What’s the purpose of a green bank? In broad strokes, we’d say a green bank is a catalyst that uses cheaper taxpayer money to crowd in private capital in support of a government’s clean energy plan, helping to finance sectors that would either fail to get off the ground without its help or would take off much more slowly.
When you look at the UK’s Green Investment Bank from this perspective, it’s been phenomenally successful. Since late 2012, the bank has invested £2.8 billion ($3.5 billion; €3.3 billion) of public money in 85 projects worth over £10 billion. Last year alone, the bank invested £770 million in 30 projects, crowding in £2.9 billion of private capital.
The GIB’s success in catalysing private capital is what makes its privatisation such a controversial affair. Put simply, the government has not yet been able to adequately answer the two main questions surrounding it: What does the sale of the country’s first green bank say about its commitment to clean energy? And why does it now think private money will be a better catalyst than public money?
When it was announced in the summer of 2015, the GIB privatisation came at the tail end of a slew of bad news for the UK clean energy sector, particularly for onshore wind. At the time, it was hard not to view its sale as another sign that the government’s love affair with clean energy was coming to an end. But with Theresa May’s Industrial Strategy published this week citing “affordable energy and clean growth” as one of its pillars, the bank looks very vital indeed.
Not a problem, proponents will say. Privatisation was never intended to deviate the GIB from its low-carbon mission (in fact, there’s a golden share in there to make sure that’s the case); privatisation will instead free the bank to raise its own equity and debt without being a headache to the budget and run afoul of state aid rules.
Which is fine, except it doesn’t really answer how private capital will be more effective than public capital in a catalytic role. Some may disagree, but one of the reasons offshore wind is so vibrant in the UK right now is because the GIB worked tirelessly to attract private capital, using taxpayer money to fund projects when private capital was still getting comfortable with its risk profile.
That’s the role of a catalyst – to step in and fund certain sectors when private capital is unwilling or unable to do so. That pioneering role can be done with private money alone, but the higher risk appetite will cost you, which might easily derail certain projects and nascent sectors.
This makes the current furore about frontrunner Macquarie’s alleged plan to ‘asset-strip’ the GIB particularly misguided. Of course Macquarie is going to sell some of the GIB’s stakes in the projects it helped fund. After all, whoever buys the bank is said to be required to fund its level of yearly spending for the next three years. But so what? The GIB’s main role was in getting these projects off the ground and generating clean energy. A new owner won’t change that.
The more important question is how private ownership might affect the GIB’s mission going forward. But first, the government needs to make up its mind about what it wants from the bank’s privatisation. If it just wants to offload the GIB from its balance sheet, then these questions are moot; if it wants the bank to continue to broadly fund the low-carbon economy, then private capital will be up to the task; if, however, it wants the bank to keep playing a catalytic role in funding promising sectors of the low-carbon economy, then it should take a second look at privatisation.
Private capital is the right solution for a lot of problems. But it isn’t always the most efficient and cheaper way to get new sectors off the ground.
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