11 November 2010
The UK’s proposed Green Investment Bank (GIB) should focus on “quick wins” and offer, for example, financial products that reduce the cost of mezzanine debt for offshore wind projects, according to a leading investment banker.
Policy uncertainty is causing “a paralysis of investment opportunities”, said Abyd Karmali, a managing director and global head of carbon markets at Bank of America Merrill Lynch in London. But a lack of public finance means that policy instruments – such as a green bank – must be designed to leverage, not crowd out, private finance, he said.
“The [green bank] has to have a clear set of metrics of when to exit or not offer its products, otherwise it will overlap with private investors,” he told Environmental Finance Publication’s Climate Finance 2010 conference this week.
The government is still discussing what its planned GIB will do. More details will be released next year and it should open its doors in 2012, said Karmali, who was on the GIB’s advisory panel. However, it will have a small staff and will rely on existing financial intermediaries. “Initially, we expect it to be almost a virtual institution,” he said.
Karmali suggested the bank could offer a “menu of risk-reducing products” that private institutions could use, such as mezzanine debt, securitisation of existing project finance loans, insurance products, loan guarantees and first-loss equity provisions.
Of these, subordinated or mezzanine debt – which bridges the gap between secured debt and equity investment – is probably the most important of product offerings, Karmail said. “It appears to be the most tricky one … but it’s also the one where GIB could have the biggest impact.”
However, the GIB should not remove all risk for investors, otherwise it could give investors and lenders supra-normal returns, he said. And he does not believe the GIB should be a venture capital investor. “I believe there’s enough expertise in the UK already,” he said.
Potential sources of funding for the GIB could include low-cost government borrowing, green bonds and savings products, as well as the income from the sales of EU emissions allowances, he added.
Christopher Cundy
