October 20, 2010
Speaking as a professional greenie, the anguish from my fellow greenies over the undercapitalisation of the Green Investment Bank is puzzling. The argument appears to be that the enormous amounts of capital required to build our new low-carbon infrastructure cannot be sourced from traditional sources of investment – the figures given by Ernst and Young indicate a £450bn requirement with only £80bn of funding available from utility companies, project finance and infrastructure funds.
A Green Investment Bank would be able to create financial products for particular areas of infrastructure development; for example, you could buy an ‘Offshore Wind Bond’ and receive a rate of return depending on the success of offshore wind development projects. These would be funded by capital from the GIB. This would make it relatively easier for these products to access capital, making the financing of these projects much quicker and cheaper. Ordinary people would be able to do things like invest in Green ISAs, knowing that their money would be used for projects that would help us move towards a low-carbon economy.
Sounds like a good idea, doesn’t it? There’s a bit of a problem, and it’s because you’re creating what will be in essence a State-backed bank that will be issuing bonds with what will be in all likelihood a rate of interest exceeding that of gilts, £370bn of them, to be precise. Interest rates on gilts have been relatively low because there’s been significant demand from institutional investors for safe state-backed finance products. Add £370bn into the market and all of a sudden interest rates on gilts will go up as demand drops as a consequence of the increased supply of Government-backed debt. This is, you know, the very thing the cuts are intended to stop.
That’s not even looking at the fact that infrastructure projects have a relatively long lead-time, meaning that unless the bank is severely restricted in the bonds it is able to issue in the short term, it’ll suddenly acquire massive amounts of liabilities that it will have to service at cost higher than that of gilts. These costs will be passed onto project developers, raising their cost of capital. Indeed, the only people likely to make money out of this idea would be – yes – the bankers, and people providing financial advice, like, say, Ernst & Young.
The way to secure investment in infrastructure projects is to provide grants for nascent technologies and long-term revenue support for technologies on the cusp of commercial profitability – and to provide a stable policy environment with respect to their development. With this in mind, the fact that the RO system remains untouched following the Spending Review and that £200 million of new grants for manufacturing infrastructure and technology demonstrations has been announced, it would seem the sector is in a pretty good place. Institutional investors want to make money, and they will invest more in project finance if there’s a clear rate of return. Breaking them out of the habit up relying on Government-backed debt to do this is not helped by a GIB.