An Investment Bank With Green-Tinted Glasses

A number of the essays in Going for Growth, a new book edited by my colleague Will Straw, are well worth reading. Two in particular stand out as being of significance in the climate change debate.

One of us is highly likely to return soon to the issue of innovation and so we’ll set Stian Westlake’s contribution to one side for now. Gerry Holtham’s call for a public vehicle to carry private sector investment into major infrastructure projects will have particular resonance to those currently involved in the Green Investment Bank debate.

I’m afraid I can’t link directly to the essay, but the book is free and downloadable from the ippr website, so it won’t trouble you to go and find it yourself. Gerry Holtham is highly qualified to make his argument; he’s a former director of ippr and so knows the public policy field but in recent years has been working in the capital markets and so knows finance too.

In a nutshell, Holtham argues that UK has in recent years underinvested in infrastructure which is now hampering growth and that the gap can only effectively be filled by a government-backed institution to provide guarantees and take preference shares in productive, infrastrutural assets. His proposal is for the Green Investment Bank writ large.

Of course, this would reduce the costs of capital to investors, but it would also reduce risk substantially. But why wouldn’t it harm the government’s balance sheet and therefore fall foul of treasury rules? The answer is it might be a problem in principle for the treasury, but in practice, because the institution would be designed to leverage private capital into productive assets that will earn substantial returns – for instance, energy or railways – it need not be.

His arguments turn the Private Finance Initiative on its head:

‘Instead of getting the private sector to raise expensive finance to build assets and lease them to the public sector, a public sector entity would raise cheap finance to procure assets and lease or sell them to the private sector for operation, thereby servicing its debt.’

This argument is very important. As the growth debate on this blog has hopefully illustrated, tackling climate change requires high levels of investment. The Green Invesment Bank was conceived of as a vehicle that would perform precisely the role Holtham outlines.

However, it suffers from two problems. First the case for requiring a GIB has not been made clearly enough by the right people. In yesterday’s launch of Gowing for Growth, the FT’s Martin Wolf dismissed it as uneccesary provided emissions were priced properly. However, while emissions pricing might deal with some aspects of market failure, the evidence so far is that they are not effective enough to provide strong investment signals and, critically according to Holtham, the private sector has been underinvesting for decades anyway. In addition there’s an element of risk in large – and especially in green – infrastructure that only government can deal with.

Second, explicitly labelling the Green Investment Bank green has made it unattractive to a Treasury that is both highly sceptical about using government guarantees for investment and about the whole green economy narrative. Perhaps rather than a bespoke green investment bank we should be aiming for a large-scale state infrastructure bank whose objectives are to create an investment climate and the infrastructure for growth, but wearing glasses tinted green by climate legislation and energy and transport policy.