Green Investment Bank

Written evidence submitted by the Association of Greater Manchester Authorities and the Business Leadership Council (GIB 20)

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