The Spending Review announced £1 billion of Government funding plus ‘significant’ proceeds from the sale of assets to capitalise the Green Investment Bank (GIB). Details as to how the GIB will work are to be announced in the Spring. By itself this ain’t going to be enough.
Ernst and Young estimate the GIB would need to be capitalised to the tune of £4-6 billion to 2015 to meet the UK’s climate and energy goals. To be sure, funding alone won’t be enough from the Government in the absence of a coherent and stable climate and energy policy regime.
Forget about £ for capitalisation, the GIB’s funding issues appear even more fundamental. The £4-6 billion is supposed to help unlock investment of £250-450 billion to 2025, compared with a current expectation of only £50-80 billion. Where’s the extra money going to come from? Realistically it has to be the private sector. The Government’s modest £1 billion (so far) reflects the steep challenge of bringing the public finances under control. Fair enough.
So, private sources: Bonds, deposits, potentially equity to support the GIB; plus direct debt or equity through co-financing. The GIB Commission, which published its report in July, discusses most of these. Let’s look at just one – bonds. The GIBC suggested that issuing bonds was the major way the GIB could draw in funding from major institutional investors like pension funds or insurance companies – perhaps the majority.
But issuing bonds means in addition to holding assets, the GIB would also have liabilities – just like a real bank. Majority ownership along with any Government conditions of control on the GIB would indicate the Government controls ‘general corporate policy’. The problem is that these liabilities will then be counted in Public Sector Net Debt (PSND), which the Government is publicly committed to have falling by 2015/16. PSND is defined as financial liabilities less liquid assets.
The GIBC is at least partly alive to the issue, noting that all the GIB’s investment decisions would be made independently from the Government. Unfortunately, with majority ownership, that is unlikely to be enough.
There are ways around this. The Government could pledge to sell a majority of its shares by the end of the Parliament (thus not hurting its debt goals). The problem with this is that the GIB might be a couple of years away from investing, longer before it issues bonds, and much longer still until investment returns that might attract private buyers starting rolling in.
Another idea would be to devolve the Government’s shareholding to individual taxpayers, again by the end of the Parliament, perhaps with a further restriction of say 5 years on on-selling. This ‘green shareholding’ could even help build popular enthusiasm for the GIB.
A third idea could be setting the GIB up to only issue third-party guarantees, much in the way the Government does currently with the Enterprise Finance Guarantee (EFG). To my knowledge, EFG-backed loans do not add to Public Sector Net Debt (PSND). Rather only the expected cost of the guarantees shows up, as government expenditure, which in excess of revenue leads to the flow of Public Sector Net Borrowing (PSNB). Only this small flow, not the whole value of loans, adds to the stock of PSND. PSNB is defined as the difference between total expenditure and receipts or equivalently the change in net financial liabilities.
The question remains though, whether dropping majority ownership will be enough to lose the GIB from the Government’s accounts, or, in the case of the guarantee option whether the GIB will be able to meet its mission. That’s because the Government wants the GIB to pursue an ambitious, largely public (at least for now), aim – financing green investments with sub-market risk-return profiles.
Could the Government force the GIB to retain this mission without a majority ownership and without falling within the definition of influencing ‘general corporate policy’?
And if the Government gave guarantees only, will that allow enough green investment? It might make finance for green investments available that isn’t there currently – but perhaps at a price that chokes off demand for such finance.
If all these fixes fail or are unacceptable to the Government e.g. because it doesn’t want to do things ‘off balance sheet’ – what then? It seems to me that keeping the GIB in the public sector, even if it issues bonds, will cause a hit on PSND – but it’s much less clear what the impact will be on PSNB. That’s because at the same time as creating financial liabilities (bonds) it would be creating financial assets (giving out loans and guarantees).
The Government’s major fiscal goal is to eliminate the structural fiscal deficit (the structural element of PSNB) over the course of the Parliament. For PSND, the goal is only that this will be falling by 2015/16. Given the PSND hit would likely come before 2015/16, this should still be achievable.
Whatever option the Government ultimately goes for it needs to keep in mind the scale of the investment challenge it is trying to address.