The government is in asset sale mode. The planned sale of the nationalised banks will set a new high watermark for capital raised, previously set by the BP privatisation, presided over by Margaret Thatcher in 1987.
The sale of the Green Investment Bank (GIB) is being pushed through, alongside the sale of Lloyds and RBS. But, the criteria by which these sales will be judged are quite different. The sale of the retail banks needs to maximise returns to the taxpayer through the share price achieved on the day of the sale. But, the sale of GIB shares needs to optimise return to taxpayers in the long term by securing the bank’s unique mission.
The GIB’s unique mission has two components: (1) to act as a dedicated finance institution for the green infrastructure we need to build over the next 50 years, and (2) to make the rest of the finance market work by using its expertise to prove innovative and novel projects and creating funding models for private investment banks to follow.
The GIB was born out of cross party, business and civil society consensus on the need for an investment bank to fund novel and innovative green infrastructure in the UK. The green remit of the GIB was enshrined in law by the Enterprise and Regulatory Reform Act 2013 and its focus on market failures, ie financing projects, not otherwise funded by the market, is guaranteed by state aid rules which ensure state entities don’t compete with functioning private markets or lend at below market rates.
Prioritising short term over long term needs
The government’s intention to sell of “at least a majority of its shares” in the GIB was announced by the secretary of state for business, innovation and skills, Savid Javid, at the GIB’s Annual Review on 25 June 2015. And a further ministerial statement on 15 August 2015, which stated that the government intends to undo the ‘green lock’ by repealing the Enterprise Act, means that the government is prioritising the short term need to raise cash for the bank over the long term need to secure its mission.
A useful lesson from history comes from 3i, founded in 1945 as a state owned SME investment bank, it was privatised in 1994 and gradually drifted in its focus. Now 3i, a very successful investment bank, is indistinguishable from any other private equity investor and the UK has seen the SME finance gap re-emerge as a barrier to enterprise development and growth.
The problem for the government is that, whilst the GIB is state owned, any borrowing would appear on the government balance sheet. Supporters of the GIB have always insisted that it needed to be allowed full borrowing powers to operate at sufficient scale for the investment needed in the UK’s low carbon and green infrastructure. However, not at any cost and, without a government stake and its green purposes enshrined in law, there is nothing to ensure a privatised GIB would continue to address market failures and fund projects that are not otherwise fundable by the market. In other words, it’s not worth giving up the ‘G’ in GIB in order to secure the ‘B’.
Risk of losing its purpose
The GIB moved into profit in the second half of 2014-15 and has succeeded in raising £3 of private sector finance for every £1 of public sector investment, all while working in the hard to fund project space. It is rightly proud of this success and has built up valuable expertise in bringing difficult projects over the line which, once proven, the commercial sector can more easily finance. But, if privatised, the GIB would no longer benefit from risk free capital from the public purse and would be subject to the same commercial pressures of other banks, making it unlikely that it will keep this focus for long.
Ideally, the GIB would get the full borrowing powers it needs but remain a majority state-owned entity. There are smart ways government could divest some of its stake, via a trust or the devolved administrations and city regions.
If we continue on the current track we could end up with just another investment bank, with no lock on its green purpose, and no additionality in the market.
This blog is based on a briefing written for Lexis Nexis published on 7 August 2015 and adapted in light of the ministerial statement on the 15 October 2015.