Environmental Audit Committee
Oral evidence: Future of the Green Investment Bank, HC 536
Thursday 26 November 2015
Ordered by the House of Commons to be published on 26 November 2015.
Written evidence from witnesses:
Members present: Huw Irranca-Davies (Chair); Peter Aldous; Jo Churchill; Mary Creagh; Geraint Davies; Margaret Greenwood; Peter Heaton-Jones; Mr Peter Lilley; Caroline Lucas; John McNally; Rebecca Pow.
Witnesses: Rt Hon Anna Soubry MP, Minister for Small Business, Industry and Enterprise, Department for Business, Innovation and Skills, and Richard Callard, Executive Director, Green Investment Bank Shareholder Team, Department for Business, Innovation and Skills, gave evidence.
Q97 Chair: Welcome to this morning’s session. This is the second public hearing in the Committee’s inquiry into the future of the Green Investment Bank. We are pleased to have with us today Anna Soubry MP, Minister of State in BIS, and Richard Callard, the Executive Director of the Green Investment Bank Shareholder Team. You are both very welcome indeed. As I say, because time is so very short and because there is statements on the floor today, if you are happy we will go straight into it. We will try to keep our questions snappy and if you can do that for the answers as well.
I noticed in yesterday’s CSR that the only reference to the Green Investment Bank was in the context of selling off Government assets in order to raise money. The worry with that is that this could be a quick fix asset sale to plug the deficit. Can my worries be assuaged?
Anna Soubry: I hope so. The way I look at it is that it is just the right thing to do. It is the natural next stage in something that has been very successful. I think everybody knows where I am politically. I am not some absolutely—I nearly said mad free marketer but you know what I mean. I am not an ideologue about all these things at all and I absolutely think this is the right thing to do. It makes sense to do it because I think we will find that we will get more investment into this bank, green investment in particular, so it is just the right thing to do.
Q98 Chair: Okay, that is great. We will go into some detail on that, but coming off the back of the statement yesterday the worry was that it only fell within that little part that is to do with selling off assets. Let me flip that round and ask you this. Your Department recently published a paper that was entitled “The Future of the UK Green Investment Bank” that had some great warm words in it about ensuring the long-term future for the bank but on the basis of some of the concerns out there. What is there to stop the Government going for a quick-fire asset sale on this? What is there to stop it if you change your mind in three months’ time, just flog it off?
Anna Soubry: I think the thing is we want to sell it at a good commercial rate and do a good deal for the taxpayer but at the same time it is also part of making sure that we encourage people in continuing this good work. So there are two reasons for doing it. I don’t know whether Richard can give the details—he is the man who knows all the details; I just do the politics.
Q99 Chair: But is there anything specifically that would stop you just selling it off in a quick-fire fire sale?
Anna Soubry: We want to do the best thing for the taxpayer. That is always the most important thing.
Q100 Chair: There is nothing in the mechanics that would actually stop you doing this, is there, in the way that other assets have been sold off?
Anna Soubry: In the mechanics, I wouldn’t think there are, but it is the political decision that you make, isn’t it? I can’t imagine that I would be happy about selling it for anything that would be a bad deal for the taxpayer. The taxpayer has to be the absolute priority in making sure that we get good value for the taxpayer.
Chair: That is brilliant. Thank you, Minister.
Q101 Margaret Greenwood: The Government plans to ensure that the Green Investment Bank is reclassified to the private sector by repealing the public sector controls from the Enterprise and Regulatory Reform Act. We want to examine the key issue, which is the potential consequences for the bank’s green mission and core purposes. Do you accept that if the Green Investment Bank is reclassified as a private sector organisation there is no way for the Government to guarantee that the Green Investment Bank will continue to meet the green purposes for which it was created?
Anna Soubry: I think the mistake everybody makes is this: why would you want to buy it unless you wanted to continue the sort of work it is doing? In buying it, of course you are buying into the investments it has already made. I am confident that whoever purchases it will want to maintain it with the aims that it has and the clear investment that it has made in the past into green enterprise and green ventures. If you want to add anything, Richard, please do.
