When is a government bank not a government bank?
Earlier today, the Green Investment Bank (GIB) launched its annual results at its annual review meeting. GIB’s financial results were generally unexciting. In the last financial year it turned a small profit of £96,000 (which incidentally is less than the £180,000 it cost to audit the report!).
The more interesting part of the review was the announcement by Business Secretary, Sajid Javid, that the government wishes to divest part of its stake in the bank. GIB was set up by the government in 2012, and remains 100% owned by the government. To date it has invested £2 billion of government funds into 50 green infrastructure projects – primarily offshore wind. GIB is a ground-breaking institution and the model has been copied by other countries around the world.
The government has now suggested that it wishes to sell a £1.4 billion stake in GIB to private investors, which would make it a minority shareholder. The rationale given for the move is that the funds raised could be used to pay down national debt.
Critics have been quick to jump on the announcement as implying a watering down of government’s commitment to decarbonisation. The creation of GIB was a significant promise in the Conservatives’ 2010 manifesto, and has been a symbol of the government’s commitment. In the government’s defence, GIB has already played an important role in bringing new investors into UK green infrastructure, and it is not necessarily true that this would be undermined by the divestment (particularly given that the bank’s green credentials are enshrined in law).
However, the divestment raises other important questions about the future direction of the bank. What would its focus be going forward? Wouldn’t it just be like any other bank? At what point is a government bank no longer a government bank?
GIB has always had a challenging role: it is neither a delivery arm of government, nor a fully commercial bank. (This is best demonstrated by the remuneration packages for senior staff, which are very high by civil service standards, but are way below what you would see in a private investment bank). The rationale for the creation of GIB was that it would increase the flow of capital into the ‘green infrastructure’ – making it a mission led bank, with a very specific remit. However, State Aid restrictions mean that the bank must provide finance on commercial terms (i.e. equivalent to what a commercial bank would offer). It is not a source of subsidised sub-market finance.
Yet State Aid guidelines also mean that GIB must demonstrate ‘additionality’: it can only invest in sectors where there is a ‘market failure’, where commercial banks are not providing capital in sufficient volumes. In practice this has meant that GIB has looked to identify sectors at the boundaries of what other financiers are considering, such as offshore wind (which constitutes 50% of GIB’s investments to date), energy efficiency, energy from waste, and bioenergy. GIB invested in operational wind farms when other investors were generally uninterested. It has now managed to raise a £1bn fund with other investors targeting operational offshore wind assets. GIB has now moved into providing construction stage finance to offshore wind projects – again, leading the market and bringing in others. All of this is helpful in a sector with massive investment needs, particularly given the increased regulation and lower risk appetite of commercial banks following the credit crunch.
So what happens when the government privatises the bank? In some respects this might make things easier for GIB. A minority government stake is likely to mean that State Aid conditions are lifted. It would no longer have to demonstrate additionality, and could therefore invest in a broader range of sectors including less risky, more mature renewables such as onshore wind and solar PV. It would also allow GIB to scale up, and to continue to make new investments.
But wouldn’t this just make GIB the same as any other commercial bank? If government holds a minority stake then presumably GIB’s focus would also have to change. New shareholders in the bank would presumably want to remove government’s right to direct GIB’s activities. The focus would necessarily shift from GIB taking risks in emerging sectors towards finding the best investments across all sectors. In other words, it would start to look much more like another commercial bank. In itself this is not necessarily a problem: GIB could continue to provide much needed capital into green infrastructure if the returns are right. But it does beg the question of who would support the financing of emerging sectors.
You also start to question why government needs to retain a stake at all.