My Lords, I declare an interest in that I have a corporate finance business. We have not commercially done any work in this sector, although we informally provided some advice on this area.
I welcome the discussion and the introduction of this amendment. I will preface my comments by saying that we on this side take a very questioning view of these provisions in Grand Committee, and we are more than happy to adapt our view to explanations that are forthcoming. We may take a different view on Report, but we have far more questions now than we are comfortable with as regards this provision. I thought that the contribution of the noble Lord, Lord Stoneham, was very good, and I share a lot of the reservations that the noble Lord, Lord Teverson, just expressed.
I will give a sense of where we are coming from on this. Our overall concern at this stage is that this is all tactics and no strategy. Our query is whether there is a strategy, but this tactic does not tell us what it is.
Our concern is that as a tactic in and of itself it is probably incorrect. We understand the Government’s stated objectives, which are that they want to grow the business and make it possible to take on a wider range of sectors, to have a multiplying impact on mobilising investments and to encourage private sector enterprises to get the green investment tide rolling. Of course, nothing makes that happen more effectively than beneficial public policy, and I am not sure that we have had a great deal of that or that it is encouraged in a lot of the areas that the Government had previously wished to encourage, but that is another matter that I may return to later.
There is also no doubt that the Green Investment Bank has indeed had some successes. I will also state that its structure, the recruitment of the staff and many of the aspects of the operation that exist are to be commended. It is a good team and a good group of people, and they have played a very good role in triggering great attention and focus, trying to lever investment and interest in green investment. The costs of the bank are not inconsiderable; I think the run rate is now probably something in the region of around £30 million, which is covered by a grant from the Government. That will soon fall on its operating budget, which does not currently exist, although with the establishment of its most recent fund it now has some management fees to be able to offset that.
However, we take a different view about the green investment market, and the notion that things are all hunky-dory and that things have completely changed is patently not the case. It is absolutely clear that the green funds are underperformers, and it is certainly true that a number of green investments have vanished; the participation of an institution such as the Green Investment Bank has provided reassurance and time for investment professionals to be able to work out a number of the details which other commercial organisations do not have the time or ability to do. It is also true that the investments are quite hard to sell and that in many cases the funds will end up being recurring revenue streams and will be sold on that basis. It is also true that the price of oil is still low, having tumbled, which means that exploration becomes less economic, reducing supply and increasing the problems with the viability of renewable markets. Indeed, fairly recently Jan-Willem Bode, the director of one of the largest green energy organisations in the UK, said that many shareholders,
“feel like pulling the plug right now because it is just too much negativity thrown at the sector”.
That was in relation to the Government’s approach to green subsidies. Dwindling demand and low supply in the energy market have not boded well for a floundering alternative in the energy investment market. It is therefore not entirely accurate to take the view that everything is absolutely fine.
I believe that the bank has had a tremendous success most recently with its most recent subsidiary, the Green Investment Bank financial services fund, which is focused on offshore wind. I want to make the point that offshore wind is in a different category—it has a totally commercially viable fund capacity. The new generation of offshore wind equipment is larger and
much more efficient and is something the market can already take up. I do not want to undermine the success of the bank; it is good that it did it, but that success is not an exemplar, nor does it prove a variety of other things. In fact, it is the exception which, in many ways, proves the rule.
The key to the Government’s argument is that this is a technical amendment needed to satisfy the Office for National Statistics. In another place, there was recently a debate on this and there was assurance that this amendment does not change or alter the objectives of the Bill, or even close in the articles for assisting in other green projects. There was assurance that these objectives will remain and that the bank will be fully committed to them. Our analysis is that this is clearly not the case.
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There is too little detail and there is no proper business model. The bank’s profit is anaemic. It is £100,000. This is based on the fact that the money comes from a grant. The £100,000 does not even include the bonuses that would normally be provided for such an institution to carry its investment professionals. Then there is its portfolio claim.
