Green Investment Bank

George Kerevan Excerpts

Wednesday 25th January 2017 Westminster Hall

[George Kerevan (East Lothian) (SNP)]

It is, as ever, a pleasure to serve under your chairmanship, Mr Owen. I join colleagues on both sides of the Chamber in commending the hon. Member for Edinburgh West (Michelle Thomson) for securing the debate. I underline the fact that she is a well known entrepreneur in Scotland. She speaks not as someone who is simply anti-market, but as someone who has worked very hard in her own right to make markets work in Scotland. It is on that basis that I wish to ask some questions of the Minister.

I agree with most of what has been said so far, but there is one issue we need to take a bit further. Perhaps the Minister in his summing up could explain a bit more the Government’s reasoning. The Green Investment Bank was set up to deal with a very specific form of market failure. I am interested in the subject because when a green investment bank was first mooted, I was a senior journalist on The Scotsman in Edinburgh, which is celebrating its 200th birthday today. We organised a campaign, which I was very much involved in, to bring the headquarters of the Green Investment Bank to Edinburgh, and we were successful.

The perceived market failure is obviously to do with the funding of environmental projects. Some of us, though—I do not say this to make a cheap point—believe that the rush to sell the Green Investment Bank, only two years after it really started being in operation, was a product of the wish of the previous Chancellor to raise capital to meet his target to balance the books and abolish the deficit. That is understood. Now that the Government have given way on the ex-Chancellor’s 2020 target to get into surplus, and given that in some sense his colleagues seem less happy with his activities, so much so that he is not the Chancellor any more, it might be a chance to look more at the nuts and bolts of whether market failure is being addressed, rather than simply to try to raise capital.

The market failure being addressed was not a lack of capital in general, but a much more specific form of market failure. Most large infrastructure projects are funded by consortiums of banks and investment houses, because the projects are usually too large for any one undertaking to take all the risk. The failure in the past decade in the UK has been getting the consortiums together. That was partly exacerbated by the fall in investment appetite and risk appetite after the 2008 banking crisis.

The Green Investment Bank does not put its own money in per se; it puts together the consortium of the banks. It puts up a little money to underwrite some of the risk and show that the risks have been properly looked at, and it brings other people in. That model is growing and has proved successful on a small scale. It would be worth while leaving the model in place until we see at the end of a decade whether it has enabled significant consortiums to be put together for major projects, rather than simply considering the small projects that the Green Investment Bank has been involved in to date. If the Government abandon the GIB now, they have to prove that it will continue under private ownership to address that specific market failure.

When the Minister responded to the urgent question tabled by the hon. Member for Brighton, Pavilion (Caroline Lucas), he seemed to suggest that the proof that market failure had now been addressed systemically was that private sector interests were prepared to buy the bank. I challenge that assertion. I know the Minister will not mention Macquarie, but I will. I do not do that to stand by some of the criticisms of Macquarie. I want to address Macquarie’s business model, because it or a company like it may become the owner of the Green Investment Bank.

Macquarie puts together consortiums of investors, but it does that to buy existing infrastructure projects that earn a capital return. In December, it put together a consortium and bought the gas pipeline business of the National Grid. That is understood. It is a very sensible long-term model, and it is very profitable for Macquarie, which might explain why it is known in Australia as the billionaires’ bank—it has made many billionaires. The problem is that buying existing assets is easy, but that is not where the market failure is. The UK capital market is more than able to address that problem. The market failure is in building new asset classes. The Government have admitted in their new industrial strategy that the problem is that we somehow under-invest in infrastructure, despite having a huge capital market in comparison with other countries.

The Treasury Committee is undertaking an investigation and we have uncovered one of the major issues. When an infrastructure project is built, it is not retained in ownership by the people who built it. It is passed on ultimately to the ownership of pension funds and insurance companies. They use it as a long-term investment to pay annuities and long-term pensions. The insurance companies are crying out for regulatory change because they say they are unable—my second question to the Minister is to ask him to look at this—to invest capital in new infrastructure, and the new environmental projects they are desperate to invest in and own, because the regulatory and capital requirements are too onerous. The result is that British insurance companies find it easier to buy into American new infrastructure projects than into British ones. If Donald Trump turns on the spending tap in the United States and spends $1 trillion on investment in new infrastructure in America, inevitably in the present regulated climate, British pension funds and insurance companies will underwrite that investment rather than investing here.

