The Sale of the Green Investment Bank inquiry

The UK Green Investment Bank plc (GIB) has attracted substantial private investment into some sectors of the green economy, such as offshore wind, but the Department for Business, Energy and Industrial Strategy (the Department) does not know whether it achieved its intended impact. By March 2017, GIB had committed £3.4 billion to fund or part fund 100 projects, and had attracted £8.6 billion of private capital alongside its investments. These investments were primarily in offshore wind, and waste and bioenergy, but also in energy efficiency and onshore renewables. GIB told us that many other technologies, such as tidal power and carbon capture and storage, were not sufficiently developed for them to be suitable commercial investments. However, the Department lacked clear criteria or evidence to judge whether GIB was achieving its intended green impact and addressing failures in the green energy market, including a shortage of private investors prepared to invest in green energy projects. It therefore does not know to what extent GIB achieved its intended green impact, or whether overall it achieved as much as it could. Recommendation: The Department should put in place a robust evaluation framework for all companies it creates. The Department must ensure that its evaluations: refer to the original policy objectives; are continuous; and are completed and published before any decisions are made about a company’s future.

The Department prioritised reducing the level of debt in the public sector and how much money it could gain from the sale over the continued delivery of GIB’s green objectives. The Department had two primary objectives for the sale: to remove GIB from the public sector balance sheet and therefore reduce public debt; and to achieve value for money, which it defined in terms of maximising the sale price. The sale reduced public sector net debt by £1.6 billion and moved responsibility for around £500 million of GIB’s future commitments to Macquarie. Subject to achieving its primary objectives, the Department also wanted to ensure that GIB continued as an institution that focused on investing in projects beneficial to the green economy. The government repealed legislation which protected GIB’s investment in the green economy—its green purposes—to ensure that GIB would be removed from the public sector balance sheet following the sale. The Department established a ‘special share’ arrangement to protect GIB’s green purposes after the sale, but it did not require bidders to make specific or legally binding commitments to how GIB would continue to deliver these in practice. The Department did not have any certainty over, for example, how potential bidders would invest in different sectors or technologies. Macquarie told us that the special share or other commitments it made were not a burden and did not affect the price it was prepared to pay. It is therefore unclear why the Department did not look to strengthen these commitments contractually. Recommendation: When selling public assets UKGI should pin down commitments from buyers to ensure the original ambitions for these assets are achieved. Departments, in conjunction with UKGI, should be clear about, and justify, what commitments they are prepared to water down in order to secure a sale and what 6 The sale of the Green Investment Bank impact this may have on future benefits for British taxpayers. In this case the Department should have sought explicit assurances as to the quantum of future investment in the UK.

The Department succeeded in selling Green Investment Bank, but its approach to the sale was reactive, meaning that it had to make compromises to secure the sale. The Department followed a standard auction process but this took nearly 18 months, more than double the time expected. The delays were caused by a range of factors to which the Department had to react. Responding to what it saw as a “subdued” initial level of interest, the Department developed an alternative for a phased sale starting in late 2018. This alternative gave the Department a fall-back in its negotiations with Macquarie and helped secure a higher price. However, the Department only fully evaluated the potential benefits and risks of the phased sale option in February 2017, 11 months after launching the sale and after several key decisions had already been taken. The Department estimated that the phased sale option would raise £63 million more than selling GIB to Macquarie, although the high end of its range was £197 million more and the low end £75 million less. The Department decided not to adopt the phased sale option as it concluded it involved greater risks and would have delayed declassification. The sale to Macquarie also assumed that government would retain a 90% stake in five of GIB’s assets, which the bidder valued below government’s own valuation. In April 2017, the Department decided to sell GIB to Macquarie for less money than its mid-estimate in order to minimise its exposure to the risks associated with the phased sale option. Recommendation: When selling an asset, all government departments should clearly outline at the start what they are selling, when they can be flexible, and when they will walk away. Analysis should be used to support these decisions before they are made, not after they are taken. The Department should seek to evaluate the assumptions it made to value GIB’s assets under construction, report this to the Committee, and set out how this will inform its future approach to assessing risk.

