The context that originally shaped the Green Investment Bank privatisation plan has changed; it is time the government's approach changed too
Watching Nick Hurd being quizzed on the government's planned privatisation of the Green Investment Bank (GIB) earlier this week, I couldn't help but feel a twinge of sympathy for the Climate Change Minister and his Department for Business colleagues.
Not that the urgent question about the controversial sale granted to the Green Party's Caroline Lucas wasn't justified and necessary, it was. And of course, any sympathy is quickly tempered by the fact the criticism sparked by the government's likely privatisation of a prized taxpayer asset to an Australian bank with a reputation for asset-stripping is entirely of its own making.
But you would need a heart of stone not to empathise a little with Hurd as he found himself in the position of having to adhere to ridiculously strict non-disclosure requirements, meaning he could not name the companies bidding for the GIB despite everyone in the chamber and beyond knowing precisely who they are (frontrunner Macquarie Group and a rival bid from a coalition of investors led by Sustainable Development Capital (SDCL), just in case you haven't been reading the business pages lately).
Nor could he provide his inquisitors with the one bit of information they craved: namely what, if anything, the government can do to ensure the new owner of the GIB resists the urge to strip the institution of its assets and continues to mobilise sufficient levels of investment in relatively early stage green infrastructure projects. Lacking the freedom to comment on the precise details of the on-going privatisation negotiations due to those same onerous competitive sensitivity issues, Hurd could do nothing but resort to highlighting the government's proposed independent special share in the bank - which critics have universally dismissed as inadequate protection for the bank - while offering vague reassurances about the intention to sell the bank as a "going concern" and the requirement for bidders to come forward with credible plans for its future development.
As he received the hairdryer treatment from Dennis Skinner and forensic questions about Macquarie's record of asset stripping from some informed backbenchers, Hurd might have been forgiven for privately reflecting that he was being asked to defend a policy dreamed up by former Business Secretary and Ayn Rand aficionado Sajid Javid, not to mention a process dominated to date by Treasury officials who are desperate to pocket the cash from the sale and have never really understood the strategic value of the GIB.
In the circumstances Hurd did a pretty good job of detailing how even if the GIB stayed in government hands it would look to offload some assets in the future, how it is debatable whether a state-owned bank is needed in an increasingly mature market, and how the bidders are only interested in the bank because they want to build on its position in an increasingly attractive green infrastructure space.
But faced with questions about what guarantees the government could secure about the bank's post-privatisation direction, why Ministers would want to offload such a strategic asset at a time when they are committed to a more activist industrial strategy, and whether or not this green bank could soon be allowed to invest in fracking projects Hurd's responses felt, well, less than bankable.
The rumour doing the rounds in parliament's tea rooms is the still relatively new team at the Department for Business, Energy, and Industrial Strategy is not 100 per cent sold on this privatisation. There is thought to be recognition in some quarters that concerns about the future direction of the bank post-privatisation have some justification, as well as an acknowledgement the bank could play a useful role in driving the government's new industrial strategy. City sources reckon the process is hanging in the balance with a number of possible outcomes still on the cards. Either way, a decision is required soon, as the current uncertainty and the inevitable impact on morale at the bank is doing the GIB no favours as it continues to pursue its all-important green mission.
Plan A remains the sale of 100 per cent of the bank, with Macquarie very much in the box seat as the likely new owner. It should be noted SDCL issued a statement this week arguing its offer was "the best alternative to meet the government's objectives" and it is "committed to keeping it British, green and growing". But it should also be noted SDCL's coalition of investors includes overseas backers and several media reports have indicated Macquarie remains the frontrunner.
A complete sale of the bank need not be a disaster. Macquarie issued its own update this week that did not reference the takeover bid, but did highlight its multibillion dollar track record of investing in UK renewables projects. And SDCL has said it wants to "safeguard the future of the bank as a going concern".
Hurd is right when he says the bidders are interested in the GIB because they recognise the attractiveness of its position as a leading investor in green infrastructure.
But it is still hard to see how the deal as it is currently envisaged could guarantee continued investment from the bank at the requisite level or in the right sort of projects. The government's much-trumpeted independent special share should ensure when the GIB invests it does so in demonstrably green projects. But once the bank is 100 per cent controlled by a new owner its former government owner will struggle to stop the GIB being hollowed out.
