The Green Investment Bank - Environmental Audit Committee Contents

Written evidence submitted by the House of Commons Scrutiny Unit


1.  The impact of the Green Investment Bank (GIB)'s operations depends upon:

(a)  whether GIB is a separate institutional unit for National Accounts purposes;

(b)  the institutional sector within National Accounts to which it is classified; and

(c)  whether the public sector exercises control over GIB.

2.  These decisions are for the Office for National Statistics (ONS) to take, by applying the standards set out in the European System of Accounts (ESA95). ONS is guided in its application of the ESA standards by a case history of previous classification decisions. The case history is not publicly available in an accessible form, but HM Treasury's public website does include a guidance note for Government Departments on sector classification, Class (2010) 1 Sector Classification (see attached link) which sets out the relevant issues.

The remainder of this note draws upon information in the guidance note.


3.  GIB needs to be a separate institutional unit to be classified by ONS for National Accounts. It will be a separate institutional unit if it has its own legal form and is able to lead a separate existence, by, for example:

  • making decisions in an autonomous way;
  • entering into contracts;
  • owning assets and disposing of them;
  • employing staff;
  • making payments from its own bank account; and
  • drawing up accounts.


4.  Assuming that GIB meets the criteria for a separate institutional unit, it would then be classified by ONS to one of the five institutional sectors available within ESA95, that is:

(a)  non-financial corporations;

(b)  financial corporations;

(c)  general government;

(d)  households; and

(e)  non-profit institutions serving households.

5.  Given the planned scope of GIB's operations and that it will be a market body, the expected classification would be "financial corporation".


6.  ONS will determine whether GIB is in the public sector, ie a "public corporation" or the private sector, ie a "private financial corporation on the basis of "who controls the body".

7.  ESA95 defines control as the ability to determine general corporate policy by choosing appropriate directors if necessary. It says further that control exists through ownership of more than half the voting shares or, in the case of government, through special legislation or regulation empowering the government to determine corporate policy.

8.  Thus, if GIB was set up with Government majority shareholding or under legislation that allowed the Government to appoint directors or determine corporate policy, then it would be classified to public sector by ONS.

9.  However, control can also be exercised in a variety of other ways. The most common are discussed below.

Appointment Rights

10.  A right to be consulted over the appointments of directors or a veto over appointments is viewed as exercising very similar control as given by the right to make appointments. So, if the public sector has these rights for a new body, it would be classified to the public sector by ONS.

11.  If the initial appointments to the board of a body are made by the public sector, it will be classified as in the public sector, and this classification will continue, even if the body subsequently becomes operationally independent of the public sector.

Multiple Sponsorship

12.  Where a body is owned or controlled by a number of public sector bodies, it is the overall weight of the public sector that counts for classification purposes. So, a body where Government bodies appoint the majority of directors would be in the public sector even if a private sector partner appointed more directors than any single Government body.

Special Shares/Reserve Powers

13.  There is a distinction in this area between active controls and passive controls. The existence of passive controls, eg to prevent changes in ownership or the disposal of assets, would not, in itself, lead to the classification of a body to the public sector.

14.  The presence of active controls, eg the ability of the public sector to seize control of a Company or replace the directors in the event of poor performance, would normally lead to a body being classified to the public sector.

Special Terms in a body's constitution

15.  A body's memorandum and articles may have terms that require government consent for certain actions. If the restrictions are time-limited, then they would not amount to control requiring the body to be classified to the public sector. Permanent restrictions over important areas of a body's work would normally result in a body being classified to the public sector.

Second Tier Controls

16.  Where the Government can influence the behaviour of a body's board. eg by retaining controls over directors' pay or dividends, this could be seen as a sign of public sector control.


17.  The existence of government indemnities does not, in itself, mean that a body is in the public sector, especially if they are time-limited, narrow and unlikely to be called. Wide ranging indemnities could be seen as evidence that the body's functions are seen as being within the public sector.

18.  Government guarantees of the borrowing of a business would be viewed as the equivalent to shareholding if the guarantees would be called upon before the equity of private investors.


19.  A body can be classified to the private sector even if 100% funded by Government, provided that it is clearly controlled by the private sector.

20.  Where Government funding is by way of grant with conditions that allow public sector control over the wider policy of the body, including approval of the business plan, this would be seen as a form of public sector control.


21.  Where the public sector owns the majority of the shares, there is control and the body is classified to the public sector. Public sector control can exist with minority share ownership if other forms of control are in place.

22.  A body not set up as a company can be classified to the public sector on the basis of a participating interest, defined as:

  • conferring any right to share in the profits or the liability to contribute to the losses of the undertaking; or
  • giving rise to an obligation to contribute to the debts or expenses of the organisation in the event of a winding up.

23.  However, if the participating interest does not give the public sector control, the body could still be classified to the private sector.


24.  It is possible that GIB could be set up in such a way that classification to the public sector was obvious e.g. Government majority shareholding or right to appoint directors. If this was not the case, ONS would take a decision on whether viewed in the round, it is credible that the body should be seen as being in the private sector or public sector. They would look at whether the various controls discussed above were present and attach an appropriate weighting to the control. The aim would be the assess whether the total influence the public sector holds over the body amounts to " control" as defined in ESA95.

25.  The ONS decision on GIB would be taken on the basis of information supplied by the DBIS that had been agreed with HMT. The decision would be published, but is not subject to negotiation. Classification would only be revisited in the event of a major trigger e.g. sale of Government shareholding, exercise of reserve powers in exceptional circumstances.


26.  If GIB is classified as a public corporation, then its borrowing from the market or overseas will score in Public Sector Net Debt (PSND), the measure used by ONS and HM Treasury to measure the stock of public sector net debt. Any borrowing from the UK Government would have a neutral effect on PSND, as both sides of the transaction will be removed in the consolidation.

27.  If GIB is classified as private financial corporation, then the effect of its operations on PSND and other measures of Government spending are confined to its transactions with public sector organisations.

12 January 2011

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