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This article was included in the summer 2011 issue of Informer - the real estate newsletter.
Against the backdrop of increasing energy costs, climate change and the need for the UK to invest, fund and plan for the strategic development of its energy infrastructure, the Government has made a recent announcement in relation to establishing a Green Investment Bank (GIB).
On 23 May 2011, Nick Clegg announced further details about the Government's Green Investment Bank (GIB), including that GIB would begin investing in low carbon projects from April 2012. This was followed the next day with a report from the Secretary of State for Business, Vince Cable, setting out more detail on its governance and business model.
What is the Green Investment Bank?
In the March 2010 Budget, the Labour Government announced its intention to establish the GIB. This was to involve both public and private sector capital, to invest in the low-carbon sector. In May 2010, the Coalition Government confirmed plans for the GIB, setting up the GIB Commission.
In the March 2011 Budget, the Chancellor, George Osborne, announced that the initial capitalisation of the GIB would be £3 billion but that the GIB will not be given borrowing powers until 2015-16. The Government expects the GIB to attract a further £15 billion of private sector investment, taking the total funds available to the GIB to £18 billion.
Not another bank? Why do we need a Green Investment Bank?
The Government estimates that the transition to a "green" economy will require an investment of up to £200 billion in the energy sector over the period to 2020, and further investment in other key sectors such as transport, waste, water and flood defences. Without its intervention, and the establishment of a specific energy bank, the Government considers that there is a risk that the necessary, and key, levels of investment that are required in these sectors will not take place.
How will it work?
The GIB will first need to be approved on state aid grounds by the European Commission before it can be established. It will therefore be launched in three phases as follows:
- Phase one: Incubation from 2012 to state aid approval. During this phase, in order to progress the work of the GIB as quickly as possible, the Government will make direct, state-aid compliant investments in green infrastructure projects from April 2012 until these investments can be transferred to the GIB. This will allow companies to start to plan their applications for funding for green projects.
- Phase two: Once the Commission has approved the GIB, legislation will be introduced to establish the GIB as an independent institution. The GIB will operate at arm's length from Government, which will agree the GIB's strategic priorities.
- Phase three: The GIB will have full borrowing powers in that it will be able to borrow in the capital markets and from the private sector from 2015, subject to public sector net debt falling as a percentage of gross domestic product
"Green assets"
The GIB's initial remit will be to focus on green infrastructure assets aiming to achieve significant green impact whilst at the same time making financial returns. The GIB's early targets are likely to be offshore wind, waste and non-domestic energy efficiency projects. Further work is being done to explore other sectors which may be eligible for investment by the GIB, so these eligible sectors will change over time.
The GIB may be also used to help finance the Green Deal scheme. The Government is currently undertaking further work to assess the potential and necessity for the GIB to support the financing of investment in domestic energy efficiency during the first stages of the Green Deal. The Progress Report says that the primary aim remains for the Green Deal to be a private-sector led scheme. The Progress Report also says that although the GIB is likely to continue to explore other products, a range of possible GIB product interventions have been tested, including:
- Risk mitigation: a product that would provide first loss debt in each of the construction and operating phases of a project.
- Innovative finance mechanisms: products that would provide an upfront refinancing commitment to guarantee an exit for long-term bank finance after construction, upon certain conditions being met.
- Capital provision: products that would involve the provision of equity and senior debt on market terms to provide additional capital.
Investor concerns
A major concern for investors has been whether the GIB's governance would be set out in legislation or whether control would be retained by the Treasury. If control was retained, then some investors have commented that this could risk political considerations influencing the GIB's investment activities. This was particularly because the Treasury had also argued that the GIB should only be allowed to borrow from the Government rather than from the private sector. It is understood that, in addition to disputing the control of the GIB with the Treasury, DECC (the Department for Energy and Climate Change) has also disagreed with the types of green project in which the GIB should invest. Clearly, much work is needed in order for GIB to be established and be fully operational as an "independent" bank and further announcements and guidance is expected.
We can be certain of one thing, that the funding of our energy infrastructure, whether through GIB, or otherwise, is likely to be a key issue for the UK economy in the future.