountable to ministers
for individual investment and lending decisions;
having a board of directors to set strategy and approve
investment decisions, who would be drawn primarily from the public
having a management team with relevant commercial
ensuring that the Green Investment Bank contains
a bank that is regulated by the Financial Services Authority and
complies with relevant FSA/Bank of England requirements; and
providing for the non executive chairman to appear
before relevant parliamentary select committees on at least an
5.3 The Carlyle Group sees green bonds as being
essential for funding the Green Investment Bank (where they are
issued by the bank), and for the lowering the cost of debt for
projects. The UK bond market, including pension funds and insurance
companies, valued at around £1.2 trillion, is an essential
source of investment for low carbon energy projects. However,
at the moment, most of this capital flows to high rather than
low carbon projects.
5.4 Green bonds could address current market
capacity constraints [see above], enable targeted public co-investment
to address confidence gaps and unlock opportunities for new public-private
5.5 In order to persuade pension funds and insurance
to shift from gilts, private equity, venture capital or real estate,
to the low-carbon energy sector, green bonds should broadly reflect
the existing bond offerings, carrying similar characteristicsincluding
level of return. Green bonds would also need to be Government-guaranteed
and backed by visible, stable and transparent revenue streams
to pay coupons.
18 October 2010