The commercial temptation for the new owner to sell off assets that were invested in at an early stage and are now offering profitable revenue streams would be considerable. At that point would the new owner return the cash to shareholders, divert it to other potentially more profitable parts of the business, or recycle it into more green projects as the GIB would have done in its current guise? Even if bidders insist their intention is to honour the GIB's current strategy what guarantees can they give? Macquarie's track record of offloading assets to maximise returns is well documented.
Dennis Skinner's critique may have been as vocal as it was predictable, but his allegation that history shows how governments sell off assets to the highest bidder and then watch from the sidelines as the repercussions, positive or negative, play out rings true. The risk of the GIB continuing as a weakened, under-invested institution, focused on delivering returns to overseas shareholders, and offering limited finance to only the safest and most mature clean technologies is very real. The risk, highlighted by the Environmental Audit Committee's Mary Creagh, of a Royal Mail style debacle where private shareholders walk off with extraordinary returns at the taxpayers' expense is similarly real.
The fact is the context that delivered the original rationale for privatising the GIB has changed considerably over the past year.
The two main reasons for privatising the bank were financial and ideological. Financially, the Cameron government saw deficit reduction as a priority, and recognising that the bank needed a capital injection in the near future decided it had better come entirely from the private sector. The resulting windfall from a sale would also come in handy to help make George Osborne's notoriously dubious sums add up. Ideologically, the feeling within parts of the Treasury was that in just a few short years the bank had served its purpose of addressing a market failure and was already crowding out private finance that could just as effectively fund mature clean energy projects.
Fast forward a year and the May government has unceremoniously torched Osborne's deficit goals and has embraced the need for a more interventionist state and coherent industrial strategy, not to mention a new national decarbonisation plan. Moreover, the bank is now profitable, delivering financial returns to taxpayers. Even if the government insists on honouring the arcane accounting rules that mean that if it holds even a tiny minority share in the bank it must remain on the Treasury's books, the political pressure from deficit hawks is not as pronounced as it was.
Ideologically, it is highly contestable the market failures the bank was meant to address have been resolved. Critics say the bank has been too focused on onshore and offshore wind projects that private investors were already keen to back. But while this was the bank's initial focus it has in recent years played a much more active role in anaerobic digestion and energy efficiency projects where the market has singularly failed to move fast enough. The bank may lend on commercial terms, but its position as a catalyst, mobilising private finance and helping to ensure the market evolves faster than would otherwise have been the case, is clear. The bank in its current guise would be a likely initial investor in new technologies like floating wind farms or marine energy technologies, but is the same true of most infrastructure banks? Theresa May has made it clear she wants to see a more interventionist state, the GIB is what that looks like.
All of which means the government should not just be comparing the two bids for the GIB against each other, but also against alternative plans for the bank's future that are in line with the government's strategic goals.
A viable Plan B could see the government retain full or at least majority control of the bank, take what is, in the grand scheme of things, a miniscule hit to its deficit reduction schedule, and let GIB get on with the serious business of accelerating green investment across the economy (accelerating being the key word, private investors will deliver green infrastructure, the GIB will help them get there faster).
The boost to both the government's decarbonisation plan and industrial strategy would be considerable, and it would likely require a much smaller injection of capital from the Treasury than had originally been envisaged. The bank is in the process of raising a new fund for investment in offshore wind projects that is expected to top £1bn. There is also the potential to recycle revenues from those valuable assets the bank already holds and ensure the proceeds are used for new projects. The bank is already quietly getting on with tapping into private sources of capital, but without compromising its original strategic goals in any way. There is no reason why this should not continue and expand into other areas, curbing the need to ask the Treasury for cash injections on a regular basis. If the Treasury really has no money to spare, a buyer for a stake in GIB could likely be found given the attractiveness of the sector and its growing profitability.
Alternatively, if the government genuinely believes the bank would be better off in private hands then it must make sure the criteria it is using to judge the bids are much more robust than city sources currently believe to be the case. As a bare minimum a Plan C should strengthen the powers of the independent special shareholders to ensure the bank's mission is properly honoured and secure binding assurances from the new owners that the GIB would not be subsumed into a larger entity, would continue to mobilise meaningful levels of investment, and would not be raided for a short term shareholder windfall. If the bidders are not willing to proceed under such conditions, then so be it.
Hurd and his colleagues may not be able to name the bidders they are considering, and they may not be able to provide much information on the criteria they are using to weigh the bids. But that should be where the restrictions, not to mention any sympathy for the challenge they face, ends. They are not without options as they look to deliver the best possible result for taxpayers and the UK's strategic industrial and environmental goals. The point is fast approaching when they will have to exercise one of those options. It is time for Plan B.
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