Green investment bank's chief plans to borrow and raise debt
The chief of the UK's £3bn green investment bank is preparing to move the bank to borrowing and raising debt, in order to vastly expand its scope in bringing forward renewable energy and other environmental projects across the country.
The move would be a sharp break with the current set-up of the bank, which on Thursday published data for the first time on its initial investments totalling £635m. It receives money from the Treasury in order to fund green projects, but is not allowed to raise money on the capital markets, in the way normal banks do to fund their investments.
When the Green investment bank (GIB) was launched last year, the Treasury insisted that it should not be allowed to borrow independently, because its debt would appear on the government's balance sheet and could – on paper – make it look as if the deficit was increasing.
But the bank's set-up will be reviewed when its current funding is scheduled to run out, in March 2015. Shaun Kingsbury, chief executive of the GIB, told the Guardian that it was imperative for him to prepare now for the possibility of being able to borrow money in less than two years' time, which he strongly supports as a way of expanding the bank's impacts.
"Access to debt markets will come. If I can deliver on all this [current investments] I will have access to all sorts of capital… As the story emerges, we will look at different sources of capital," said Kingsbury, adding that in order to prepare for that he was already working on models of how the bank in its new format could work. "I am working on these kinds of things now."
Kingsbury said moving the bank to a more commercial basis was necessary to allow it to grow and be effective. "People focus on our [current] budget as if that is the end. But the government has committed to an enduring institution. For me the key was to get established. We will become a valuable, profitable business, and I will have access to all sorts of capital if successful."
However, Kingsbury is likely to face some opposition. Treasury mandarins, who firmly – and controversially – prevented the bank from having borrowing powers, may balk at allowing such a major change so soon, and ahead of the next general election.
Kingsbury said the bank was already proving itself. "It was agreed that we would not have access to capital markets at the beginning," he said. "But £3bn is plenty to demonstrate that we can deliver. That is what we are focused on now. But beyond that we may have access to different types of capital. The key is to build a successful business – that business will have capital formation around its business model."
"We will be able to borrow money at some point in the future – the date is not certain yet," he said.
On Thursday morning, the bank published data on the progress of its first five months of investments, from the launch in November to 31 March 2013. So far, the GIB has directly provided £635m of investment, in 11 transactions that have a total value of £2.3bn, with the rest coming from the private sector. Kingsbury said this ratio of GIB to private funds – £1 of public cash to about £3 of private investment – was what he had been seeking. "We are crowding in private sector capital, not crowding it out," he said.
The investments so far have included two offshore windfarms, three industrial energy-efficiency projects, and – more controversially – five waste or biomass projects, including one to help the UK's biggest coal-fired power station, Drax, to convert some of its coal boilers to wood and other biological materials.
Last week, green campaigners including Friends of the Earth, Greenpeace and the RSPB sparked a bitter row in the renewable energy sector when they publicly condemned biomass projects, which they said could result in an unsustainable use of wood. The Renewable Energy Association rebuffed the claims and said the biomass used in the UK was from sustainable sources. Many green campaigners are also against projects to generate energy from waste, even though this cuts carbon emissions.
Kingsbury said Drax qualified for the £100m investment despite its size because the project would not have gone ahead without it. None of the projects invested in would have been possible without public money, he said, because commercial banks are facing increasing constraints on providing funding for long-term projects of as much as 25 years, partly because of investor nervousness but also because of international banking rules.
"Banks are struggling to provide long-dated capital [that pays back over more than 10 years]," he explained. "Folks are nervous about providing 20-year dated capital."
He said investment in renewable energy in the UK had also been hit by uncertainty over the reforms to the electricity market proposed by the government, which are in a bill currently going through parliament, but key details of which – such as the level of subsidies – have yet to be fully decided.