Green Investment Bank

Debate between George Freeman and Graham Stuart

Thursday 29th October 2015 Westminster Hall

[George Freeman]

I respect that. The point I am making is that the Government have a strategic commitment to the British people, and it was not the least of the reasons we were returned to office—to get our public debts under control. The hon. Gentleman’s party may take a more cavalier view of public debt, and I respect that, but our view is that we need to get it under control. For that reason, but not only that reason, institutions that can borrow today, thus contributing to exacerbating the public sector debt problem, need to be liberated to get access to the flourishing private capital markets that the Green Investment Bank has played no small part in creating. The figures that I gave earlier on the extent of the global sector are relevant to that.

To complete my comments on the rationale for the decision, I looked this morning at research on market interest, and interest in acquiring a stake in the Green Investment Bank is likely to come from large-scale institutional investors such as UK pension funds, infrastructure private equity funds and sovereign wealth funds—specialist investors with an interest in green infrastructure. The bank has already successfully attracted similar investors into its managed fund for investment in offshore wind. Many of those investors do not currently invest in individual green projects. Allowing them to acquire a stake in the bank will provide a vehicle for them to invest in the area for the first time. That is a part of developing a more active private sector market in renewables and green energy. Through the bank’s portfolio of renewable energy and green infrastructure projects we hope to widen the pool of investor exposure and stakeholders in the sector. The sale of the bank is partly about enabling that new pool of capital to be brought to bear, helping to accelerate investment.

[Graham Stuart]

Do the Government have any preference, then, as to the number of investors that might come to the Green Investment Bank? He has talked about some taking a stake—perhaps pension funds; but what if a major international bank offered for 100% of the bank, and that was the highest offer? Would they sell to a single institution, and would there then be a danger that that would just be swallowed up in a much larger organisation, so that the purpose of the bank could eventually be diluted?

[George Freeman]

The overriding principle is that we want to ensure that the bank is put on a footing where it has the freedom to operate and is able to raise the necessary capital without being jeopardised by having an investor base that is too fragmented and small to be effective, or too small or too large an interest to be sustainable. Both of those represent risks. We will need to take a view and ensure that we give it the best possible chance to be able to carry on and fulfil its remit. I will say something about its green remit in a minute.

[Graham Stuart]

I know that it is difficult and, I imagine, sometimes commercially sensitive but I would like to press the Minister. Is it the Government’s view that the sale to a very large global bank would be a bad thing? He has described it as a risk. I know that the Government will take a view but do they have a view that they can share with the House today? We are trying to find out what the Government are going to do with this bank.

[George Freeman]

Our view is that we want to give the Green Investment Bank the best possible chance of having a stable and secure future and being able to raise the sort of money that it needs out of the market. Having been an investor myself in much smaller companies, I would say that anyone involved—my hon. Friend is aware of this—will know that there is no perfect shareholder structure. Often having a very small number, particularly if it is one, can create risks of its own. Having far too many small investors can mean that it is a struggle to raise the capital needed. A happy balance will need to be struck, but the judgment will have to give the Green Investment Bank the best chance of fulfilling its remit. I will say something about its green remit in just a moment. My hon. Friend made an important point.

Crucially, the plans are not being imposed by the Government on a reluctant bank. They have the full support of the company and its independent board and chair, Lord Smith of Kelvin, and others. Lord Smith of Kelvin said:

“I welcome this. You can’t keep going back to the Government for more and more money. If we want to build something that is sustainable and durable, we need private capital. This was always going to happen.”

He also said:

“The UK Government led the world in their vision and commitment in setting up the world’s first dedicated green investment bank, so we are delighted to have their support as we enter a new phase and seek additional investors in our business.”

Shaun Kingsbury, the chief executive officer, said:

“That is why I believe the decision announced by the Business Secretary is the right one. It is the option that gives us the best chance of creating the greatest green impact.”

