May 15, 2017    7 minute read

Is the Green Investment Bank Safer in the Hands of Macquarie?

For Better or Worse    May 15, 2017    7 minute read

Is the Green Investment Bank Safer in the Hands of Macquarie?

Prophesied as the new dawn for conservative thinking within the realm of renewable energy, the UK’s Green Investment Bank (GIB) is no longer under government ownership.

Formed in 2012 on the back of a manifesto commitment, the GIB was the first of its kind to be seen anywhere in the world. Its directives were simple: deliver funds to areas that would not ordinarily be able to source funding from the private sector.

Since its formation, the GIB has committed £3.4bn to roughly 100 different projects, with beneficiaries ranging from energy efficiency, waste, offshore wind and onshore renewables. There has also been a specific focus on those smaller projects which may not have shown up on the radar of private sector investors.

A Public Good?

On the surface, the strategy makes sense. If the only investment in green energy is derived from quick profit-seeking smash and grab private investors, then investment and output within renewable projects will always lag behind their goals. Through this lens, energy (specifically renewable energy), could be thought of as a public good, and thus investment and distribution of it should be promoted by the state.

A public good is non-rivalrous and non-excludable. If one individual derives a benefit from a public good, others will also enjoy the benefit, despite not paying for the proliferation of the good itself. Similarly, consumption by one person will not restrict others’ consumption, thus implying that the marginal cost of supplying the good to an extra person is zero.

Energy standards within the EU and other modern economies have somewhat ended the debate as to whether energy is, in fact, a public good. Even Venezuela, through Chavez’s nationalisation of petroleum, has shown that it is no longer labelling certain fossil fuels as private goods.

The debate, particularly within the EU, has moved towards health. Increasing standards and regulations, for instance, the 2020 Renewable Energy Directives, show that at the heart of the argument is the health of individuals and sustainability, which in themselves can clearly be seen as public goods.

Is State Ownership Ever the Answer?

Does it really matter how we view renewable energy or projects undertaken by the GIB? The definition we attach to what renewable energy means socially, and what we perceive the GIB to be doing, will have profound implications on how these factors and institutions ought to be managed.

One school of thought within economics is that, as a public good, energy and therefore institutions like the GIB have a high chance of being mismanaged. Without a profit incentive, a government may throw unnecessary public money and resources at inefficient programs, thus failing to maximise returns on investment and perhaps suffering diseconomies of scale.

The ‘Tragedy of the Commons’

This has been seen in Venezuela, where wells on oilfields have suffered considerable pressure drops, meaning benefit may have decreased since public ownership.  Furthermore, Garrett Hardin argued that proliferation of a public good can lead to what he called ‘the Tragedy of the Commons’.

What he means by this is that each individual will try to reap the biggest benefit from this new available resource. As demand outstrips supply, each additional unit consumed will directly affect the derived benefit for other individuals. By setting up the GIB it could be argued that the Government is moving down this path, labelled by Friedrich von Hayek as ‘the Road to Serfdom’, or it could just be a forced start for an ailing sector.

Enter Macquarie

Macquarie, an Australian Bank, has now acquired the ownership of the Green Investment Bank. A statement from Tory minister Nick Hurd affirms that the GIB may have just been a necessary kick for private investment within the renewable sector:

“It now makes sense to move it into the private sector where it will be free from the constraints of public sector ownership, allowing it to build on successes.”

Not all stakeholders have been best pleased with the £2.3bn sale. Some Liberal Democrats have called the move “environmentally irresponsible”, and Doug Parr, a policy director for Greenpeace, has argued that the government has “given away one of our key tools for advancing green technologies”.

Weighing Up Both Sides

Both sides of the argument can draw merit. While it has been beneficial for low-yielding or somewhat inefficient areas to be able to source investment, the sums may not eventually add up. By investing in unprofitable areas, the government will fail to gain returns on investment thus making the process less sustainable. This could then cause net investment to decrease which would be a headline that the Conservative government would be keen to avoid.

Is this then simply passing the buck on to the private sector? Again this could be argued either way. Macquarie has responded to complaints about its purchase by arguing that it will invest £3bn in projects over the next three years, this would outstrip the £3.4bn invested during the government’s four and a half year tenure.

However, the whole point of the GIB was to reach out to areas that would not ordinarily be able to source funding, thus it is unlikely a private bank focused on returns, will invest in such areas. Allegations of asset stripping practices have also been levied at Macquarie.

This is the process whereby a large private company will seek to profit from a large public acquisition by selling off parts of their newly owned enterprise. The Australian bank has already conceded that £230m worth of early stage investments will be sold off, thereby adding fuel to the fire that this is a sign of things to come under this new ownership.

Smart Politics or Mere Pragmatism?

Theresa May has been on somewhat of a privatisation drive since she has taken office. Gordon Brown bailed out Lloyds Bank in 2008 to the tune of £20.3bn, conservative governments have now recouped very close to that figure if you include the dividend payments that they would have accrued. Theresa May has overseen the latest sale of Lloyds shares which has seen government ownership fall to below 2%, this has been accepted as a shrewd sale and of benefit to both the bank and the taxpayer.

Thatcherism (or neo-conservatism) has been heavily associated with privatisation, although it is not yet clear to see whether May is a Thatcherite or merely a pragmatist like Cameron. It is clear that after unsuccessful periods of austerity, the government will try to free themselves of all large liabilities on their balance sheet, the casualties of which may be Lloyds Bank, the GIB, and perhaps the NHS.

GIB’s Role in the 2022 Election

Political subterfuge may have also played a part in the sale of the GIB, on the dawn of an election, the news has been suppressed by ‘Brexit’ and the different party manifestos. Despite this, if elected, it could be May’s legacy due to decisions such as the sale of GIB that will decide her fate in 2022, if the Fixed Term Parliament Act remains in place.

Important areas like renewable energy may not be important political battlegrounds today, but over the next five years, as fossil fuels inevitably stutter and alternatives are increasingly looked to, the importance of innovative approaches to renewable energy might be the focus of an election campaign. In such a case, the performance of the GIB under Macquarie’s stewardship will be fascinating to observe.

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