My point for the Minister is that the market failure is still there. Using the sale of the Green Investment Bank to Macquarie or any company like it will simply be using it as a cash cow rather than underwriting risk for a future infrastructure investment. That will not resolve the problem. The Government must prove to Members on both sides of the House that the sale to any company will solve the underlying market failure. The sale to Macquarie, given its business model, will not solve that problem.

One question is whether Macquarie is a fit and proper company to own the Green Investment Bank. The Minister will probably avoid answering that question and will not mention the Macquarie name but, in the most systemic way, can he prove to us that the sale of the Green Investment Bank in such a short period to another owner will resolve the market risk of having a player—the Green Investment Bank—as the referee that brings the consortium together from the rest of the capital market? In the absence of that, the Green Investment Bank must be left in place and we must question why the British capital markets as a whole do not fund infrastructure investment and have not done so successfully for several decades. That is a regulatory issue and the ball is in the Government’s court.

--- Later in debate ---

[Mr Hurd]

May I make a little more progress?

This has been a good, well informed debate. There is clearly disagreement about whether it is right to sell the GIB, and I respect that, but there is clearly common ground—this is worth restating—that the GIB has been a fantastic success story. In fact, exactly that language has been used by Members on both sides of the House. That success has been achieved in very short order by a relatively small group of people who were given a very challenging mandate. That is genuinely impressive. The Government are therefore keen, as I am sure the House is, to place on the record our appreciation of the work of not just the GIB’s senior management team but everyone who works in that organisation. It is particularly important to show our appreciation for the professional approach of the GIB’s staff, because as those who have been in the commercial world know, these kinds of transactions drag on and create uncertainty and anxiety.

The GIB has been a success story. It was set up to accelerate private investment in green infrastructure. It has a fantastic success record of turning every £1 of public money committed into £3 of matched private sector commitments. It has achieved a series of firsts—not least the first ever offshore wind fund, which has now reached final close having raised more than £1 billion of capital, making it the UK’s largest renewable energy fund. There is also agreement that if we do sell the bank—there is disagreement about that—the Government will be responsible for securing best value for taxpayers and getting a deal that we can justify to the public, whose money has been invested in this institution. It is important that Parliament holds the Government firmly to account for that.

I think something has been missed in this debate. There has been a lot of assertion about the motives of any potential preferred bidder or even the motivations of the Government. There has even been the suggestion that this sale represents a sapping of green ambition on the part of the UK Government, but that could not be further from the truth. I meant what I said on the Floor of the House yesterday.

I will come on to the criteria, which we will be very robust in sticking to when it comes to reviewing any proposal before us. However, one of the things that we are looking at most closely when considering a proposal from a preferred bidder is their forward commitment, not only to people—particularly in Edinburgh, which I hope will reassure the hon. and learned Member for Edinburgh South West (Joanna Cherry), in whose constituency the HQ of the bank is located—and to an ongoing institution with a clear identity in the future, but, critically, to forward investment. That is because hon. Members are right: we need more funding and we need more private capital coming into our green infrastructure. That is obvious; every country needs that.

Part of our starting premise, which has not been reflected in this debate at all, and part of the motive for privatisation, is to confront the reality that the GIB, however successful it has been, is constrained at the moment by the framework in which it operates. I do not think that people get up in the morning thinking, “Thank God I’m working for an instrument of public policy”—I do not think that is quite how people see things—but they are constrained in what they can do by state aid rules and the number of restrictions that come from being a public sector organisation. We feel that this organisation, when liberated from all that, can do more and we want it to do more. We need to be reassured by any future owner that they share that vision, are committed to it and are prepared to back up that commitment. That will not be just the evaluation of Ministers or officials in Government—

[George Kerevan]

Will the Minister give way?

[Mr Hurd]

I will just finish this point. I want to reassure Scottish Members of Parliament, and I have already told the hon. and learned Member for Edinburgh South West this in our meeting, that when it comes to making any final judgment we will be led by the judgment of the chairman—Lord Smith of Kelvin, who is highly respected—and the board about the credibility and integrity of future commitments made by a bidder, and the degree to which they can be bound into contractual arrangements.

[George Kerevan]

Will the Minister give way?

[Mr Hurd]

I will just finish. That is a dimension to this transaction that has been completely absent from this debate, which has been bogged down a bit by a lot of assertion and prejudice about the character and values of a preferred bidder.