In August 2017, the government sold the Green Investment Bank to a consortium led by the Australian banking group, Macquarie, for £1.6bn. Wind back to 2010 and the Green Investment Bank had been heralded as an opportunity to deliver major projects on the UK’s ambitious carbon reduction targets and to boost the green economy.
The UK’s commitment under the Climate Change Act 2008 was to reduce greenhouse gas emissions by 34 per cent by 2020, and by 80 per cent by 2050 (with the baseline measured from 1990 levels).The EU Renewable Energy Directive of 2009 also commits the UK to securing 15 per cent of all UK energy from renewable sources. The creation of the GIB – which was finally formed in 2012 – was a signal that the UK was ramping up its focus on climate change.
But by 2015, with another spending review underway, the government decided that it could not afford further public investment in GIB. David Cameron’s government also had a policy goal to sell assets where there was no strategic rationale to retain them. If a sale could also contribute to a reduction in the fiscal deficit then it was viewed as a double win for the government.
The Public Accounts Committee examined the sale last year. While the government broadly secured the financial objective, we have serious concerns about whether the Green Investment Group (as it became) will contribute to the UK’s green objectives. The GIB was created because a lack of private investment in green projects prior to 2011 meant the UK was not likely to meet its obligations. In 2011, the government estimated this shortfall to be £33bn per year in the decade to 2020.
The GIB was expected to take the risk that other investors would not, with a potential win for UK industry as well as the climate. The bank’s mission was to “accelerate the UK’s transition to a greener, stronger economy” and to “build an enduring institution” – though “enduring” was not clearly defined, which became an issue when we examined the sell-off.
The “double bottom line” policy meant that the GIB was designed to achieve both green impacts and financial returns. Financial success was determined by a required rate of return on investment, but the definition of what constituted success for the green objectives was not clear and this has been a concern running through to sale and beyond.
The lack of defined green success criteria made it impossible to measure whether the objectives had been achieved. And the contribution of the GIB investments to wider growth in the green economy was not properly evaluated, so it has been impossible to assess the degree to which the GIB caused growth in the green economy since 2012, and whether it addressed previous failures in the green energy market.
By the end of March 2017 the GIB’s portfolio of 100 projects totalled £12bn, including £8.6bn of private capital committed. The GIB achieved investment in all four target sectors: offshore wind, waste and bioenergy, energy efficiency and onshore renewables. But it struggled to deliver investment into energy efficiency, as the much smaller average size of transactions of energy efficiency projects meant it wasn’t able to commit as much capital to the sector as the government would have liked.
And in spite of being a state investment vehicle it resisted investment opportunities in other technologies (such as tidal energy or carbon capture) because they were not sufficiently developed to be suitable commercial investments.
The primary objective in selling the GIB was to remove it from the public sector balance sheet and therefore reduce public debt. At the same time the government clearly had an interest in maximising the sale price.
But to be credible the sale had to be about more than just money. The aim was to ensure that the GIB continued to focus on investing in projects beneficial to the green economy. The government could have achieved a higher price (and therefore better value for money by its own definition) if it had taken a phased approach to sale. Because many projects were in construction phase, there was a larger discount to take account of the risk. Two years later more of the projects would have been operational, lower risk and so the government could have achieved a higher price.
Even with the financial benefits there were some smoke and mirrors. The government claims that the sale reduced public sector net debt by £1.7bn. But this figure does not take account of underlying assets. The reduction of the public sector net financial liabilities (which nets assets against liabilities) is much lower at £201m. The government chose to use the higher figure in its calculations. The sale also moved responsibility for around £500m of the bank’s future commitments to Macquarie.
The bank was established with five green purposes: reduction of greenhouse gas emissions; advancement of efficiency in the use of natural resources; protection or enhancement of the natural environment and biodiversity; and promotion of environmental sustainability.
New owner Macquarie has publicly committed to continuing these, but is not legally bound to do so. It could choose, for example, to pursue one purpose to the detriment of the other four.
Five trustees were appointed to safeguard the public interest in continuing investment to reduce carbon emissions. Our concern was that their influence is too limited. They have the power to prevent changes to green purposes but they do not have input into investment decisions. So the green purposes could be maintained or altered but there is no guarantee that Macquarie will invest to deliver on them. There is also no guarantee that Macquarie’s committed £3bn investment in the three years after the sale will be in the UK. The bank was created as an “enduring institution” but the definition of “enduring” was loose.
On sale the name changed to the Green Investment Group (GIG), meaning Macquarie has secured a useful brand for global marketing. Our worst fears are that the Green Investment Group will not deliver on its green objectives for the UK. In its rush to sell off this asset the government has also sold off control of investment into reducing carbon emissions. The double bottom line – of cash and green dividend – could become a double loss and the government will be powerless to stop it.
Meg Hillier is chair of the Public Accounts Committee.