Our broader analysis is also troubling. This issue goes back to the 2010 election. At that time, the global financial crisis had created an obvious barrier to raising high levels of private capital for investment in renewables and low-carbon industries and our ability to meet the UK’s climate change targets was in severe danger. The obvious solution was a public infrastructure bank able to lend to worthy green projects while leveraging private sector cash—a very traditional model. That is a variant of what was pursued. But, as we said, the market has not changed as much as people anticipated. While there are different conditions, the investment environment continues to face many challenges. The Green Investment Bank has proved that public sector banking, free from the short-termism and bonus culture of the City, can be a successful model. The Green Investment Bank is the most active investor in the UK green economy. It has invested, I think, £2 billion in 50 or so projects across the UK. These investments have been in a whole range of different things on a commercial basis with a reasonable return, but we suggest there is a weakness.
There are a variety of different options for what we do next. We are not inherently opposed to privatisation. Putting the bank into the private sector is not an unnatural step and is a legitimate option. But it is not inherently the natural next step and it is only one of many options. Even if it is decided that that is what is going to be done, the options available are much wider than the Government are suggesting.
In another place, the Parliamentary Under-Secretary of State in the department said that £2 billion had been invested in 55 projects and that another £6 billion had been put in by the private sector. I would like to know the basis on which that £6 billion was calculated. What was the bank’s role? It was not the arranger and it did not always have the principal role. How did it pull the money in and what is the nature of what has been pulled in? That, in and of itself, provides part of the conclusion to what its strategy should be.
It has also been argued in another place that the bank has been able to attract new sources of finance into green sectors for the first time. It is certainly true, within the context of a fund structure, that other forms of investment have come in. It has maintained the commercial capacity of a long-term infrastructure fund with a very similar investable pattern to roads and other things. Are there other areas where the Government can suggest this has been the case?
As I say, the Government can argue that the bank should grow and develop its balance sheet, gain access to private capital markets and borrow. But we would be grateful if they would be clearer about their sales objectives. What are they? Are they being established on the basis of price or on the Government’s future role? We are in the middle of a spending review assessment. Is there a view on what the Government’s long-term financial commitments or options are? Have options been excluded that would provide further cash, even if that means bridging finance? Will they provide cash for the deal with the private investors that they are doing? They are market testing to private investors. They have decided to dismiss an IPO because they say that its profits are anaemic. An IPO is a legitimate option on a portfolio, particularly as the Government have been fairly silent on what return they expect for the £2 billion already invested.
There is no view on what is happening with the rest of the money that has been provided and on whether it can be called or is going to be taken back by the Government. There is no view on what the shareholder position should be. There is no view on the shareholder agreement or on the size of equity. Even if the Government wanted to have a shareholder agreement—I must just compliment the UK; we have the greatest minority protections for shareholders—what could they possibly get in a shareholder agreement that would be beyond what was available under current statutory provisions? Is there anything specific that the Minister can suggest? Is there going to be an attempt to maintain a mission for this investment bank? What will the long-term government participation in it be? What are the incentives for the advisers? It is important that the Government answer all those questions and satisfy us before we can be entirely happy that this can move forward.
Our suspicion is that this is really about the way in which the Government will test the market, looking to maximise price, getting the largest sum and withdrawing from this as an investment, with no overall clarity on the shareholding retained, on how the mission is generated or on what sort of provision, underwriting, deal or other sorts of expenses will be given over to a private investor. We would like to know what other structuring options were considered. The noble Lord, Lord Teverson, was absolutely clear and we are absolutely convinced that other structuring options are available. I should like to know whether the Government feel that they have exhausted every last option, and I may be mischievous enough to suggest one at a later date. I should like to know whether there is clarity on a combined commercial view and strategy, whether there is a government view on the market structure and whether it will be able to meet the Government’s targets, and whether there is a price that the Government consider acceptable, given that the book value has increased by a certain amount.
Crucially, how do the Government intend to maintain the bank’s mission? It is far too easy for this to change— effectively from the day of the private investment—into a different sort of institution and a different sort of bank. How do they expect to maintain its mission?
There is indeed a way to maintain it that deals with the ONS and with a variety of issues. As I said, we may be mischievous but we are loath to suggest it at this stage because it is for the Government to come forward with a much clearer view of their strategy and intentions, as well as of the detail. As I said, we are not opposed to taking a different view on Report but, at this stage, one can only think that we have been given a very limited understanding and a rather limited—how do I best describe this?—window on what the consequences are of allowing this amendment to go forward on the basis of a rather poor technical argument about how to deal with the ONS. We would be grateful if the Government could come forward with a much greater level of detail.