Other important commentators have concurred. Richard Howard, head of environment and policy at the think-tank Policy Exchange, said at the evidence session of the Environmental Audit Committee yesterday that the legislation may not be needed to maintain the green focus, and that if we remove that legislation and allow someone to invest, that investor would come along and invest because they are interested in supporting what the Green Investment Bank is doing. He said that private capital funds have got involved precisely because the bank has a track record in these areas and that they are buying into a pool of expertise in investing in green projects.

The Environmental Audit Committee’s report on green finance in March 2014 said that the Green Investment Bank

“needs to be able to raise significant further private sector capital for investment alongside the Bank’s programmes, and to borrow itself to enlarge the scale of its work…The Government must make an early and clear statement about the Green Investment Bank’s long-term future beyond the 2015–16 horizon of its Spending Review funding settlement”,

which answers one of the points made earlier.

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[Kevin Brennan]

rose—

[Graham Stuart]

rose—

[George Freeman]

I will take these two interventions, and perhaps I can then crack through the questions.

[George Freeman]

I want to take specific advice, but I will write to the hon. Gentleman on whether any constraints are envisaged on what may or may not constitute green investment. My understanding is that we want to give the bank the freedom to invest in a range of different technologies. Indeed, part of the bank’s mission is to be able to catalyse investment in a much wider range of technologies that will be key to building a 21st-century green economy.

[Graham Stuart]

The Government announced that they will privatise the bank so that it can access capital, as the Minister has set out. The letter announcing that privatisation stated that the bank will be guaranteed by the statutes. Those statutes have suddenly gone, and promises have been made to the Treasury. It feels as if the Government machine has already decided to privatise this bank, but the basis on which the Government are privatising the bank has changed. Will it be possible to go back? The Treasury is rightly trying to address the deficit and the debt, but there is a conversation to be had, because the bank is not being privatised on the basis that was originally proposed. There is a risk that this thing will not do what we want it to do. The Climate Change Act 2008 commits us to action, and if that action costs more, we would be back to cutting off our nose to spite our face.

[George Freeman]

My hon. Friend makes a good point, and I know he has raised it with my right hon. Friend, the Secretary of State for Business, Innovation and Skills. It flows from everything I have said that we are determined to ensure that the Green Investment Bank is able to continue being a green investment bank. Given the constraints under which we are operating, we need to be creative in exploring every option. I am open to my hon. Friend’s suggestions about how we might be able to do that in a way that does not compromise the bank’s ability to operate in the way we want.

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[George Freeman]

Well, the shadow Minister should see the list of questions I have been asked, not least by the shadow Minister himself. I will try to answer those questions and, if I fail, the hon. Member for Hartlepool (Mr Wright) can intervene at the end.

I was asked whether the management of the Green Investment Bank would prefer a statutory lock. The chief executive officer allegedly said that he is “agnostic” about privatisation, but he did say that he prefers a statutory lock. He also said that he wants the ability to raise funds from the private sector, and he understands the need to remove the statute and the statutory constraints.

My hon. Friend the Member for Beverley and Holderness asked how the shareholder framework document will change. Clearly, the framework document will need to change as the shareholding changes. When the bank was set up in 2012, the document’s primary purpose was to set out that the bank should operate independently so that the Government could not interfere in its investment decisions and to ensure the bank’s green ethos. Privatisation will further increase that operational independence, but the bank’s green ethos is now entrenched. The Green Investment Bank is what it is, and it is what is in its business plan, which will be a material document in the shareholder subscription round.

My hon. Friend also asked whether the market failures that the bank was set up to address have now improved to such an extent that we no longer feel the bank needs to operate in the same way. He is right that the bank was set up shortly after the banking crisis in the depths of the dark period of 2010, 2011 and 2012, when the economy was moving very slowly, to rectify a lack of long-term liquidity in the market. It is true that long-term funding for infrastructure projects has recovered strongly, as illustrated by the data I gave earlier. There was a lack of specialist green infrastructure investors, particularly at scale, which is what the bank has now become. The bank has helped to support such infrastructure projects, and we intend that the bank will remain a specialist green investor after privatisation. That is what the bank does, and it is what an acquirer will be buying. We want to let the bank off the leash to do more of that.

