Supplementary written evidence submitted
by the Department for Business, Innovation and Skills
1. This note sets out the possible public and
departmental finance impacts of different Green Investment Bank
models.
2. All references of borrowing in this note could
be done through GIB-issued bonds
RELEVANT PUBLIC
ACCOUNTING PRINCIPLES
3. The National Accounts, from which measures
of deficit and debt are drawn, are compiled by the independent
Office for National Statistics (ONS). National Accounts includes
GDP statistics, and Public Sector Finance (PSF) statistics. The
latter are economic statistics relating to the activity of the
public sector including receipts, expenditures, borrowing and
debt.
4. HMG chooses to define fiscal policy objectives
by reference to PSFs statistics, most notably Public Sector Net
Debt (PSND) and Public Sector Net Borrowing (PSNB—the deficit).
In broad terms, PSNB is the difference between the Public Sector's
income and spending in a financial year. PSND is the difference
between public sector financial liabilities and liquid public
sector financial assets.
5. Alongside the fiscal mandate[64],
the Chancellor set out in Budget 2010 a supplementary debt target—to
ensure that PSND as a percentage of GDP is falling by 2015-16.
As part of meeting these targets, the Spending Review plans entail
a reduction in total managed expenditure of over £80 billion
in 2014-15[65].
6. These are factors in considering the classification
of the GIB and treatment of its functions. It is also important
to note the need for transparency for the government's fiscal
credibility and also for the GIB's credibility if it is to eventually
attract investment.
CLASSIFICATION OF
THE GIB AS
"PUBLIC" OR
"PRIVATE"
7. The ONS assesses whether bodies are classified
to the public or private sector. The decision would be based on
whether the Government was deemed to be in control of the general
corporate policy of the body, with relevant considerations being
whether Government:
- Had the right to appoint directors.
- Owned the majority ownership of shares.
8. There are also a number of other secondary
factors which could indicate control including:
- Right to limit financial flexibility (such as
borrowing limits).
- Right to approve business plans.
- Right to control Director's pay.
Private sector classification
9. Private sector classification of the GIB would
mean that any borrowing by the GIB would not impact on PSND; and
the impact on PSND would be limited to any Government equity investment
in the bank.
Public Sector classification
10. The activities of a public sector GIB would
score against the fiscal aggregates when the GIB transferred money
outside of the public sector, i.e. made investments in the private
sector. GIB activities could also create contingent liabilities
for the public sector which could materialise as an impact on
the fiscal aggregates at a later date. The OBR is looking to improve
reporting of contingent liabilities.
LIABILITY SIDE
OF BANK:
IMPACT ON
PSND/B OF DIFFERENT
SOURCES OF
FUNDING
Asset sales
11. Sales of government financial assets reduce
PSND and are PSNB neutral. Since government taking an equity stake
a private sector GIB would also be a financial asset, redirecting
the funds from asset sales in this way would have no impact; other
than to note a lost opportunity to pay down debt. Similarly, if
the GIB was public sector, then the granting of loans or purchase
of equity by the GIB would be financial transactions giving rise
to financial assets, so would similarly net off.
Conventional Government funding
12. Government could fund the GIB as it does
with other Government spending: through tax receipts or borrowing
through either the Debt Management Office (DMO) issuing gilts,
or to a lesser extent National Savings and Investments. The principle
in determining the mix of borrowing is to minimise the costs of
debt management.
13. But to control the overall need for borrowing,
the Chancellor sets an overall envelope for Government spending
which is then allocated to departmental budgets (Departmental
Expenditure Limits—DEL) at the Spending Review. Transactions
outside this envelope will increase PSND and PSNB, depending on
the nature of the asset bought.
14. The £1bn that has been allocated to
the GIB from departmental budgets in 2013-14 is funded within
the planned spending envelope
Bonds and other borrowing by the GIB itself
15. If the GIB were classified by the ONS as
being in the private sector, any borrowing by the GIB would not
impact on PSND/B.
16. For a public sector GIB, funding additional
activity through issuing its own bonds or otherwise borrowing
would score against PSND and possibly PSNB (depending on how the
cash was spent, see next section)[66]
in the same way as if funding came directly from Government.
17. All borrowing could impact other fiscal measures,
such as PSNB and General Government Gross Debt, in the event that
the GIB could not pay its debts and the Government provided further
funds to support it. The precise impact would depend on the form
of support provided.
18. An important consideration is the efficiency
of a GIB borrowing itself compared to its activities being funded
from general government (eg extra DMO borrowing activity at the
margin). GIB debt issuance would need to pay a premium on DMO
debt issuance, even if the GIB debt had an explicit government
guarantee, as institutional investors would demand a premium to
reflect the fact that GIB debt would be significantly less liquid
than gilts.
ASSET SIDE
OF BANK:
IMPACT ON
PSND/B OF GIB PRODUCTS
Equity and Loans
19. Financial transactions with the private sector—the
GIB making loans or equity investments in return for which it
receives an asset—would increase PSND but not PSNB. A public
sector GIB could make loans and equity investments up to the Spending
Review allocation (including up to the level of additional asset
sale proceeds that are allocated to it), without increasing PSND
above the overall path set out in the Spending Review.
