THE SNP Government has welcomed the news that Vince Cable, the UK Business Secretary, is considering a proposal to locate the proposed Green Investment Bank (GIB) in Scotland.
WHY DO WE NEED A GREEN INVESTMENT BANK?
The commercial exploitation of low carbon technologies is dependent on building new infrastructure – electricity from offshore wind turbines in the Atlantic needs to be transmitted to consumers un the south of England. The scale of the investment required is collosal. Bob Wigley, the banker appoined by George Osborne to examine how a GIB might work, estimates it will cost £550bn by 2020 to substantially decarbonise the economy.
However, large infrastructure projects are finding it very difficult to raise private capital as traditional syndicated bank loans have been scuppered by the credit crunch. In theory, the GIB would leverage private investment for new energy infrastructure by guaranteeing such syndicated loans, or buying them and securitising them.
WHY CAN’T ORDINARY BANKS DO THE JOB?
They could but they won’t. The UK was able to fund the creation of the North Sea oil and gas industry (including a new domestic gas grid) without creating a special funding agency. The problem today is that fossil fuel energy is still far cheaper than renewables. Unless there is a carbon tax to equalise returns, the markets will not come up with the £50bn a year required to decarbonise the economy.
HOW WILL A GIB BE FUNDED?
The Coalition has not made up its mind. The GIB will need in the order of £3-5bn in equity, even if it is in the form of state guarantees. This would enable the GIB to raise debt capital through issuing bonds, say in the region of £20-25bn.
Bob Wigley suggested that selling green ISAs to the public would raise £2bn a year. But David Cameron has stolen this idea to fund his new “Big Society Bank”
Another suggestion is to sell off Treasury assets, including the Channel Tunnel, to fund the GIB. That idea has been scuppered by the Treasury. It wants the cash to paid down the National Debt.
But the Treasury has suggested the £200 million of Scottish Government cash it holds from the Fossil Fuel Levy should be taken and put towards GIB funding.
DO OTHER COUNTRIES HAVE A GREEN BANK?
Yes: Germany. It is called the Kreditanstalt für Wiederaufbau (KfW), or Reconstruction Credit Institute. It is publically owned and was formed in 1948 as part of the Marshall Plan. KfW is owned jointly by the Federal Republic (80 per cent) and the individual German states (20 per cent).
In 2009, KfW lent £46bn to the German domestic market, mainly for infrastrurcture and green energy investment. That’s roughly the mannitude required each year in the UK to finance needed energy infrastructure. KfW also invests in municipal infrastructure such as public transport and sanitation.
HOW IS KfW FUNDED?
KfW covers most of its borrowing needs in the ordinary capital markets, mainly through bonds guaranteed by the federal government. But it is not allowed to compete with the private sector. Instead, it provides commercial banks with liquidity at low rates and long maturities. Effectively, KfW provides cheaper, secure funds in partnership with private banks and in strategic areas favoured by the Federal and state governments.
WHY LOCATE IN SCOTLAND?
First, given its role is to work in strategic partnership with other lending institutions and funds, it makes sense to locate the corporate HQ in one of the existing financial hubs. That narrows the field to Edinburgh or the City of London. Bristol and Leeds may boast a large concentration of financial jobs, but they are mostly in the back office. Birmingham and Manchester may be a major financial centers but their locus is retail banking, not fund management like Edinburgh.
Second, Edinburgh is a good place to do business and recruit skilled staff. The latest edition of the authoritative UK Competitiveness Index ranks Edinburgh as the most competitive large city in Britain. Despite worries that the economic crisis will harm Edinburgh’s economy, there is hard evidence to the contrary; e.g. the recent decision by Tesco to locate the HQ of its banking arm in the Scottish capital.
Third, after recent banking consolidations, the UK needs to revitalize competition in its financial system – which means reinforcing Edinburgh as a friendly counterweight to the City of London. That process will be aided by sending the GIB northwards as a (modest) replacement for HBOS being swallowed by Lloyds.
Fourth, Scotland is the key market for infrastructure investment in renewables and transmission lines southward. Putting the GIB next to those who want to raise funds is only common sense.
DOES SCOTLAND HAVE COMPETITION FOR THE GIB?
Ian Swales, the Lib Dem MP for Redcar, has been drumming up support to bring the GIB to the English North East. In response, Treasury Minister Justine Greening noted the Coalition was “open-minded to all options” for the location of the GIB, “including the Tees Valley”.
We can also expect a serious challenge from the City of London. Bob Wigley, the City banker responsible for drawing up the blueprint for the GIB, previously chaired a commission on the competitiveness of the London economy for Mayor Boris Johnson. Expect Boris and Bob to join forces on keeping the GIB in the City, especially as Wigley wants to chair the new bank.