MNI INTERVIEW: UK To Offer To Share Green Venture Risk- Aikman
MNI (LONDON) - The UK government is likely to promise private investors it would assume the first tranche of any losses in a bid to drive GBP30 billion in climate-related investment, former senior Bank of England official and King’s Business School finance professor David Aikman told MNI.
But public exposure would have a hard ceiling at the GBP7.3 billion contribution from the government’s new National Wealth Fund, with no hidden state commitment to bailouts if things go wrong, Aikman said in an interview.
Ahead of its Oct 30 Budget the Treasury is wrestling with how to accelerate green investment, while meeting fiscal rules and not ratcheting up public sector debt. The already-existing British Business Bank and UK Infrastructure Bank would also be involved in the infrastructure push, but Aikman said the preferred strategy would be to drive the amount of private capital higher by improving the risk-reward balance, and that boosting green gilt issuance, which has been running at GBP10 billion per fiscal year, would play a subsidiary role.
"I assume, what they'll be trying to do with the National Wealth Fund is to derisk ... those projects by taking a first-loss position," Aikman said, "You shouldn't be on the hook for more than ... the capital of the National Wealth Fund.”
"The assumption in that there are worthy projects that will be generating good returns. Maybe the horizons are too long to attract finance right now. Or there's some characteristic of these projects that make them unbankable or difficult to finance in the private sector. I think this kind of de-risking idea is the way that they should they should do it.” (See MNI INTERVIEW: UK Borrowing For Investment Risky - OBR's Miles)
CHALLENGE TO ATTRACT INVESTORS
Aikman, however, injected a note of caution, as international experience has shown such public risk-taking schemes, associated with multilateral development banks, have struggled to bring in private investors.
"It's similar to the role that MDBs play ... there, the experience has been quite negative, where they've ended up taking very safe positions, and as a result, not crowding in any private finance at all," Aikman said.
"One lesson from that experience ... is if they do want to crowd in private finance, they need to be doing something that isn't being financed otherwise.”
Funding the projects directly with government borrowing via green gilts is not feasible, he said. The premium compared to conventional issuance is not significant, and the funds raised go into the same public sector pot, so increasing volumes would put strain on fiscal objectives. (See MNI INTERVIEW: UK Fiscal Headroom Only Clear After Spending Review)
"I think it makes absolutely zero difference to the climate transition, the net zero transition ... it's a drop in the ocean compared to outstanding gilts issuance. There's no harm in doing this. Maybe they're tapping into some kind of investor clientele that are of happy to invest and hold these bonds that wouldn't be quite so keen otherwise. But ...the greenium [green premium] is pretty small, hard to estimate," Aikman said.
An additional attraction for the Treasury of the shared-risk approach is that the state banks and NWF will not count towards government debt, at least in the way that they have been factored into the fiscal rules so far, but the NWF should be able to borrow on the same credit rating as the UK government.
"It probably could borrow more cheaply than a private bank. So then you've kind of got an additional multiplier effect," Aikman said, with gilt issuance in effect providing just the initial GBP7 billion investment.
There have been early announcements of government plans to invest in carbon capture technology. The gilt remit will be published on Oct 30.