Senior Associate at Chadbourne & Parke (London) LLP
Post date: Friday, 10th August 2012
The establishment of the first green investment bank moved a step closer in May 2012 when the government announced the appointment of Lord Smith of Kelvin as chair and Sir Adrian Montague as deputy chair and senior independent director.
Their first task will be to recruit the directors and a senior executive team as well as oversee the launch of the bank’s new headquarters in Edinburgh and office in London.
From April 2012 until achieving state aid approval from the European Commission, the GIB will be in an incubation phase. Investments will be structured so that either (i) no state aid is involved (because the Government is participating on fully commercial terms); or (ii) the projects are within the scope of existing state aid exemptions and approvals.
The government committed in the 2011 budget to capitalize the bank with £3bn through 2015. The bank will be fully established following two key phases.
The first phase relates to the government’s investments from 2012 until the bank receives state aid approval. The government expects to obtain such approval by September 2012, but said it would start making investments in green projects from April 2012. Investments will be managed by a new team, called UK Green Investments (UKGI), set up within the government’s department for business to drive investment in green infrastructure until the bank is formally established.
The second phase is the establishment of the GIB as a standalone, fully operational institution following the European Commission’s approval, with full borrowing powers from 2015 (subject to public sector net debt falling as a percentage of gross domestic product). Once established, the bank is meant to operate at arm’s length from the government.
The bank is designed to accelerate private sector investment in the green economy. The initial strategic priority sectors are offshore wind power generation, commercial and industrial waste processing and recycling, energy from waste generation, non-domestic energy efficiency and support for the "Green Deal".
Offshore wind. The GIB could play a key role in finding additional sources of financing, by co-investing or helping to refinance after the construction phase.
Waste. It is envisaged that the GIB could help companies scale up investments by introducing equity and debt co-investment. It could also provide risk mitigation products that reduce the risk profile of projects and make traditional bank debt more available.
Non-domestic energy efficiency. The GIB could introduce finance mechanisms to increase the amount of lower cost debt for commercial buildings and industrial energy efficiency. These financing mechanisms could potentially be combined with advice to help identify further energy efficiency measures.
At least 80% of the funds committed by the bank will be invested in these sectors. Up to 20% of the funds may be invested in other green sectors. For this purpose, UKGI has been provided with funds by the government (around £100m) to invest in small waste infrastructure projects. It was reported that another £100m has been made available for investment in the non-domestic energy efficiency sector.
The government says that at least £110bn is required by 2020 to replace aging power plants, to upgrade the grid and build renewable energy projects. The lack of sufficient and appropriate financing may threaten the UK’s transition to a low-carbon economy. The government is currently investing, on an arm's-length basis, ahead of obtaining state aid approval from the European Commission.
£80m have been committed to two specialist fund managers, who are responsible for generating and managing investments in areas such as waste recycling and reprocessing facilities, pre-treatment projects and energy-from-waste projects. The maximum amount of individual investments is not likely to exceed £15m, suggesting that the funds are likely to back small to medium-sized projects rather than large-scale waste-to-energy projects.
An initial fund of £50m will be managed by Foresight Group, a leading independent alternative asset manager specializing in environmental, infrastructure and private equity investing, and an additional fund of £30m will be managed by Greensphere Capital, a specialist investment firm focused on sustainable energy and infrastructure.
The GIB’s investment committee will take the investment decisions based on a detailed set of investment criteria: sound banking principles, ability to mobilise additional private sector capital and green impact.
The committee will report directly to the board. Above a certain threshold (or in particular cases) individual investment decisions may require the board’s approval.