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| Strategic Investment Funds
BOX 2.6
Preliminary study for the Green Investment Bank, United Kingdom The Green Investment Bank (GIB) provides an example of a public financial institution for which a detailed preliminary study was implemented (Vivid Economics 2011, Box 2). Entitled “The Economics of the Green Investment Bank: Costs and Benefits, Rationale and Value for Money,” the study provides an in-depth examination of the case for establishing a green investment bank in the United Kingdom. Although the GIB is not a strategic investment fund, it has a similar mission to invest in infrastructure with a double bottom line. The GIB was established in recognition of the market failures and barriers to investment in green assets in the United Kingdom. The 2011 study was implemented in four phases. The first phase identifies market and institutional failures and barriers to investment in green infrastructure and large-scale, late-stage green technologies. The second phase analyzes what drives the identified investment gaps, how they may be closed, and whether the GIB may have a role. The third phase comprises a broad value-for-money assessment of the GIB as an institution, and of each of its interventions. The final phase considers the impact of the GIB on UK growth and how the GIB may be used to maximize growth. The preliminary phase of the study identifies 15 sectors with financing gaps. It analyzes which of the 15 sectors have market failures, or areas of capital shortage, that the GIB could feasibly address. The study then considers the magnitude and degree of permanence of these market failure and capital shortages. Sector-specific market failures identified by the report include externalities, information asymmetries, market power, and complements. The main financial market failure identified by the report relates to investor
unfamiliarity with new types of technology and business models related to carbon technologies, as well as limitations on companies’ ability to expand their balance sheets. To determine whether the GIB constitutes value for money for taxpayers, the study assesses how GIB interventions compare with other possible policy vehicles. This value-for-money approach is applied to each sector in two steps. In the first step, each sector is screened for four attributes: complementarity with other government policies, market additionality, timing and investability, and green impact. It is illustrative to look at how these four criteria were applied to some of the 15 sectors. The criterion of complementarity excludes flood defenses, which already had alternative public funding in place. The criterion of additionality ruled out onshore wind and photovoltaic electricity generation, for which private capital seemed to be available. The criterion of timing ruled out carbon capture and storage, a technology considered too young to be ready for large-scale investment. On green impact, the areas with the highest expected effect were selected; they included offshore wind, for which the risks of pushing into deeper water were not yet well understood by private investors. Only a limited number of private investors were therefore active in deeper waters, and the GIB could make a difference. The second step includes an assessment of investment returns, in terms of returns to society (net present value per unit of capital invested) and private returns to the GIB (return on capital employed). The study also includes a discussion of the type of financial instruments that the GIB may employ, and on what terms.
Source: Vivid Economics 2011.
The feasibility study therefore helps establish the bounds within which the SIF can credibly operate while imposing minimal risk to the sovereign’s balance sheet. A well-conducted feasibility study therefore requires specialized knowledge and experience in areas ranging from market dynamics, fiscal policy, and investment fund legislation, to governance and management of a fund. Because of the complexity and diversity of topics to be covered, such studies are typically implemented by teams of experts—typically from global consulting firms,
