The case for full privatisation of the GIB has not been convincingly made, but with the deal done the onus is now on Macquarie to deliver on its impressive set of promises
The day after George Osborne confirmed he was leaving parliament, are we seeing one of the last manifestations of Osbornomics?
The full privatisation of the Green Investment Bank (GIB) has all the hallmarks of the erstwhile Chancellor: short-sighted, ideologically motivated, and fixated on the deficit. The current government's decision to continue with the sale of a State-owned bank mobilising significant investment in upgraded infrastructure and strategically important industries at the same time as the Prime Minister is hymning the importance of a more activist state and post-Brexit competitiveness can be added to the long list of glaring contradictions delivered during Theresa May's short time in Downing Street.
It is easy to see why a cross-party alliance of MPs remains deeply concerned about the deal and the rather opaque manner in which it has been delivered. The GIB is Europe's largest green energy investor. It has supported nearly 100 projects and leveraged £3 of private sector funding for every £1 of investment. It is profitable. The reason for its privatisation remains hard to fathom.
Moreover, after five years the GIB is really starting to find its feet. Having initially focused on relatively low risk wind and energy from waste projects, the bank has started to really live up to its core mission, mobilising investment in next generation offshore wind projects and offering innovative finance for energy efficiency programmes, such as LED lighting deployments. The opportunity to play a crucial role in emerging marine energy arrays, floating offshore and high altitude wind turbines, electric vehicle (EV) charging infrastructure, large scale energy efficiency upgrades, carbon capture and storage, and next generation nuclear, not to mention the potential for international expansion, was obvious,
Yes, the bank urgently needed an injection of new capital having worked through its initial government funding. But the original reason for pursuing full privatisation of the GIB was Osborne's obsession with the national debt and a narrow reading of accounting rules and EU State Aid that would have kept a partially privatised bank fully on the government's books. A new Treasury team supposedly more interested in mobilising strategic investment in crucial infrastructure and addressing the UK's regional imbalances could surely have found a way to provide the now profitable bank with a capital injection that did not adversely swell the deficit.
The reality is the strategic rationale for full privatisation of the bank has not been convincingly presented.
The weakness of the government's arguments in favour of privatisation become even more apparent when you consider May's apparent long term goals include an active industrial strategy, deep decarbonisation, the nurturing of British-owned businesses and assets, and the creation of a highly competitive, modern, post-Brexit economy. Add in the fact the UK is about to lose access to the European Investment Bank and its multi-billion Euro funding for low carbon projects and the timing of the decision looks even more bizarre.
The GIB was set up to combat the market failure of insufficient private capital flowing into early stage clean tech infrastructure projects. It is highly contestible that in five short years this long-standing failure has been fully corrected.
I've told this story before but it is worth repeating. Back in 2008, just days before the financial crisis, I interviewed the then CBI Director General Richard Lambert. He declared the banking sector had for too long failed the green economy through an inability to innovate and deliver the financing required to overcome the upfront cost of energy efficiency and renewables technologies that delivered long term savings.
Things have improved somewhat in the ensuing decade, but not that much. There is still a reluctance amongst banks - many of whom are understandably cautious about protecting their balance sheets post-2008 - to stump up millions of pounds to deliver technologies that are, in the grand scheme of things, still relatively new. Hence the justification for a state-backed entity capable of taking on some of the additional risk associated with emerging technologies and first-of-a-kind projects, while leveraging in private sector interest in order to familiarise the wider sector with the fast-evolving market. The idea a state-owned GIB had no useful role to play in accelerating the deployment of floating wind turbines, underwater tidal arrays, or whatever highly innovative yet capital-intensive technology clean tech pioneers come up with next simply does not to hold water.
The unavoidable impression is of a government with far too much on its plate sticking with a flawed decision made by the last regime, because yet another U-turn would be too complicated and would spark charges of the UK messing private investors around and not being 'open for business'.
But all that being said, this strategic mis-step need not morph into a tactical disaster for the green economy. Having made the decision to off-load the bank, the sale to Macquarie looks about as good a result as Ministers and green businesses could have expected. Greg Clark and Nick Hurd look to have made a pretty reasonable fist of a difficult and thankless job.
The special share should keep the new owners focused on mobilising investment in low carbon infrastructure, while the returning of £160m to the taxpayer with a promise of more to come will be welcomed by the Treasury.
More important still, Macquarie's various pledges today send a clear signal it is committed to becoming a major player in the green economy. The promise of £3bn of investment over the next three years - a run rate higher than any the GIB has recorded to date - is not to be sniffed at. Meanwhile, the commitment to run the GIB as a standalone brand with offices in Edinburgh and London is hugely welcome and adds another powerful voice to the green economy's ranks.
Concerns about Macquarie's record as an alleged 'asset stripper' were always overblown, particularly when aimed at an institution with a fairly solid track record of low carbon investment. It is worth noting the bank has been a major backer of offshore wind and is an advisor to the Swansea Bay Tidal Lagoon project. The issue is not whether Macquarie now offloads some of the GIB's assets - under state-ownership that was always the plan. The issue is whether the proceeds of such sales are recycled into new low carbon projects or handed out to shareholders in Sydney. The commitment to mobilise £3bn of fresh investment and the bank's stated interest in expanding the GIB's presence into Europe goes a long way towards alleviating those fears.
And yet, concerns about the deal will not dissipate overnight, nor should they. The Green Party's Caroline Lucas may be deliberately downplaying the role of the GIB's new special share and Green Purposes Company when she declares Macquarie's assurances "worthless" and raises the prospect of the bank one day investing in fracking. But her fears about the long term future of the bank are completely understandable.
What happens in three years' time once Macquarie's initial £3bn has been invested? There appears to be nothing to stop the bank slowing down its run rate if market conditions have changed. Equally, what is to stop the bank focusing on the most lucrative and most mature renewables projects, providing only the occasional nod to earlier stage, higher risk technologies? Surely, shareholders will demand precisely such a strategy, and who could blame them?
In the longer term, could the holders of the GIB's special share really stop the bank's owners folding it into the wider group as and when they deem fit? There are several informed observers of the deal who remain unconvinced the powers handed to the Green Purpose Company are strong enough to block such an eventuality. Will Macquarie allow the GIB to become a vocal advocate for rapid decarbonisation when it continues to hold substantial fossil fuel assets around the world?
There is potential for the GIB to carve out an exciting future under new ownership and prove the doubters wrong, even if the case for a state-owned low carbon investment bank remains compelling. But in order for this privatisation to emerge as a late triumph for the Evening Standard's new editor and his former colleagues in government, Macquarie needs to honour all of today's impressive promises, continue to back the kind of low carbon projects private sector investors have previously been wary of, and rapidly scale up this crucial institution over the next three years and far beyond. In short, it needs to become the unalloyed champion for the green economy the former Chancellor never was.