The hon. Member for Brighton, Pavilion (Caroline Lucas), who is no longer in her place—she gave her apologies—asked whether a profit-maximising bank would be in danger of crowding out investment because it would be just like any other bank. In fact, the Green Investment Bank is already profit maximising; it has turned its first profit. It exists to prove that it is possible to be green and profitable. That is in the bank’s very DNA; we want to show that the green economy is a real economy. That is how we will attract the private sector capital that we need. The GIB’s expertise can do so regardless of whether it is in the private or the public sector, of course, but we want to give it the freedom to raise that money.

The hon. Lady also asked whether other countries are copying us. It is true that we were in the vanguard when the Conservative-led coalition set up the Green Investment Bank, and we have been copied. It is our ambition to be in the vanguard as we take the market forward. We need to raise not just hundreds of millions or billions, but tens of billions—actually, over the next decade or so, we need to raise hundreds of billions—of money for green infrastructure. There is no way that any Government could fund all of it, even if they wanted to. We need to go to the next stage by leading private sector capital into the market.

Several hon. Members, including my hon. Friend the Member for Beverley and Holderness, asked whether the bank cannot raise debt anyway, and whether we had explored all the options. The truth is that equity raising by the bank will effectively score like debt to the public sector once that equity is invested, so this is not just about debt, but about ensuring that the bank has the right financial mix to operate. My hon. Friend also asked about the European fund for strategic investments, a £300 billion pot for capital raising, and whether the bank will still be encouraged and able to access that money.

The Government are aware of the European funding for infrastructure investment, and are examining how best to make use of that facility—my hon. Friend makes a good point. In our view, that does not alter the case for moving the bank into private ownership. We absolutely need to ensure that it can access funding. The Government and devolved Administrations are actively considering, along with other UK institutions, how they can work alongside the bank to maximise the impact for the bank and others of accessing that European funding. The EFSI guarantee can be used by the bank to co-invest in and co-finance with both public and private institutions, so privatising the bank does not in itself preclude benefiting from the European fund.

[Graham Stuart]

For the record, is the Minister saying that the bank’s change from its current status to privatised will have no impact whatever on its ability to access those funds, to which we are contributing so many billions of pounds?

[George Freeman]

I would not want to go as far as to say that it will have no impact. What I am saying is that we are actively ensuring that the bank will still be able to access funds from the EFSI. It may have to do so through consortiums with other parties, in a slightly different way from how it did when it was a state-owned bank.

My hon. Friend asked whether citizens would have the opportunity to invest directly. We are exploring all options as part of the sale. I would point out that the bank is still a very young company that has only just broken even, meaning that it is pretty unlikely to have a sufficient track record to attract much interest from the retail market, but we are obviously keen to grow the level of retail investor exposure into the market as it matures. He and others asked whether we and the bank had considered raising green bonds. Issuing bonds is absolutely one of the things that the bank will be free to do if it chooses. At present, it is prevented from doing so, as it would score against public sector debt in the same way as borrowing.

Several hon. Members have asked why we are repealing the legislation. I have touched on this already, but in order to grow in line with its ambitious green business plan, the bank needs the freedom to borrow and access much larger pools of private capital, and it will have that freedom if it can borrow without affecting public sector net debt. That means getting the bank reclassified as a private enterprise and off the Government’s balance sheet. To do so, we must do two things: sell a majority of the company, and repeal the legislation. Otherwise, the company could still be classified in the public sector, even after a sale.

One or two hon. Members have asked why we cannot just retain the bank in Government ownership and allow it to borrow, citing the statement by my right hon. Friend the Chancellor that as and when debt starts to fall as a percentage of GDP, we can release borrowing restrictions on the economy generally, so why not on the bank? The problem is that, in Government ownership, the bank’s borrowing and capital raising would still count against public sector debt. Equally, it still has to compete for funding, along with all Government expenditure needs and with the pressure on the Exchequer, even as we get the debt under control. In my own field of health, for example, health demand is rising substantially, and we want to liberate the bank from having to fight in the Whitehall corridors in the same way as every other Department in spending rounds.

