Green Investment Bank

Written evidence submitted by the House of Commons Scrutiny Unit

GREEN INVESTMENT BANK – EFFECT OF OPERATIONS ON NATIONAL ACCOUNTS

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;

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.

http://www.hm-treasury.gov.uk/d/classification_sector.pdf

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

Separate Institutional Unit

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

· drawing up accounts

Institutional Sector

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

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’.

Public or Private Sector

6. ONS will determine whether GIB is in the public sector, i.e. a ‘public corporation’ or the

private sector, i.e. 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, e.g. 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, e.g. 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. e.g. by retaining

controls over directors’ pay or dividends, this could be seen as a sign of public sector

control.

Indemnities

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.

Funding

19. A body can be classified to the private sector even if 100 per cent 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.

Ownership

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.

ONS Decision on GIB Classification

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.

Effect of Classification of GIB on Government Debt and Borrowing

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