Guarantees
20. Any payouts made as the result of a guarantee
would score as grants so, would score against PSNB and PSND and
therefore need to be funded from within the GIB's DEL allocation
if the overall PSNB/PSND impact is to remain within the Government's
SR plans.
21. Payouts from guarantees, however, are by
their nature uncertain. The income from guarantees would score
to offset PSNB/PSND (unless used to fund further departmental
spending) but there would be a timing mismatch (as the income
would reduce PSNB/D in earlier years but payouts would increase
PSNB/ PSND later on); and a risk that payouts exceed the total
sum of costs (if charged below market value or if payouts exceeded
expectations). In addition, the payouts could be lumpy and uncertain.
DEFICIT REDUCTION
AND THE
SCALE OF
THE BANK
22. A borrowing, public sector GIB would need
to restrict its borrowing to stay inside the Government's fiscal
plans, and could particularly impact on the ability to meet the
supplementary debt test set alongside the fiscal mandate. It could
also create pressures on PSNB and the central test of the fiscal
mandate as the contingent liabilities involved in GIB borrowing
could materialise into calls for further government support.
23. Assuming that the GIB was successful in obtaining
return on its investments these restrictions would become less
of a burden as its balance sheet increased organically.
24. Unless excluded from Basel requirements,
the GIB also would need to keep a capital reserve as a certain
minimum percentage of equity capital, so could only borrow a limited
amount for a fixed amount of equity.
COMPARISON WITH
EUROPEAN MODELS
25. An analysis of other European models, including
KfW in Germany, CDC in France and CDP in Italy, shows a wide range
of models, most of which are majority owned or wholly owned by
the state. A summary table is at Annex 1.
Scope and role
26. European development banks have key differences
to the GIB:
- They have broad scopes, well beyond green infrastructure.
- Their customer base is different—most European
state banks lend to the public sector and to other banks.
- They have conservative investment policies, focused
on asset quality.
- Most provide low cost liquidity rather than risk-mitigation
products.
Accounting treatment
27. While all European countries operate under
the European System of Accounts ("ESA") 1995, European
development banks operate under different national fiscal policies.
In particular, the UK uses a wider (and truer) definition of "public
sector" debt and borrowing (PSND/B) than other European Governments
(which use "general government" net debt and borrowing).
As a result, European state banks score differently on their countries'
balance sheets.
Should UK change its accounting treatment or treat
GIB differently?
28. Excluding GIB borrowing from PSND, as was
done for Lloyds and RBS, would remove the risk of the GIB breaching
the fiscal mandate through borrowing. The treatment of Lloyds
and RBS debt was, however, justified as a temporary and extraordinary
(non-discretionary) situation.
Annex 1
EUROPEAN STATE DEVELOPMENT BANKS
| | |
| Debt Ratio
(public sector net debt/GDP)
|
| Country | Relationship to National Government
| Local Accounting Treatment | Expected UK
Accounting Treatment
| Existing
(according to CIA's world fact book, 2010)
| If Development Bank were included |
| Germany
— KfW
— €400bn
| — Public corporation 100% owned by Govt
— Explicit state guarantees on publically issued debt
— State control provides implicit guarantee for the entity itself
| — Equity stake counts towards general Government gross debt
— Liabilities and entity explicitly guaranteed (and unconditionally) guaranteed
— Guarantee of the entity itself not accounted for
| — Balance sheet would contribute to PSND
— PSNB would reflect guarantee payouts, voluntary debt write offs and operating losses
| 72% | ~90% |
| France
— CDC
— €221bn
| — Public corporation 100% owned by Govt
— State control provides implicit guarantee for the entity itself
| — Equity stake counts towards general Government gross debt
— Implicit guarantee of the entity itself not accounted for
| — Balance sheet would contribute to PSND
— PSNB would reflect guarantee payouts, voluntary debt write offs and operating losses
| 77.5% | ~87% |
| Netherlands
— FMO
— €2.3bn
| — Public-private development bank; 51% owned by Govt
— State control provides implicit guarantee for the entity itself
| — Equity stake counts towards general Government gross debt
— Implicit guarantee of the entity itself not accounted for
| — Balance sheet would contribute to PSND
— PSNB would reflect guarantee payouts, voluntary debt write offs and operating losses
| 62.2% | ~63% |
| Scandinavia
— Nordic Investment Bank
— Liabilities total €24.7m
| — Public corporation
— 100% owned by member Governments
— Government control provides implicit guarantee for the entity itself
| — Equity stakes count towards general Government gross debt
— Implicit guarantee of the entity itself not accounted for
| — Balance sheet would contribute to PSND
— PSNB would reflect guarantee payouts, voluntary debt write offs and operating losses
| n/a - multiple member states
|
17 February 2011
64
To achieve cyclically-adjusted current balance by the end of the
rolling five-year forecast period. Back
65
Relative to a baseline of growing DEL in line with general inflation
in the economy, and AME as forecast in the June 2010 Budget. Back
66
If the GIB were to borrow and then not spend this money there
would be no direct impact on the fiscal aggregates as the cash
reserves (liquid assets) it would hold would offset the borrowing
(liabilities) in the National Accounts. There could however be
secondary effects if the interests rates paid and received by
the GIB differed. Back
| 
