Saturday, 22 April 2017

The Privatisation of the Green Investment Bank: Yet Another Example of the Imbalance Between Short-Term Gains and Long-Term Losses?

Today’s post was intended to move away from the world of politics after a number of posts in Financial Regulation Matters focused upon the actions of the political leaders in the U.K. However, politics and financial regulation, and business matters moreover, are intrinsically intertwined. Therefore, today’s post will remain in this juncture between the relevant fields and look at the recent news that the British Government is about to sell the Green Investment Bank (GIB) to a consortium led by the Australian-based Macquarie Group. So, in this post, we will take a look at the GIB in more detail and see whether the claims from the government that the deal represents good value for the taxpayer really hold true under scrutiny.

The Green Investment Bank, which proudly proclaims on its website to be ‘first bank of its type in the world’, was created in 2012 after consultations stemming from the 2010 General Election. In 2012 the bank received the authorisation from the European Commission to receive state aid and subsequently became a fully-fledged financial institution. The bank, which currently has only one shareholder – the U.K. Government – has a capitalisation of nearly £4 billion that was designed to allow it to invest in ‘green’ endeavours up and down the country, ranging from wind farms to bio-waste processing plants. In 2015, the Government decided that it would sell a majority stake in the bank, stating that the move would give the bank ‘more freedom to borrow, remove state aid restrictions, and allow it to attract more capital’ and this week a bid was accepted, preliminarily, to that end. The bid of £2.3 billion, which comes from a consortium led by the Australian-based Macquarie group but, also interestingly for British academics, contains the Universities Superannuation Scheme (USS), sees what would be, potentially, Britain’s fastest-ever privatisation create a £160 million profit for the public purse which one onlookers suggests ‘we can’t grumble about’. However, there have been a number of questions raised about the proposed sale.

The first point of call in terms of opposition was the last-ditched attempt for a judicial review by a rival bidder, Sustainable Development Capital, which was based upon the need for the Government to operate in a way which create the best value for the taxpayer, although it was subsequently dismissed by the courts. The potentially fastest ever privatisation – the process has yet to be officially completed – raises a number of issues further than the issue of ‘value for money’ because of the reputation of the leader of the consortium, with the phrase ‘asset-stripper’ being highlighted by a number of media outlets. At the turn of the year, when the deal was first mooted, the fears were that the bank was preparing to sell many of the constituent parts of the GIB’s portfolio once it secured the deal, with wind farms being the prime contender. This led to Scotland’s Economy Secretary, Keith Brown, writing officially to the Climate Minister in Westminster, Nick Hurd, to warn that the sale could result in the new owner embarking upon an ‘asset stripping’ exercise, although the company insisted that it has a ‘substantial and longstanding commitment to the renewable energy and clean technology sectors’. As for the USS, its role will be to help the new consortium by way of funding future investments to the tune of about £2 billion, which equates to it investing in two of the three new investment vehicles being created by the new consortium. However, although it is expected that USS as an institutional investor will invest in these sorts of endeavours, it is the make-up of the entities in which it is investing which is of concern. USS recently joined forces with Credit Suisse, who as we know here in Financial Regulation Matters has been enduring a torrid spell, to invest in private debt that contains ‘AAA-rated or AA-rated listed securitised debt notes’ – we do not need a great memory to know that this means very little. Also, the integrity of the Macquarie group has been called into question, with one commentator noting that Nick Hurd is ‘betting that the interests of a bank known as Australia’s answer to Goldman Sachs will coincided with the ambitions of UK policy on green infrastructure. Let’s see how, five years from now, that gamble has worked in practice’. Encouraging Australia’s answer to Goldman into the arena does not particularly sound like a great idea for the future of Britain’s investment in anything ‘green’.

The Government, ultimately, are spinning this move as a clear indicator of the potential of Theresa May’s Conservative Government in light of the forthcoming General Election, but it is worth noting that the Conservative Government were eager to offload the bank as soon as possible anyway, in order to relieve the books as the bank stood as a liability for the Government. The purpose of these posts is not to lambaste only the Conservative Government because, in essence, all political parties have an awful lot to answer for. However, the Conservatives are currently in power and, as such, will receive the majority of criticism (I’m sure they do not lose sleep over it). With that in mind, the headline that the Green Investment Bank has created a £160 million surplus is rightly being kept off the business pages, with the actual headlines being that the Government are privatising an entity, faster than they ever have before, which is helping to fund green projects in this country. Not only that, but the entity they are selling to are renowned corporate players and, as such, are raising huge concerns as to the appropriateness of them taking over. The attachment of the USS was probably supposed to bring authority to the move, but the recent actions of the USS raise further concerns. Ultimately, the £160 million will be worthless if the group strip the assets of the GIB, and even more so will look like a rip-off if, as expected, the firm reduce the amount of investment once the news cycle moves along. The speed of this privatisation is arguably the most remarkable element to this story however, with only 5 years from start to finish representing a clear move by the Government to signal its intentions – the country’s assets are available to the highest and most preferable bidder. 

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