The circumstances that drove the government's planned full privatisation of the Green Investment Bank have changed beyond recognition - is it time for a rethink?
It was John Maynard Keynes who famously observed "when the facts change, I change my mind - what do you do?" It is a question Theresa May and her new Business Secretary Greg Clark will soon have to answer, as the long-running attempt to privatise the Green Investment Bank (GIB) nears its culmination. Their response will provide the clearest signal yet as to whether the government's new, let's be honest, slightly Keynesian-sounding, 'industrial strategy' rhetoric is a cynical exercise in political positioning or a meaningful attempt to improve the competitiveness and resilience of the UK economy.
In the wake of the Brexit vote the bid deadline for firms interested in acquiring the GIB and its assets was extended to allow them to better complete due diligence processes. Sources indicated the extension was the result of the huge complexity associated with a deal that could be worth around £4bn, rather than disruption caused by the Brexit vote. But if the referendum result has not changed the sale process, it has certainly changed the context in which the proposed privatisation will take place - in fact it has changed it beyond recognition.
The government's plan to privatise the GIB was based on five inter-related arguments. Firstly, if the bank was to be allowed to borrow without undermining George Osborne's supposedly cast-iron deficit targets it needed to be moved out of government hands and off the Treasury balance sheet. Secondly, a cash sale to a private investor would provide another handy one-off boost for Osborne's debt reduction drive. Thirdly, getting the GIB off the government's balance sheet would free it from EU State Aid rules which sources insisted had restricted its activity in some crucial areas. Fourth, some observers reckoned there was an ideological desire to extricate a Conservative government from any involvement in a Lib Dem-inspired state-owned bank and the proactive industrial strategy it implies. And finally, the GIB urgently needed a cash injection from somewhere as it is fast approaching the point at which all the initial Treasury capital has been invested.
Following the most eventful month in the post-war history of British politics only the last of these five arguments is still incontestable. The GIB still needs an injection of capital in the coming months if it is to continue to invest in much needed low carbon infrastructure. But the rest of the rationale for privatisation has been transformed, meaning the government should at the very least revisit its thinking and ask if the plan to offload such a strategic state asset still holds water.
George Osborne's departing gift to the UK was the admission his 2020 budget surplus target would have to be shelved - a wise move that his successor, Phillip Hammond, has hinted heavily he wants to build on with a promise to "reset" fiscal policy and "borrow and invest wisely" at a time when interest rates on government debt are almost through the floor.
The need to get the GIB off the government balance sheet in order to allow it to borrow - an interpretation that is said to have necessitated a sale of 100 per cent of the government's stake and sparked legal gymnastics in the form of the proposed special share mechanism and its attempt to protect the bank's green remit - might not be quite so pressing after all.
In fact, the GIB in its current form or something similar could provide a ready and waiting mechanism for Hammond to deliver his promised policy reset and pump much needed low cost capital into the kind of job-creating, productivity-boosting projects the UK is likely to need if it is to stave off post-Brexit recession. The facts have changed, and it would be bizarre for the government to wilfully rid itself of the option of a more proactive state bank at a time when it might just need one.
Meanwhile, one of the many EU policies likely to be 'in play' in the Brexit negotiations are State Aid rules.
As Ben Caldecott of think tank Bright Blue argued in an excellent column for BusinessGreen last week, state development banks in other European countries, such as Germany's KfW, have block exemptions from State Aid rules because they pre-date the EU. "Now that we are committed to Brexit, the UK Guarantees Scheme for Infrastructure and GIB should be similarly unshackled so they can provide concessional finance," he proposed. "Providing low cost finance to sectors (as opposed to specific companies or 'national champions') through fair and competitive tendering processes can boost growth, without unfairly and counter-productively 'picking winners'. Such a reform would allow lower cost capital to be invested in assets able to improve long-run productivity." Amen to that.
Again, the facts have changed and it would be bizarre in the extreme for the UK to fully offload its strategically-focused State-owned development bank, just at the precise point when negotiations with the EU could finally allow the UK to properly operate the kind of strategically-focused State-owned development bank some of our more competitive European neighbours have benefitted from for decades.
Finally, both Theresa May's speech making the case for a more assertive industrial strategy and the formation of a department with the term 'industrial strategy' in the title, suggests the previous government's anti-interventionist ideology may be on the wane. There are still plenty of influential Conservative Ministers who think the state's role should be defence of the realm and collecting the bins, although there are also a few who would privatise the army and let the market decide whether or not we want our cities to collapse under their own waste if they got half a chance. But the key figures at Number 10, the Treasury, and the reformed Business Department seem to understand the merits of government-backed investment in strategic infrastructure and industries.
The facts appear to have changed and the potential for state-backed investment as a means of bolstering the UK's green economy and meeting its legally-binding emissions targets should not be anathema to the main players in the May administration.
Where do these changes leave the GIB privatisation? With respected international institutions just weeks away from tabling their bids and the bank still requiring a cash injection it seems highly unlikely the sale process will be pulled at this late stage. Ministers are desperate to send the signal the UK is 'open for business' and will be keen to grab the headlines offered by a successful sale. A fully publicly funded Green Investment Bank using ultra low-cost capital and generating long term returns for the taxpayer while nurturing the development of strategically critical infrastructure and industries remains a very good idea, but its continuation in its current form is politically unlikely.
Equally, full blown privatisation of the GIB need not be a disaster. The special share that comes with the proposed sale should protect the bank's unique green remit, while even if the GIB is fully privatised that would not necessarily stop a government keen to take advantage of cheap money from tendering the GIB and other banks and asset managers to channel public funding into priority sectors.
But, in light of recently changed circumstances, a third way might be available that secures the bank the private sector investment it needs while best ensuring it remains a strategic asset capable of delivering low cost finance to productivity-boosting, emission reducing sectors. Speaking to the Environmental Audit Committee last year, GIB chief executive Shaun Kingsbury said he was "agnostic" about whether private investors coming in to the bank took a minority or majority share, while also making it clear the bank's preference was for the government to retain a sizeable stake.
"It is our preference that the government retains a significant minority-25 per cent, 30 per cent, in and around that number," he explained. "That is preferable for a couple of reasons. First, they have been a very good shareholder, let me be clear, and I would like their continued presence in the shareholding of the company to bring that continuity as we move through from being purely publicly owned to being publicly and privately owned. The second reason I think that is important is it demonstrates a commitment to the bank, and with that commitment you will get much more interest in the people wishing to buy the reciprocal 70 per cent-ish, 75 per cent, whatever that number is. That is important in terms of driving the competitive tension in the process to get the best possible price, to get the best possible commitment to the greenness of the bank going forward, and to make sure that we have an enduring institution here that is around in five years' time, in 10 years' time building the clean, green infrastructure the country will still need."
The context surrounding the GIB privatisation process may have changed, but it has made the bank's original preferred option look more compelling than ever. Full privatisation of the GIB risks undermining one of the economic opportunities that could come from Brexit, at the same time as running counter to Theresa May's promise of a new approach to industrial strategy. It is time for a rethink.