Q102 Margaret Greenwood: Just following on from that, the CEO of the bank told us that retaining a statutory lock on the bank’s green purposes would have been preferable to other solutions. Would you agree with him?
Anna Soubry: I think the most important thing is that if we are to have a successful sale then we have to be clear that it is not going to be overly constrained in any way so we do not get a good deal for the taxpayer and also do not put it genuinely into the market. We do not want to constrain the sale and we do not want to constrain its future in a way that would be adverse to its history and to our hopes for the future.
Richard Callard: The ONS has been very clear with us that having statutory protections over the Green Investment Bank, regardless of how much of the Green Investment Bank we own, will most likely trigger us to be on balance sheet, so to remain classified as the public sector, which would mean that whatever a privatised GIB did would hit public sector accounts.
Q103 Margaret Greenwood: Would you say that is more important than the pursuit of the green purposes?
Richard Callard: No. I think Shaun Kingsbury said that you can’t have a situation where the Government’s debt targets are being influenced by a private company over which we have no control.
Q104 Chair: It seems to me that there is no way that you can guarantee that the GIB in the long term will maintain its green credentials. You can give assurances. You can say, “Why would anybody invest in the Green Investment Bank unless they had green imperatives?” but ultimately there is no guarantee, is there? When you move this off balance sheet, compelling as that might be from a Government objective of moving it off the balance sheet, actually there is no guarantee that it keeps its green credentials. Do you agree with that, Minister?
Anna Soubry: Apart from the fact that it has £2.4 billion already committed to green projects, with £1.2 billion actually into those. That will be what any buyer is getting, so that is going to be at the absolute core of it. That is in itself a mark of its future.
Q105 Mr Peter Lilley: Did I understand you to say that if it has a clause in its articles requiring it to stick to green investments, it remains on the Government’s balance sheet?
Richard Callard: No. At the moment, the articles are enshrined within the legislation, so the green purposes are in the objectives clause of the articles of association. At the moment, legislation prevents the company changing those articles without coming back to Parliament to seek approval. When we sell the Green Investment Bank we expect the green purposes within the articles of association to remain there. What we will have repealed and removed is the statutory lock over those, and indeed we are asking bidders to sign up to those green objects in the articles as part of a sale.
Q106 Caroline Lucas: When you are asking them, what does that really mean? It just seems to me that we are playing with words here. If you have removed the statutory lock then you have removed the guarantee that it will be used for green purposes, so asking very nicely does not necessarily get you very far, does it?
Richard Callard: I think we have been clear. We have not tried to hide this; we have been clear. We can’t bind, because of the way the rules of the classification system works.
Q107 Caroline Lucas: So why can’t you be clear with us now and just say, “It is absolutely the case that if we sell the Green Investment Bank we cannot absolutely guarantee that the aims of it will still be green. We can hope, we can assume, we can make all sorts of assumptions, but essentially we cannot guarantee”?
Anna Soubry: No, because you can’t deny the substantial investment that you will be picking up when you buy it, the fact that it has committed £2.4 billion.
Q108 Caroline Lucas: No, but you are going to hopefully do new things aren’t you? You are not going to be just doing—
Anna Soubry: Sorry, you interrupted me. I can’t hear.
Caroline Lucas: I am sorry. You will also be hopefully making new investments. It is not just the investments that have already been made that you carry forward. You may have to honour the investments that have already been put in train, but in terms of making new investments there is no guarantee that they will be green, and I just want you to agree that that is the case.
Anna Soubry: You want us to agree with you, yes, but I am not going to just simply— Caroline Lucas: I want clarity from you and I am not getting it.
Anna Soubry: No, because I don’t agree with your premise and I think you are not appreciating the fact that any buyer is getting all those pre-existing investments and those commitments, and they are not two and sixpence. They are many big things.