On top of that, private ownership will give the bank much greater freedom to operate, removing a number of constraints. It is worth pointing out that it was always envisaged that the bank should aim to mobilise maximum private capital, and it fits our strategic policy aim of getting the market to work on tackling green policy challenges. As I said, we have the full support of the management and the CEO of the company.

Let me turn to the important question of how we will protect the bank’s green mission and remit in the absence of the legislative lock. As a key part of any sale discussions, potential investors will be asked to confirm their commitment to the bank’s green values, green mission and green business plan, and set out how they propose to protect them. We envisage that that will involve new shareholders agreeing to various specific things: retaining the green objectives in the bank’s articles of association; ensuring that the bank continues to invest in a way that achieves maximum positive green impact; maintaining the bank’s existing standards for reporting on its green investment performance; and providing independent assurance of that.

We fully expect that, as part of a subscription round based on the bank’s offering to the market, its green business plan with clear long-term investment in a range of sectors and projects will deliver the safeguards that Opposition Members have asked for without the need for legislation that would curtail those freedoms. We are absolutely committed to ensuring that the bank continues with that green mission, and I am happy and open to explore mechanisms suggested by any party for safeguarding the bank’s green remit in a way that does not fall foul of those public control tests.

[Graham Stuart]

On that point, as we all know, when a company goes to market, it depends on the conditions at the time. It is at least feasible that when the bank goes to the market, those who wish to invest on the basis that the Minister is discussing will disappear, leaving those who will simply buy the capital and assets invested and treat the bank as a zombie fund, immediately sacking as many of the staff as possible, running it at a minimal level and calculating a reasonable return. What guarantee can the Government give, if those turn out to be the only buyers around, that they will not stay so committed to privatisation—in order to meet, rightly, the need to sort out the national debt—that they end up giving the bank away to be turned into a zombie fund, not only avoiding innovative green projects but not really developing anything at all?

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[George Freeman]

Proceeds will depend on how big a stake is sold, on the outcome of negotiations with investors about the value of the company and on how the company’s business plan is judged. We will need to be satisfied that any transaction represents value for money for the taxpayer, and fits with the Government’s wider policy interests and with the best interests of the bank. The hon. Gentleman would obviously not expect me to speculate this afternoon on what figure we would expect and thus undermine the process.

Importantly, the hon. Gentleman also asked me about the £1.8 billion of funding that is left. As he has highlighted, the bank can carry on for at least another year, given that it has £1.8 billion—roughly—in reserves; he suggested that after that period it could start recycling capital. The truth is that to grow its business and invest in accordance with its green business plan, the bank will need access to a much greater volume of capital from a wide range of sources.

The hon. Gentleman asked why there was urgency about this process. What we do not want is to get to a point where the bank has no reserves and badly needs capital. Anyone who has raised money knows that the time to raise it is not when there is no choice but to raise it, because money is desperately needed, but when a company is in a strong position, and has a pipeline, assets and a good track record. We think the bank is in that situation now. We are confident that we can attract private capital into the bank because of its track record and because it is operating successfully.

[Graham Stuart]

I am grateful to the Minister for giving way again; he is being very generous with his time. My understanding is that the funding agreement runs out in March next year, and that the steady state activity of the bank for the last couple of years is £700 million to £800 million a year. There is not clarity about what happens from 1 April 2016 onwards, and the bank will have no access to that £1.8 billion; according to my calculations, the reserves were more like £1.5 billion, but whatever the exact figure is, it will be quite a lot of hundreds of millions of pounds. Perhaps the Minister, while answering other questions, might seek advice elsewhere about this issue; I would be grateful if he could respond to me about it. I am interested to know how the bank will be taken care of between its current funding provision running out in March 2016 and whatever date it is sold, and how we ensure that there is not a chilling effect.

[George Freeman]

My hon. Friend makes an important point. A key part of the rationale for proceeding with this move now is that the bank’s momentum—its existing status—is a strength; it is an asset rather than a liability in the context of the bank’s fundraising. So we are actively looking at everything we can do to ensure that clarity about the bank’s status, position and momentum is provided to potential investors. It is not in our interests that there is confusion, and we are addressing that issue.