In designing a GIB, planners anticipate a number of key outcomes for infrastructure funding. For one, the bank could act as a catalyst for early stage projects that are currently struggling to attract private sector funding but which – with sufficient initial investment – could help deliver on carbon reduction targets and other ‘green’ policy objectives.
The bank could also provide implicit benefits to the market; the very existence of a GIB may bring confidence to private investors concerned about funding gaps and therefore speed up the pace of investment. It is also expected that a GIB will increase competition in the marketplace, particularly within the small-to-medium market segment.
What exactly IS a ‘green bank’?
Creating a GIB is anything but straightforward. For one, governments will need to be clear about how the bank will operate, its proposed scope and how it will invest its capital.
One scenario would see the GIB seek to make a commercial return on their investment, and therefore would leverage its capital to increase the impact and return of its investments. Countries with less active capital markets and low private investment may consider creating a GIB that primarily invests in uneconomical but ‘green’ initiatives by providing grant-like funding for specific projects. Others may choose to have the GIB structure investments on a commercial basis, but where expectations of returns are balanced against an equal expectation of defaults.
Setting green objectives
Government backers will also need to be clear about their objectives for the bank. In the UK, for example, the GIB seems at risk of being stretched between three – sometimes conflicting – sets of policy objectives: a preference for the bank to invest in green projects (almost regardless of their commercial viability); a desire to grow the green economy, but not at the expense of fiscal stability; and thirdly a belief that investments should be biased towards growing the national economy (particularly small to medium businesses).
Floating the green boat
Another key question will be how much to invest into the bank’s initial capitalization. The UK’s initiative will start with £3 billion, while Australia’s recently-announced Clean Energy Finance Corporation is expected to have almost A$10 billion in seed money when it starts operations in 2013.
Of course, the impact and reach of those investments will be strongly influenced by the bank’s ability to borrow against its capital. In other words, the UK’s bank – which has been given permission to borrow as of 2015 – may be able to multiply the impact of its investment, versus Australia’s bank which is not expected to bring money in alongside their capital.
Not surprisingly, many developers and investors are carefully watching the progress in both the UK and Australia to see what suite of products the banks might offer and how they might be able to tap into that funding to reduce the risk and strengthen the financing of their green projects.
By James Stewart, KPMG in the UK