Q109 Caroline Lucas: What about the new investments then? How can you guarantee new investments from whoever buys the Green Investment Bank will be green? How do we guarantee the new investments?
Anna Soubry: It is not as simple as you make out, Caroline. The point is you have to say why would anybody want to buy it unless they—
Caroline Lucas: No, you don’t. You have to just answer the question: is it guaranteeable that those new investments—
Anna Soubry: I am trying but you keep interrupting me.
Caroline Lucas: Because you are coming back into hypothetical issues.
Anna Soubry: Because you don’t like the answer I am giving you.
Caroline Lucas: No, because you are not answering the question, Minister, again.
Anna Soubry: Well, that is your view, but I don’t agree with you and I think I have given my answer.
Chair: Can I bring Rebecca in? She wants to come in on this.
Q110 Rebecca Pow: One assumes that research has been done in advance. What types of interest are you getting from people wanting to purchase a green bank? Are they indeed green in the sense of investing in green energy and green projects?
Richard Callard: We have been talking to potential investors since late last year and they tend to be sovereign wealth funds, pension funds, infrastructure funds. They are looking to access green renewables expertise or the portfolio, because green investment is becoming mainstream. So they have an interest in green. They are buying into the assets that they have already got but they will also be buying into the green team that GIB has, the 17 green professionals, and also the business plan that has a pipeline of green deals going forward. They are buying that package. That is what they are interested in and they are interested in it for commercial reasons.
Anna Soubry: That is part of the answer to what Caroline Lucas was quite properly asking. We look at who is already giving notice of interest and they are exactly the sort of people that I think—
Q111 Rebecca Pow: With the removal of many Government subsidies in renewables—not all, they are just changing their emphasis slightly—do you see that there is increased interest from private investors going into those sectors to fill that gap?
Richard Callard: If you look at GIB’s business plan, a lot of the projects in the pipeline already have their Government funding in terms of the contracts for difference. Other areas like energy efficiency—non-domestic energy efficiency—do not require any subsidy anyway, so actually we do not see that the current uncertainty, if there is any, around these areas affects the potential for sale. Of course, GIB deals with regulatory risk. That is part of what it does in the same way that many of these investors like pension funds and infrastructure funds tend to be familiar with the regulatory environment in which GIB operates.
Q112 Caroline Lucas: I want to come back to this ONS advice that you have received about what can and can’t be kept in the articles and so far. What I wanted to look at in particular was the issue about green reporting, because there is new legislation like the Modern Slavery Act that precisely requires Government disclosure from many companies and that does not seem to cause a problem. Why is green disclosure any different from something like the Modern Slavery Act disclosure?
Anna Soubry: The Modern Slavery Act is very cleverly worded, so it does not say that you have to do anything. In effect what it does is it is an expectation, so if a company does not do it, the fact that it has not done it speaks volumes. It does not require companies to do it. It makes a request and if they don’t, as I say, it would speak volumes. I think we have to understand that because it is a different way of putting a target on or putting a duty on.
Q113 Caroline Lucas: Is there any way of learning the lesson from that, in that case, in order to be able to guarantee greater reassurance to us when it comes to GIB?
Richard Callard: We start to get problems with ONS when we single out a company. If we got everybody to report on green that would not be such a problem, but we expect GIB still to report on green because, on the basis it does green, it will have to report on its green impacts, particularly while it keeps green within its articles.
Q114 Caroline Lucas: Would you be able to put the ONS advice that you have received in the public domain?
Richard Callard: I would have to ask the bank.
Q115 Caroline Lucas: Could you ask them and find out for us, please?
Anna Soubry: They gave you evidence. They have given evidence here, haven’t they?
Caroline Lucas: No, but on this bit specifically, on the report.
Richard Callard: Just to add, ONS do not opine formally on anything until the deal has been done.
Anna Soubry: So it would be afterwards?
Richard Callard: Yes.