The Department put in place measures intended to protect GIB’s green objective, but these measures will not ensure that GIB is an enduring institution. The Department wanted GIB to be an “enduring institution” that continued to play a role in delivering its goals for energy policy but it was, and remains, unclear what this means in practice. In acquiring GIB, Macquarie agreed to retain GIB’s five Green Purposes following the sale. The Department established the Green Purposes Company (GPC) with the aim of protecting GIB’s green purposes, covering greenhouse gas emissions, efficient use of natural resources, the natural environment, biodiversity and environmental sustainability. The trustees of the Green Purposes Company will have powers to veto any changes made to the Green Purposes. However, these arrangements rely on Macquarie agreeing to continue funding the GPC. The trustees’ powers do not extend to approval of investment decisions. Macquarie has committed GIB to investing or arranging investment worth more than £3 billion in green energy projects over the three years after sale. However, these commitments are not legally binding and rely on a number of The sale of the Green Investment Bank 7 factors, including market conditions and future government policy decisions. The Department did not fully explore whether it could have obtained stronger green commitments to ensure that GIB continue to support its energy policy. Recommendation: Government must clearly define relevant terms (such as ‘enduring institution’) so it can monitor performance and, in this case, evaluate alternative sale options. If an objective is not important in the context of a sale or other transaction, government should be explicit so it does not constrain decision making.

Without any legally binding commitments, Green Investment Group’s (GIG) future impact on the UK’s climate change goals is uncertain. Government intervenes in a number of ways to help tackle climate change, such as providing financial support for low carbon energy sources and for improved energy efficiency. It is unclear, however, how the Department expects GIG (the rebranded GIB under Macquarie ownership) to contribute to these interventions or the UK’s industrial strategy, for which the Department is also responsible. GIG is not currently required or incentivised to invest in the UK, or innovative technologies, or to focus on any of GIB’s five Green Purposes. Macquarie told us that a significant majority of projects where it will consider investment in the UK are likely to require some form of financial support from the government, and are therefore dependent on future government policy. Such projects include the proposed tidal lagoon in Swansea, where Macquarie told us its investment was very dependent on government policy and support. It is unclear how the Department plans to monitor GIG’s performance against the commitments that Macquarie has made, or the impact on government’s wider green goals. Recommendation: The Department should, by 31 December 2020, write to the Committee with a detailed explanation of GIG’s activities and performance in the UK, including: against the intentions Macquarie made to the Secretary of State in April 2017; its impact on the UK’s climate change goals; and the effectiveness of the special share arrangements. 8 The sale of the Green Investment Bank 1 The effectiveness of the Green Investment Bank

In June 2015, the government decided that it could not afford to continue to invest public money in Green Investment Bank plc (GIB), and announced it was considering both selling GIB and other means of bringing private capital into GIB. In March 2016 it launched a process, run by UK Government Investments (UKGI), to sell GIB. The Department for Business, Energy and Industrial Strategy (the Department) had two primary objectives in selling GIB: to remove GIB from the public sector balance sheet and therefore reduce public debt, and to achieve value for money, which it defined in terms of maximising the sale price. Subject to achieving these objectives, the Department also wanted to ensure that GIB was an “enduring institution” and continued to focus on green outcomes.13 Following a competitive process the Department awarded “preferred bidder” status to a consortium led by the Australian banking group, Macquarie Capital (Macquarie). The Department agreed to sell GIB to Macquarie in April 2017, and completed the sale in August 2017 for £1.6 billion and moved responsibility for around £500 million of GIB’s future commitments to Macquarie. The sale process

The process for selling GIB took the form of a standard two-part auction, and was marketed to over 120 institutions. The Department received only five bids in Round 1, with UKGI considering the level of interest to be “satisfactory” but “subdued”. The Department told us that the subdued level of interest is characteristic in transactions of this kind. UKGI told us that the subdued level of interest was due to the complexity of the GIB business.14 Nevertheless, at the time UKGI became aware of risks which would cause the transaction to be unsuccessful. At the end of the final round of bidding, the Department received just two bids: one from a consortium led by Macquarie, and the other from a consortium led by Sustainable Development Capital Limited (SDCL). The Department decided in April 2017 to sell GIB to the Macquarie consortium.15

Overall, the sale process took nearly 18 months, more than double the time expected. The delays were caused by a range of factors to which the Department had to react, including: increasing the time allowed for bidders to conduct due diligence of GIB; undertaking the restructuring Macquarie required of GIB before completing the sale; and an application for judicial review towards the end of the sale process.16 The Department told us that this was a complicated asset to sell, but it did not appear to have made any allowances for this when considering how long the sale was likely to take.17

