Professor Michael Mainelli, Executive Chairman, The Z/Yen Group
I don’t question the commitment of Green Investment Bank (GIB) supporters to the environment, but nor should adherents question mine when I wonder whether GIB will achieve what they desire. To bring the discussion up to date, a GIB proposal gained steam in 2008 leading the Conservative party to announce a consultation in November 2009. Bob Wigley, former Chairman of Merrill Lynch Europe, headed the Commission when it got going in February 2010.
The economic case for GIB has always been money and jobs - "new green technologies represent an important new source of jobs, investment and enterprise … the global market for green technologies and services is already worth $3 trillion per year … the UK has less than a 5% share of this market – less than France, Germany, USA or Japan … figures also show that the market shares achieved by Germany and France, normalised to their GDP, are around 50% higher than the UK's share.” The Commission reported back in June 2010, recommending an Act of Parliament to form GIB. Putting aside the political imperative to produce political theatre for a cost-constrained political party saddled with demanding carbon targets, the GIB initiative claims to address the following market failures,
- "market investment capacity limits and limited utility balance sheet capacity
- political and regulatory risks stemming from the fact that government policy determines expected returns and the history of policy changes;
- confidence gaps among investors given technology risks, lack of transparency in government policy and high capital requirements for commercialisation;
- the challenge of making large numbers of small, low carbon investments attractive to institutional investors."
The Commission rightly identified the need to ‘de-risk’ green investments. It rightly identified the big risks as a history of policy changes and perceptions of future government risk to come. But, a bit like pouring more oil on a burning fire, GIB would create more government policy risk. And so it has. Timing ranged from recommendations for a board by October 2010 to talk of getting underway by 2014. Capitalisation figures are volatile, initially around £6 billion, then lowered in the autumn of 2010 to £1 billion, then in March 2011, “This Budget announces that the initial capitalisation of the GIB will be £3 billion and that the GIB will begin operation in 2012-13, a year earlier than previously anticipated.” Government vacillation is supposed to lower risk sufficiently to leverage, in the jargon, £18 billion of private investment in green infrastructure by 2014-15. There is even talk of GIB having borrowing powers from 2015-16.
So why do GIB supporters get a hard ride from City analysts? With private offshore wind investment alone possibly exceeding £30 billion, it’s difficult to see GIB making a difference across so many green sectors. In fact, GIB has already held up investment. A rational investor seeing a looming tight election in 2009 would wait till 2012-14 to see the lay of government-policy-risk-land. Why invest now if later investors will get a better deal? And what confidence do investors have of future Government consistency? Government policy risk since 2009 has increased rather than decreased, with a £1.4 billion EIB wind farm announcement locked to RBS, Lloyds and BNP, fears over nuclear policy wobbles due to Japan, changes to feed-in tariffs and windfall energy taxes, all highlighting capricious government. Investors sometimes like multi-lateral investment or development banks as co-investors who help them force governments to stick to policies. GIB will hardly be independent, whatever the rhetoric. For a government that has binned regional development agencies and their wasteful investment arms, without many tears being shed, why re-create government investment? With many cries of “we’ve learned the lessons of the past”, it rather looks as if the execrable history of UK government-directed investment from aerospace to electronics to computing is about to be repeated, not just echoed. And finally, GIB is only a bank when it can leverage itself, i.e. create money. But who in the City, or any other market, needs a government subsidised competitor? And who outside the City wants to encourage further “off balance sheet” shenanigans?
I agree with GIB supporters that government policy inaction risk is the distinguishing green investment risk. The Long Finance’s London Accord, comprising over 40 financial institutions, has a simpler, slightly subversive suggestion presented to the World Bank Government Borrowers’ Forum at Ljubljana in May 2009. An index-linked carbon bond is a government issued bond where interest payments are linked to the government’s published carbon policy targets. At their simplest, index-linked carbon bonds would set interest rates by reference to governments’ carbon emission targets, tariff feed-in prices, in-country fossil fuel prices or carbon prices. Governments would pay more interest when they missed targets or when relevant green prices were lower than governments had promised. Proceeds are not hypothecated. Governments can use the funds for anything – schools, roads, hospitals, paying interest.
The resulting hedge enables more confident investment in projects that pay off in a low-carbon future: if the low-carbon future fails to arrive the index linked carbon bond pays a higher return, thus making up for the shortfall in return from the low carbon project. Further, the debt price would provide a constant speedometer about confidence in governments meeting green targets. Bond-cuffs. It’s difficult to see the market failures GIB addresses, but easy to see the government failures index-linked carbon bonds address. Oh, and with all the government debt being financed, index-linked carbon bonds could be launched in 2011.
So was this article about jibing, “making jeering or scoffing remarks”, or jibbing, “balking at doing something”? While my intention was the latter, the sailor in me knows the former spelling could also define why governments are the biggest risk to green investment – “jibing: changing direction through the wind”.
Professor Michael Mainelli is Executive Chairman of the City of London’s leading commercial think-tank, Z/Yen Group, and Principal Advisor to The London Accord.
- George Osborne: A sustainable Government; a sustainable economy