Q116 John Mc Nally: I have to declare a public interest in this and I have a relative involved with the Green Investment Bank through a lobbying committee. I think your answer earlier on, Minister, was quite interesting about the two reasons being the taxpayer getting benefit from this and that seems a bit contradictory to me. The reason for that is I think we have to keep hold of something, the taxpayer has to know that there are guarantees around what you do with the Green Investment Bank. That is where I am coming from.
My question, just following on from what other people have been saying, is that the Government claim that they will seek assurances from potential investors—that could be insurance companies, local authorities, pension funds, all these type of things—on their commitment to the GIB’s green objectives and its future green impact. Since these commitments, as you have already stated, cannot be enforced if the GIB is to be reclassified to the private sector, what is their force? I will give you the supplementary just now to that, which is: what would be the consequences if an investor broke one of these commitments?
Anna Soubry: I think you can do what the consequences might be. I thought I had explained why I think we should do this and by doing it we can make sure that the interests of the taxpayer are absolutely guaranteed. As to the consequences if anybody—
Richard Callard: We expect there to be a number of shareholders, so there will be a shareholder agreement that they all have to agree to sign up to as to how they operate as a collective. So it will be the company that is asked to report.
Q117 Chair: Just to clarify John’s supplementary, there are actually no consequences for investors? Sorry, was that what you were going to ask? I am sorry, Rebecca.
Rebecca Pow: As an example of that—perhaps to the Secretary of State—say the Government have announced that they are going to phase out coal-fired power stations but there was an investor who came up with a project that they deemed was an energy efficient coal-fired power station, is there anything to stop it being set up? Is there any comeback? Is there anyone to say, “That is not green, you can’t do it”?
Anna Soubry: No.
Richard Callard: No, but arguably they could do that under the green purposes now. There was lots of controversy when they invested in Drax, which was sort of similar. There was a coal-fired power station that got replaced by a biomass power station. Some people considered that to be green, others didn’t. It is quite hard to judge.
Anna Soubry: Yes, that is very interesting.
Rebecca Pow: Highly controversial.
Anna Soubry: It is your definition of green, that is the point.
Q118 Geraint Davies: So that we are clear on this, we know we have got a legacy of green investment but if the new bank wanted to widen its portfolio into non-green stuff, like fracking, then it could. Is that right?
Richard Callard: Technically it could. It is a question of whether it would.
Q119 Geraint Davies: So it could invest in fossil fuels. Okay. Can I move on to something—
Anna Soubry: Hang on, he had not finished. I am so sorry, but I think it is really important. I completely understand how one can take a quick snatch of an answer and not put it into context so I think it is important that Richard finishes. Sorry, Huw.
Richard Callard: They have a team of green specialists, none of which deal with fracking, so it does not have any experience of fracking. If you wanted to invest in fracking, you would go and invest elsewhere.
Anna Soubry: Why would you want to invest in the Green Investment Bank? Why would you want to be involved in it?
Geraint Davies: The answer would be if I was running a company, which I have, then you want to run a balanced portfolio. So if everything is green, having a bit of non-green balances your risk. There is nothing wrong with having a little bit of non-green, fracking or whatever it is, there is nothing to stop that, is there? Even though you would have your legacy of green, as the Minister mentioned, you could add in other things, anything really, couldn’t you?
Q120 Chair: Minister, I can see you smiling because I think you are going to say that fracking is part of green because it is the gas bridge to a decarbonised future.
Anna Soubry: Well, there are a lot of people who would make that argument.
Chair: Is that an argument you would make?
Anna Soubry: I think it is a very good argument and as somebody who represents an area that used to have coalmines, if it is a choice between fracking and coalmines I will go fracking any day.
Q121 Geraint Davies: Okay. So let’s hope you are not one of the directors. But moving on—
Anna Soubry: I think we can say with absolute certainty I will not be.
Geraint Davies: Moving on to something quite different, and that is the incentive for investment.
Chair: Peter, you had a—
Q122 Mr Peter Lilley: It could do fracking at present under the present articles?
Anna Soubry: Well, it has done. The argument that is being made is that Drax was controversial as to whether it was green.
