Magazine article Public Finance

Banking on a Green Revolution

Magazine article Public Finance

Banking on a Green Revolution

Article excerpt

Exactly one week after his surprise election victory in May, a freshly reinstalled David Cameron toured the Edinburgh headquarters of the UK Green Investment Bank (GIB). It is not clear if the timing of the PM's visit was intended to convey a strong sense of commitment to the bank, or if the Conservatives might simply have been desperate for something positive to do north of the Scottish border.

GIB was launched in 2012 and both Cameron and George Osborne played decisive roles in its creation, pledging to set up the bank very quickly after reaching Downing Street in coalition - back when the Tories' tree emblem was still scribbled in green.

Today, the bank's founding chief executive, Shaun Kingsbury, is unruffled by recent political shifts. "I think it's business as usual for us," he asserts firmly from his airy office on the 13th floor of Millbank Tower, a brisk walk from the Palace of Westminster. (GIB's activities are split between Edinburgh and London, so Kingsbury presumably has another office, 400 miles away, with a slightly less arresting view.)

Kingsbury recalls the climate action pledge made jointly by the Conservatives, Liberal Democrats and Labour in February, ahead of the election campaign: "It's the first time, at least that I can remember, where parties coming into an election set aside an issue and said, we're not going to throw rocks at each other on that. And they absolutely stuck to it."

It's certainly true that the parties all gave environmental issues a wide berth during their campaigning. Even the Green Party focused on the economy and ending austerity rather than energy security or the ongoing viability of the biosphere.

However, GIB addresses both sets of concerns, plugging away at the UK's climate obligations but also helping to build the nation's green-tech economy. As a result, Kingsbury doesn't seem worried about being sidelined.

The bank was the first of its kind in the world. An independent institution set up wholly under government ownership, given £3.8bn of taxpayer cash to invest in green infrastructure projects across the UK, yet tasked with making a healthy profit in the process. It buys equity or provides debt, rather than dispensing grants to worthy projects. Not losing money is key, given that GIB's liabilities are consolidated into the Whole of Government Accounts, forming a small part of the national deficit.

At the time of writing the bank has invested £1.8bn in 46 separate projects, investing at a rising pace. "Sitting alongside us is just over £4bn of private capital, from 74 co-investors, all of which have looked at the risks and decided to invest independently of us," Kingsbury says. "That makes me feel very comfortable that those are good projects, and that the risk-adjusted returns are at market rates."

GIB's third annual report will show a move into profit, as returns from earlier investments begin to flow in, Kingsbury states. "When we look across our portfolio of debt and equity investments, we have about a 9.0% to 9.5% IRR projected return on these, which is a very nice return for the taxpayer."

The bank was a pioneer - and Kingsbury ranks among PF's recent Top 50 Trailblazers - but it is no longer unique. "Our business model has been copied in a number of markets from Australia to Japan," Kingsbury notes. "They're considering one in China. There are also state-level GIBs in New York, Connecticut, Hawaii and New Jersey. You can guess where my staff want a secondment and it's not New Jersey."

The model has proven popular because it's needed, Kingsbury argues, to address a gap that would otherwise leave nationally important projects stranded without access to cash.

"People have been financing toll roads and bridges, hospitals and powerplants for many, many years," he says. "But renewable energy was coming along in much smaller chunks of capital. Where an investor would need to put up hundreds of millions for a power plant you would only need tens of millions for a wind farm. …

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