In response to its concerns regarding the low level of interest shown by bidders during Round 1 of the sale, in May 2016 the Department began to develop an alternative option: a phased sale process that would start in late 2018.18 This alternative gave the Department a fall-back in its negotiations with Macquarie and helped secure a higher price. However, 13 Q 2 14 Qq 35, 88, C&AG’s Report, para 3.13–3.14 15 Q 89, C&AG’s Report, para 3.16–3.18 16 Q 90, C&AG’s Report, para 13 17 Q 90 18 C&AG’s Report, para 3.14–3.27 The sale of the Green Investment Bank 11 the Department only fully evaluated the potential benefits and risks of the phased sale option in February 2017, 11 months after launching the sale and after several key decisions had already been taken.19 The Department told us that it was only possible to properly analyse and develop a credible alternative towards the end of the sale process.20

The Department estimated that the phased sale option would raise £63 million more than selling GIB to Macquarie. At the upper end, it estimated that the phased sale could raise £197 million more than selling GIB to Macquarie, but it recognised that it could also result in £75 million less. The Department told us that, while potentially raising more money, the phased sale option involved greater risks and would have delayed removal from the balance sheet, which was one of its primary objective.21 In April 2017, the Department sold GIB to Macquarie for less money than its mid-estimate in order to minimise its exposure to the risks associated with the phased sale option. The sale to Macquarie also assumed that government would retain a 90% stake in five of GIB’s assets, which the bidder valued below government’s own valuation. The Department told us that it considered the discount was a fair price to pay to avoid these risks.22 19 C&AG’s Report, para 15 20 Q 91 21 Q 37 22 Qq 47, 92 12 The sale of the Green Investment Bank 3 The legacy of the Green Investment Bank

When it launched in 2012, the Department for Business, Energy and Industrial Strategy (the Department) wanted the Green Investment Bank (GIB) to be an “enduring institution”. But it did not make it clear what this would mean in practice when establishing the bank. We asked the Department what it had meant by the term. It told us that it did not have “any special meaning other than the ordinary sense of the words” but that an “enduring institution” would be something that was not just throw away or temporary, and that had an institutional embodiment. GIB also confirmed that “enduring institution” wasn’t a specific term that the organisation thought about. GIB told us that it is nonetheless confident that the sale to Macquarie will ensure that GIB is an enduring institution.23 The Department told us that in the sense that GIB remained “a group of people, with a particular way of doing business, a particular capability, a brand, a presence and a location”, it was confident that the sale had safeguarded GIB’s status as an enduring institution. But it is still unclear what an “enduring institution” means in practice. Neither the Department not GIB could give us an example of what an “enduring institution” looks like or tell us of an “enduring institution” of which they were aware.24 Protecting GIB’s green mission

The government decided to repeal the legislation covering GIB’s Green Purposes to ensure that GIB would be removed from the public sector balance sheet following the sale.25 Instead, the Department asked bidders during the sale process to sign-up to a special share arrangement intended to protect GIB’s green mission.26 Following discussion with the Office for National Statistics (ONS), the Department established the Green Purposes Company Limited (GPC) to protect GIB’s Green Purposes after a sale. The GPC is a not- for-profit company limited by guarantee which holds a special share in the privatised GIB.27 The GPC has five directors, referred to as trustees, who were appointed by an independent process in October 2016. The special share gives the trustees powers to approve or veto any proposed amendment to the Green Purposes set out in GIB’s articles of association.28 The Department told us that the protection of the Green Purposes was more effective when enshrined in GIB’s articles of association than in a sale agreement. The Department also told us that if the protections had been included in the sale agreement, government would still have been deemed to have effective control, preventing GIB from being removed from the public sector balance sheet.29

Beyond the special share arrangements, the Department did not seek to strengthen the commitments it received from bidders regarding GIB’s green future by including their specific intentions more clearly in a sale agreement, for example how they would invest in different sectors or technologies. During the Department’s negotiations with Macquarie 23 Qq 25–26 24 Qq 13–17 25 C&AG’s Report, para 3.6 26 Q 58 27 Department for Business, Energy and Industrial Strategy, Report to Parliament on the disposal of the Crown’s shares in UK Green Investment Bank, November 2017, para. 3.22–3.23 28 C&AG’s Report, para 3.33 29 Q 56–59, 64 The sale of the Green Investment Bank 13 the Chair of GIB, concerned about uncertainty regarding GIB’s future, talked directly to Macquarie and obtained clearer, more specific commitments, including short-term commitments to retaining staff and GIB’s Edinburgh office. The Department told the NAO that it had received commitments from Macquarie in its final bid and subsequently the GIB Chair spoke directly with Macquarie to make those commitments clearer and more specific.30