Q123 Chair: Just to clarify that, I don’t think it could do fracking under the present articles because it is quite restricted as to what it currently does. Am I right, Mr Callard? Could it do unconventional gas?
Richard Callard: It has to meet the five green criteria, of which one is the reduction of greenhouse gas emissions. Depending on how you defined that and whether you replace—
Anna Soubry: You see, this is why these things are not as simple as people want to put labels.
Q124 Geraint Davies: On the financial structure, I know you want to get this off public sector net debt, but wouldn’t you accept that from the public sector’s point of view, if the public sector put some money into green investment it could get match funding from the private sector so it doubles its money and, from the private sector point of view, if it can put some money that is match funded by the public sector it halves its risk. Therefore, we end up doing longer-term slightly riskier green investments and that is the investment argument for a public-private partnership as opposed to just putting it in the private sector.
Anna Soubry: I think that is why it was set up in 2012 in any event. It was precisely because we knew at that time, first, there was not the sort of investment in green projects that we all wanted and, secondly, I think that following on from the financial crisis there was still a difficulty with a lot of investment, especially in those new and emerging areas. So Government have done all sorts of things in order to make money more easily available by way of loans to people who were not having access. Small business is a very good example.
Q125 Geraint Davies: So why change?
Anna Soubry: In 2015, the changes that have occurred in our economy, the improvements in our economy, and the very work that this bank has done by bringing it into mainstream and convincing people that these are good sound investments are really good strong arguments as to why, having done its job, it should now be allowed to be sold and go fully into the private sector.
Q126 Geraint Davies: There is a doubling of money but also there is market confidence. Wouldn’t you accept that the Government have withdrawn from certain areas, windfarms and all sorts of areas, and there is concern about the Government’s commitment to green? If they now sell off the Green Bank and so are not investing public money, won’t that slow down green investment?
Anna Soubry: I absolutely would not accept that at all. On the contrary, I think the sort of investment we are now putting into our offshore windfarms and the way that we are seeing them grow, the excitement that there is and the huge potential, absolutely are a real mark of this Government’s continuing commitment to alternative sources of energy rather than burning coal.
Q127 Peter Aldous: Minister, why now? This bank has just made its first profit of £100,000. Some people might accuse you of selling your turkey on August bank holiday and not Christmas Eve.
Anna Soubry: That is an argument that some may wish to make. I would not subscribe to it. I think it is the right time to do it. It is going to take a little time. We have the legislation to put through and so on, but I think it is the right time to do it. The market is in a good place and clearly people are interested, so let’s get on with it and do it.
Q128 Peter Aldous: The National Audit Office said there was a need to build up detailed business cases of how best to go about selling such a public asset as well as robust and objective valuations to decide when to put it on the market. I would be interested to know what the Government are doing to heed this advice, to get this work going.
Richard Callard: We have done an outline business case in line with the Treasury’s approval process, but we have also engaged some advisers. We appointed the Bank of America Merrill Lynch—BAML—towards the end of last year and we also have Herbert Smith advising us on legals. BAML in particular are there to look at the piece and they have given us advice on market appetite, valuations, value for money and the timeline for a sale. We are confident we have the right advice. GIB have their own advisers in place as well.
Q129 Mary Creagh: The Government have a mixed record on selling off state assets, Royal Mail perhaps being the most notorious recent one where NAO did a fairly critical report afterwards. We are not going to get to my question so I thought I would just shoehorn it in in the last couple of minutes. Is there a possibility for the British public to buy shares in this; will there be an option? How will it be sold? What we do not want is any sweetheart deals so that the funds at BAML end up getting first bite of the cherry or first slice of the cake.
