The sale of the Green Investment Bank Contents

Conclusions and recommendations

1.The UK Green Investment Bank plc (GIB) has attracted substantial private investment into some sectors of the green economy, such as offshore wind, but the Department for Business, Energy and Industrial Strategy (the Department) does not know whether it achieved its intended impact. By March 2017, GIB had committed £3.4 billion to fund or part fund 100 projects, and had attracted £8.6 billion of private capital alongside its investments. These investments were primarily in offshore wind, and waste and bioenergy, but also in energy efficiency and onshore renewables. GIB told us that many other technologies, such as tidal power and carbon capture and storage, were not sufficiently developed for them to be suitable commercial investments. However, the Department lacked clear criteria or evidence to judge whether GIB was achieving its intended green impact and addressing failures in the green energy market, including a shortage of private investors prepared to invest in green energy projects. It therefore does not know to what extent GIB achieved its intended green impact, or whether overall it achieved as much as it could.

Recommendation: The Department should put in place a robust evaluation framework for all companies it creates. The Department must ensure that its evaluations: refer to the original policy objectives; are continuous; and are completed and published before any decisions are made about a company’s future.

2.The Department prioritised reducing the level of debt in the public sector and how much money it could gain from the sale over the continued delivery of GIB’s green objectives. The Department had two primary objectives for the sale: to remove GIB from the public sector balance sheet and therefore reduce public debt; and to achieve value for money, which it defined in terms of maximising the sale price. The sale reduced public sector net debt by £1.6 billion and moved responsibility for around £500 million of GIB’s future commitments to Macquarie. Subject to achieving its primary objectives, the Department also wanted to ensure that GIB continued as an institution that focused on investing in projects beneficial to the green economy. The government repealed legislation which protected GIB’s investment in the green economy—its green purposes—to ensure that GIB would be removed from the public sector balance sheet following the sale. The Department established a ‘special share’ arrangement to protect GIB’s green purposes after the sale, but it did not require bidders to make specific or legally binding commitments to how GIB would continue to deliver these in practice. The Department did not have any certainty over, for example, how potential bidders would invest in different sectors or technologies. Macquarie told us that the special share or other commitments it made were not a burden and did not affect the price it was prepared to pay. It is therefore unclear why the Department did not look to strengthen these commitments contractually.

Recommendation: When selling public assets UKGI should pin down commitments from buyers to ensure the original ambitions for these assets are achieved. Departments, in conjunction with UKGI, should be clear about, and justify, what commitments they are prepared to water down in order to secure a sale and what impact this may have on future benefits for British taxpayers. In this case the Department should have sought explicit assurances as to the quantum of future investment in the UK.

3.The Department succeeded in selling Green Investment Bank, but its approach to the sale was reactive, meaning that it had to make compromises to secure the sale. The Department followed a standard auction process but this took nearly 18 months, more than double the time expected. The delays were caused by a range of factors to which the Department had to react. Responding to what it saw as a “subdued” initial level of interest, the Department developed an alternative for a phased sale starting in late 2018. This alternative gave the Department a fall-back in its negotiations with Macquarie and helped secure a higher price. However, the Department only fully evaluated the potential benefits and risks of the phased sale option in February 2017, 11 months after launching the sale and after several key decisions had already been taken. The Department estimated that the phased sale option would raise £63 million more than selling GIB to Macquarie, although the high end of its range was £197 million more and the low end £75 million less. The Department decided not to adopt the phased sale option as it concluded it involved greater risks and would have delayed declassification. The sale to Macquarie also assumed that government would retain a 90% stake in five of GIB’s assets, which the bidder valued below government’s own valuation. In April 2017, the Department decided to sell GIB to Macquarie for less money than its mid-estimate in order to minimise its exposure to the risks associated with the phased sale option.

Recommendation: When selling an asset, all government departments should clearly outline at the start what they are selling, when they can be flexible, and when they will walk away. Analysis should be used to support these decisions before they are made, not after they are taken. The Department should seek to evaluate the assumptions it made to value GIB’s assets under construction, report this to the Committee, and set out how this will inform its future approach to assessing risk.

4.The Department put in place measures intended to protect GIB’s green objective, but these measures will not ensure that GIB is an enduring institution. The Department wanted GIB to be an “enduring institution” that continued to play a role in delivering its goals for energy policy but it was, and remains, unclear what this means in practice. In acquiring GIB, Macquarie agreed to retain GIB’s five Green Purposes following the sale. The Department established the Green Purposes Company (GPC) with the aim of protecting GIB’s green purposes, covering greenhouse gas emissions, efficient use of natural resources, the natural environment, biodiversity and environmental sustainability. The trustees of the Green Purposes Company will have powers to veto any changes made to the Green Purposes. However, these arrangements rely on Macquarie agreeing to continue funding the GPC. The trustees’ powers do not extend to approval of investment decisions. Macquarie has committed GIB to investing or arranging investment worth more than £3 billion in green energy projects over the three years after sale. However, these commitments are not legally binding and rely on a number of factors, including market conditions and future government policy decisions. The Department did not fully explore whether it could have obtained stronger green commitments to ensure that GIB continue to support its energy policy.

Recommendation: Government must clearly define relevant terms (such as ‘enduring institution’) so it can monitor performance and, in this case, evaluate alternative sale options. If an objective is not important in the context of a sale or other transaction, government should be explicit so it does not constrain decision making.

5.Without any legally binding commitments, Green Investment Group’s (GIG) future impact on the UK’s climate change goals is uncertain. Government intervenes in a number of ways to help tackle climate change, such as providing financial support for low carbon energy sources and for improved energy efficiency. It is unclear, however, how the Department expects GIG (the rebranded GIB under Macquarie ownership) to contribute to these interventions or the UK’s industrial strategy, for which the Department is also responsible. GIG is not currently required or incentivised to invest in the UK, or innovative technologies, or to focus on any of GIB’s five Green Purposes. Macquarie told us that a significant majority of projects where it will consider investment in the UK are likely to require some form of financial support from the government, and are therefore dependent on future government policy. Such projects include the proposed tidal lagoon in Swansea, where Macquarie told us its investment was very dependent on government policy and support. It is unclear how the Department plans to monitor GIG’s performance against the commitments that Macquarie has made, or the impact on government’s wider green goals.

Recommendation: The Department should, by 31 December 2020, write to the Committee with a detailed explanation of GIG’s activities and performance in the UK, including: against the intentions Macquarie made to the Secretary of State in April 2017; its impact on the UK’s climate change goals; and the effectiveness of the special share arrangements.

14 March 2018