In acquiring GIB, Macquarie has signed up to the special share arrangements and agreed to retain GIB’s five Green Purposes following the sale.31 But the special share arrangements do not extend to allowing the trustees powers to approve investment decisions, and the trustees cannot influence the general investment strategy of GIB. The special share arrangements also rely on Macquarie agreeing to continue funding the GPC. Macquarie told us it supports the GPC and assured us that anything that GIG looks to invest in will be subject to the GPC and special share arrangements.32 Macquarie told us that it did not regard the special share and other commitments it made as a burden and that they did not affect the price it was prepared to pay for GIB. It told us that it bought GIB with the intention of continuing to work in the green sector.33 The Department similarly told us that it concluded at the beginning of the sale that any organisation wanting to buy GIB would also want to continue to invest in the green economy as this formed a core part of what it was selling. As a result, it did not consider a requirement to continue to invest in Green Purposes would be a burden.34 Future impact on the UK’s climate goals

Macquarie rebranded GIB as the Green Investment Group (GIG) after the sale completed in August 2017. Macquarie has made a number of commitments regarding the future of GIG and its role in the green economy. These include: • a commitment to GIB’s green objectives and the Green Principles (protected by the special share and the GPC); • to continue to invest in sectors including energy efficiency, biomass, energy from waste, onshore wind, offshore wind, solar, tidal and energy storage; • to target GIB to invest, or arrange new investment, over £3 billion in the three years after the sale; • to maintain GIB’s independence, brand, and Edinburgh office; and • to continue to support the Department’s UK Climate Investments (UKCI) pilot, a joint venture between GIB and the Department to invest in renewable and energy efficiency projects in developing nations.35 30 Qq 44, 55, C&AG’s Report, para 3.19–3.22 31 C&AG’s Report, para 3.33 32 Qq 114–116 33 Qq 78–80 34 Qq 81–82 35 C&AG’s Report, para 3.32 14 The sale of the Green Investment Bank

These commitments are set out as ‘intentions’ in the sale agreement and therefore are not legally binding.36 Macquarie told us that the delivery of these commitments will rely on a number of factors, including market conditions and future policy decisions. For example, Macquarie told us that a significant majority of projects where it will consider investment in the UK are likely to require some form of financial support from the government, and are therefore dependent on future government policy.37 Such projects include the proposed tidal lagoon in Swansea, where Macquarie told us its investment was very dependent on government policy and support.

The Department did not fully explore whether it could have obtained stronger green commitments to ensure that GIB delivers the intentions set out by Macquarie, and continues to support the UK’s energy policy. The Department told us that it felt it had pushed as far as it could on the commitments, along much of the detail secured around the commitments were obtained following an intervention from the Chair of GIB. Although Macquarie was happy to make these commitments, the Department was unsure if other investors would have been prepared to make those commitments had it introduced them earlier in the process.38

The government intends GIB to continue contributing to green financing to help the UK meet its climate change obligations and commitments. Macquarie has made a range of commitments regarding the future of GIB, but it is not required or incentivised to invest in specific technologies or sectors.39 There is also no restriction on the extent to which GIG focuses its investment on a limited number of its Green Purposes, rather than furthering all five objectives.40 Macquarie’s commitment to invest or arrange investment of £3 billion in the three years following the sale is similarly not limited to investment in the UK. Macquarie could not tell us how much of the £3 billion it has committed GIB to investing would be invested in green emerging technologies in the UK, in projects which support the UK’s climate change obligations, or, more generally, support Research and Development in the UK.41 It admitted, however, that it already has plans to target the European and Asian markets.42 The Department could not explain how it plans to monitor GIG’s performance against the commitments that Macquarie has made.43 It also could not explain to us how GIG’s future development links to its wider energy policy goals, or to the UK’s industrial strategy for which it is also responsible.44 36 Qq 53–59 37 Q 69 38 Qq 53–55 39 Qq 83–84 40 Qq 70–73 41 Qq 107–108 42 Qq 85, 100–106 43 Qq 64–65 44 Qq 100–104 The sale of the Green Investment Bank 15