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Wealth Warning: Banking On Green Investment Means Political & Financial Risks

Paul J Davies, The Wall Street Journal

Britain’s Green Investment Bank might lose its advantages after privatization

Infrastructure investing is hard to do. Despite all the pension funds and others with a need for long-term assets, infrastructure is often a slave to short-term political caprice. Investors thinking of backing the U.K.’s privatization of its Green Investment Bank announced this summer should remember that.

The Green Investment Bank—not a bank, but a fund—was created by the last government in 2012. What institutional investors wanted was a vehicle to spur broad infrastructure investment; what it got was much narrower.

Its focus is both a strength in terms of its specialist skills and a weakness in its exposure to green energy-related projects alone, which depend on government subsidy. The U.K. this week said it was reviewing solar power subsidies after already announcing an early end to onshore wind subsidies in June.

But renewable energy is in vogue, especially in Europe. It accounted for more than one-third of all new infrastructure projects globally in each of the last three years and in 2015 so far, according to data from Preqin.

The Green Investment Bank has committed £2 billion ($3.1 billion) of government cash to deals and has been involved in half the U.K.’s new projects over 2½ years.

Initially, it bought debt as banks held back after the financial crisis. Increasingly, however, it takes the equity of new projects. Many of these are offshore wind projects using newer technology, where fewer investors are willing to take the risk.

The Bank expects to make investment returns approaching 9.5%, which sounds slightly optimistic. Project-level returns for offshore wind are about 7.5-9% and that is ahead of onshore wind and solar, according to a specialist consultant.

With some leverage of its own, the Green Investment Bank expects to make even better returns for its future shareholders. But that may not be the main reason they want to invest.

The Green Investment Bank gets early sight of many renewable-energy projects, according to rivals, in part because its closeness to government means the deals it backs seem more likely to get bureaucratic clearance.

This perceived advantage could tempt the pension and sovereign-wealth funds who might back its privatization, likely to be done through a private auction. Another will be the pole position those investors enjoy in buying the debt of projects whose equity the Green Investment Bank has supplied.

The danger for investors is that the Green Investment Bank could lose any political advantages it may have once the government has sold out—leaving them open to the same political whims on subsidies and planning as everyone else.

The Wall Street Journal, 24 July 2015