Richard Callard: On the IPO, we don’t think it is ready as a business to be sold to the public. It has only just broken even, as you say, so it does not have the track record to go to the retail market. It needs a more sophisticated type of investor. The important thing to stress is that we want the new investors to fund the pipeline going forward, which is around about £3.5 billion to £4 billion over the next four years. So we need investors, sovereign wealth and pension funds with deep pockets who can guarantee and make commitments that they will have that money ready when it is needed, which you can’t quite do if you go into the market and tap into the general public. That is why we think it is a different form of sale, so a standard sort of auction process is the way we go. What we would have is a competitive process, two rounds. In the initial round we issue an information memorandum, have a data room, people can ask questions, lots of due diligence. We then take indicative bids through to a second round where they go through a further detailed due diligence and through a competitive process pick the most advantageous offer or offers.
Q130 Mary Creagh: What is the timescale to completion? Six months or—
Richard Callard: Yes, probably six months.
Q131 Mary Creagh: When do you think that process will start?
Richard Callard: We have not made any decisions yet but we do envisage selling in the next financial year.
Q132 Peter Heaton-Jones: Minister, were any options other than privatisation for the future of the bank considered or was it, “Privatisation is the idea and we are going to go straight with that”? Were there other options on the table that were ever considered?
Anna Soubry: It happens like this. You think this would be a good thing to do; can we now go through the pitfalls, the things that are against it, the difficulties and so on. So you start with an idea and then you make sure that that actually is a good idea. That was exactly what we went through as a team of Ministers and we came to the conclusion it was a good idea.
Q133 Peter Heaton-Jones: Were any other ideas thought about in that process?
Anna Soubry: In that process you would look at different options. If you decided it had run its course in its current form and there was a real feeling that that was the case, then you would say, “So in that event, would you want to sell it?” but obviously you then go through all the upsides and the downsides of that. It is all part of that process of coming to a conclusion that you then have confidence in.
Q134 Peter Heaton-Jones: Before the announcement was made of the intention to privatise, what consultation was done externally to decide if that was the right thing to do?
Anna Soubry: For my part, one of the most important conversations I had was with Lord Smith. I will be very blunt about that. For me to have that conversation about his views helped me to settle it in my mind. I was very open-minded on this. As I said, I am not an ideologue who just goes charging off thinking I want to sell everything off and privatise and so on. I wanted to listen to all the arguments and when he was as convinced as he was, I listened to somebody who knows arguably a lot more about it than I do.
Q135 Chair: Minister, we are running out of time. It has been a very good and interesting session.
Anna Soubry: We will answer any questions.
Chair: If you are happy, I will write to you with some more questions.
Anna Soubry: Absolutely. That is not a problem at all.
Q136 Chair: My apologies to Committee members, but I do want to ask you one thing here. When the Green Investment Bank was in front of us, in a very good session, they said that they would want the Government to remain a shareholder in the bank for as long as possible. Further to Peter Heaton-Jones’ question, why wouldn’t the Government, just for that added bit of certainty, say, “We will keep our oar in this, not just for one year, five years or whatever? We are going to be in here as a partner in this in whatever way”? Did you consider as one of the options that the Government should be a significant minority or even a majority partner in this?
Anna Soubry: To be honest with you, I did not think that that was a realistic option. If we are going to do it, I think we have to do it full fat, not semi-skimmed.
Q137 Chair: In which case, does full fat mean that the Government ultimately withdraw from the Green Investment Bank, they have no shareholding?
Anna Soubry: No, because we would always—
Richard Callard: We are open minded about what sort of stake we would keep but we are aiming to sell a significant majority. Over time our view is that we would exit in the entirety.
Q138 Chair: Why would you exit? Bearing in mind the concerns about the green focus of the Green Investment Bank, why would the Government—
Anna Soubry: We know where we want to get to so it is a process of how you get to where you want to get to.
Q139 Chair: It seems clear from what you are saying in response to this, and to Peter previously, that while it is not driven ideologically, as you say, this was the only option, the full fat option.
Anna Soubry: Do forgive me, this was the right thing to do. That was my view.
Chair: Okay. Thank you very much indeed, Mr Callard and Minister Soubry. Thank you everybody.
Oral evidence: Future of the Green Investment Bank, HC 536 11