The Deputy Prime Minister, Nick Clegg, announced, on 23 May 2011, further details about the government's Green Investment Bank (GIB), including that it would begin investing in low carbon projects in April 2012.
The Secretary of State for Business, Innovation and Skills, Vince Cable, published a progress report on the GIB setting out more detail on its governance and business model on 24 May 2011. (Free access.)
On 23 May 2011, the Deputy Prime Minister, Nick Clegg, announced further details about the government's Green Investment Bank (GIB), including that it would begin investing in low carbon projects in April 2012.
On 24 May 2011, the Secretary of State for Business, Innovation and Skills, Vince Cable, published a progress report on the GIB setting out more detail on its governance and business model.Close speedread
The government estimates that the transition to a green economy will require an investment of up to £200 billion in the energy sector over the period to 2020, and further investment in other key sectors such as transport, waste, water and flood defences. Without its intervention, the government considers that there is a risk that the necessary levels of investment in these sectors will not take place.
In the March 2010 Budget, the Labour government announced that it intended to establish the Green Investment Bank (GIB), involving both public and private sector capital, to invest in the low-carbon sector, focusing initially on offshore wind.
In May 2010, the coalition government confirmed plans for the GIB. Bob Wigley, the former chairman of Merrill Lynch in Europe, was invited by the Chancellor and the Minister of State for Climate Change to set up and chair the Green Investment Bank Commission (GIBC). The GIBC published a report, Unlocking investment to deliver Britain's low carbon future, in June 2010, setting out a blueprint for the creation of the GIB. The GIBC recommended that the GIB should be established and active within six months of publication of its report.
In the March 2011 Budget, the Chancellor of the Exchequer, George Osborne, announced that the initial capitalisation of the GIB would be £3 billion but that the GIB will not be given borrowing powers until 2015-16. The government expects the GIB to attract a further £15 billion of private sector investment, taking the total funds available to the GIB to £18 billion.
For more information on:
The GIB, see:
The GIBC's report, see Legal update, A blueprint for the Green Investment Bank (www.practicallaw.com/8-502-8405).
Climate change issues relating to investments, see Practice note, Climate change issues for investors, shareholders and insurers (www.practicallaw.com/8-501-7176).
On 23 May 2011, the Deputy Prime Minister, Nick Clegg, unveiled some of the key details about the GIB at a Climate Change Capital/Norton Rose LLP event.
On 24 May 2011, the Secretary of State for Business, Innovation and Skills, Vince Cable, published a progress report on the formation of the GIB (Progress Report) setting out more detail on its governance and business model (see Vision for Worlds first dedicated Green Investment Bank published, News Distribution Service, 24 May 2011).
The following are the key details about the GIB that have been revealed:
The GIB will need to be approved on state aid grounds by the European Commission (Commission) before it can be established. Consequently, it will be launched in three phases as follows:
Phase one: Incubation from 2012 to state aid approval. During this phase, in order to progress the work of the GIB as quickly as possible, the government will make direct, state-aid compliant investments in green infrastructure projects from April 2012 until these investments can be transferred to the GIB. This will allow companies to start to plan their applications for funding for green projects.
Phase two: Once the Commission has approved the GIB, legislation will be introduced to establish the GIB as an independent institution. The GIB will operate at arm's length from government, which will agree the GIB's strategic priorities over Spending Review periods.
Phase three: The GIB will have full borrowing powers (that is, the GIB will be able to borrow in the capital markets and from the private sector) from 2015, subject to public sector net debt falling as a percentage of gross domestic product (GDP).
The GIB's initial remit will be to focus on green infrastructure assets. It will work to a "double bottom line" of both achieving significant green impact and making financial returns. The GIB's early targets are likely to be offshore wind, waste and non-domestic energy efficiency projects. Further work is being done to explore other sectors which may be eligible for investment by the GIB, so these eligible sectors will change over time.
The GIB may be used to help finance the Green Deal scheme (see Practice note, Energy efficiency in buildings: overview: Green Deal (www.practicallaw.com/6-205-6049)). The government is currently undertaking further work to assess the potential and necessity for the GIB to support the financing of investment in domestic energy efficiency during the first stages of the Green Deal. The Progress Report says that the primary aim remains for the Green Deal to be a private-sector led scheme.
The Secretary of State for Business, Innovation and Skills, is also setting up an advisory group to advise Ministers and senior officials on the establishment of the GIB institution and on the strategic direction of its future activities. The advisory group will not take decisions regarding any individual investments made during phase one. Sir Adrian Montague (who currently holds a number of non-executive chairmanships including chairman of private equity group 3i) will chair the advisory group of independent finance experts. Once state aid approval is granted by the Commission, a GIB Board will replace the advisory group.
The Progress Report says that although the GIB is likely to continue to explore other products, a range of possible GIB product interventions have been tested, including:
Risk mitigation: This type of product would provide first loss debt in each of the construction and operating phases of projects.
Innovative finance mechanisms: These products would provide an upfront refinancing commitment to guarantee an exit for long-term bank finance after construction, upon certain conditions being met.
Capital provision: These products would involve the provision of equity and senior debt on market terms to provide additional capital.
A major concern for investors has been whether the rules governing the GIB would be set out in legislation or whether HM Treasury would retain control over the GIB which would risk political considerations influencing the GIB's investment activities. HM Treasury had also argued that the GIB should only be allowed to borrow from the government rather than from the private sector (see Government told 'don't neuter green investment bank', guardian.co.uk, 23 May 2011).
It is understood that in addition to disputing the control of the GIB with HM Treasury, the Department for Energy and Climate Change (DECC) has also disagreed with the Department for Business, Innovation and Skills (BIS) over the types of green project that the GIB should invest in.
Green investors, businesses and non-governmental organisations welcomed the announcements, which they said met most of the criteria they had set out for the GIB (see Nick Clegg unveils long-awaited details of green investment bank, guardian.co.uk, 23 May 2011).
John Cridland, Director-General of the Confederation of British Industry (CBI) (www.practicallaw.com/5-107-5978), said that the GIB:
"certainly won't work if it needs the Treasury's permission to blow its nose. The bank needs to be able to get into the markets itself and do what it's intended to do."
"It won't give investors certainty if it's not enshrined in law so I welcome the Deputy Prime Minister's decision on that."
Campaigners had expressed concerns that the Green Deal would not work if private sector providers were able to charge commercial rates of interest on the loans, as the interest payments would outweigh the savings on energy bills. In response to the announcements by Nick Clegg on 23 May 2011, Paul King, Chief Executive of the UK Green Building Council said:
"Not only has Government recognised how important legislation is, Ministers have rightly linked the Green Investment Bank with the need for low cost finance to ensure the Green Deal delivers a home refurbishment revolution in the UK" (see Green Investment Bank to help deliver Green Deal The UK-GBC reaction, UK Green Building Council, 23 May 2011.)