The government has to find a fail-safe way to cement the Green Investment Bank's low-carbon purpose - and fast
If the government's decision to privatise the Green Investment Bank (GIB) was short sighted, the plan to privatise it while removing the legal requirement for it to remain a green-focused institution appears almost blind.
Let us leave aside for a moment the debate about whether it is wise to dismiss everything we know about mainstream economics and the success of state-backed banks in other countries, in order to privatise a bank that could borrow at ultra-low interest rates if only the government let it. After all, economists and politicians have spent more than five years trying to convince the government of the merits of Keynesianism and have singularly failed to get George Osborne to accept that if we are going to let the Chinese government fund our strategic infrastructure, we might as well borrow and fund it ourselves. Moreover, this privatisation is being handled by Sajid Javid (pictured), a man who apparently thinks Ayn Rand's The Fountainhead is one of the greatest books ever written, presumably on the grounds the one thing all literary classics need is naked ideological dogma. Rightly or wrongly, the GIB is going to be privatised, the question is how and when.
This question has become vexed by the advice the government has taken, which insists it has to repeal the legislation that gives ministers a veto over the GIB's articles of association, including the five governing principles that give the bank an explicitly green remit. BusinessGreen understands both government and GIB officials are extremely frustrated at this advice, which is so restrictive it suggested even if the government sold its entire stake in the bank it would remain on the government's balance sheet as long as ministers had a degree of legal control over the institution.
It may seem like an arcane detail, but the repeal of sections of the Enterprise and Regulatory Reform Act 2013 could have a drastic impact on the nature of the GIB and the UK's wider green investment landscape. When the privatisation was originally announced, the bank's management sought to alleviate concerns that its influence would be diluted if the government offloaded it, arguing the state was likely to retain a minority stake and pointing to the way its core mission was cemented in law. Now that legal protection is to be repealed and we still have no indication as to what stake, if any, the government will retain in the bank.
You can see why green business leaders and campaigners will be concerned. The bank has not been perfect – critics maintain it should have done more to support higher-risk early-stage green infrastructure projects, instead of focusing on recycling investments in existing assets – but it has provided an important source of capital in an emerging market and provided further assurance to other investors that the government has skin in the game when it comes to low-carbon infrastructure.
Now, the risk of the bank being repurposed by its new owners to shift its focus ever further away from higher-risk emerging technologies and towards projects that may qualify as 'green' only in the loosest sense (or may not even qualify at all) has increased. Sources close to the bank argue the main reason buyers are interested is because of its record in an exciting and expanding green market. That is no doubt true, but without the threat of ministerial veto it would become easier for a privately owned GIB to back any number of commercially viable, but environmentally dubious projects. The risk remains small, but would the government be able to stop a privately owned GIB deciding that efficient coal plants or fracking projects are green enough and deserving of support?
In announcing this morning that he will move to repeal the key legislation, Javid attempted to downplay these concerns, insisting that "as part of any sale process, we would expect potential investors to confirm their commitment to GIB's green values and to set out how they propose to ensure these are protected."
His phrasing seems to suggest the ball is in the prospective buyers' court and it is up to them to put forward credible guarantees to ensure the bank's green purpose is protected. But the government has a responsibility too; a responsibility to ensure these guarantees are watertight and cannot be reversed by a future owner.
Contractual protections are all well and good, but, having been burned by some of the agreements that characterised the Royal Mail privatisation, the government needs to ensure any guarantees come with harsh penalties if they are breached. Better still, ministers need to think creatively and find a new way to cement the bank's green principles in its articles of association. Is it too late to turn the GIB into a B-Corp?
The clock is ticking. The GIB needs additional funding next year if it is continue to grow and provide a much-needed source of capital for the UK's faltering green economy. If ministers are really insistent the bank can borrow only once it is off balance sheet, they need to find a way of getting it off balance sheet, quickly. But in this rush to get the bank into private hands, they also need to provide 100 per cent assurance the GIB will remain green.
Guaranteeing the GIB's green status is not just important, it is essential. And once such guarantees are secured, perhaps the government can offer some insight into what it plans to do with the revenue generated by the sale of a taxpayer-funded body that is committed to decarbonisation. Because currently, a host of decarbonisation policies from the feed-in tariff to the renewable heat incentive to the domestic energy efficiency regime and various clean tech R&D programmes are looking chronically underfunded at a time when the UK is no longer on track to meet its legally binding emission reduction targets. The chancellor no doubt already has some ideas on what to do with the proceeds from the GIB windfall, but there are a lot of industries the GIB was designed to nurture that could really do with the cash right now.
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