AG INSIGHT | 16/01/2018
Wise public spending to mobilise private investment
Alex White, Senior Policy Officer at the Aldersgate Group, reviews the role of public spending in mobilising private investment to the low carbon economy.
The UK government has set several meaningful environmental policy goals like the Clean Growth Strategy and the 25 Year Environment Plan. It should be congratulated for this, but ambitious goals require significant investment.
Electric vehicle charging infrastructure, wide-spread low carbon electricity generation, distributed electricity networks and natural infrastructure like new forests won’t come cheap – the cost of meeting the fifth carbon budget alone is approximately £22bn per year before you consider the investment needed in the natural environment. Government can’t afford to foot that bill, but wise spending could help to mobilise those billions.
Strategic use of public funding can help to attract private money by bringing down risk and cost for the private sector. A World Economic Forum survey of ‘blended finance’ models found that of 74 blended-finance vehicles, every dollar of public money invested typically attracts a further $1-20 in private investment. The formerly government-owned Green Investment Bank (GIB – now Green Investment Group) committed £3.4bn to the UK’s green economy into transactions worth £12bn while demonstrating that green really could mean profitable. Government funding can make use of low cost finance to establish a track record in newer markets and provide a sense of greater regulatory certainty.
However, there is currently a gap in available UK and European public funding, thanks in part to the privatisation of the GIB and likely restricted access to European Investment Bank (EIB) funding after Brexit – the EIB financed £6.9bn of public infrastructure projects in Britain last year, but has not approved any new projects since the summer. The gap will be particularly felt in less developed areas like natural capital, smaller-scale energy efficiency projects and other markets that are currently too high risk for most private investors. That’s not to say the government isn’t investing: the £505m Energy Innovation Programme includes £184m for innovation in low carbon heat and a £14m Energy Entrepreneur Fund for example and £5.7m for a new Northern Forest was recently announced. But we need to move from millions to billions. This means that more funding is needed, and what is available must be deployed efficiently.
To be as effective as possible, public money should be targeted to address specific problems in harder to finance areas, through cornerstone investment within single purpose funds. Once the market has been established (as the offshore wind market has been by the GIB) the funds should be recycled to tackle new issues and develop new markets. Leveraging private finance alongside public investment will continue to be crucial to maximise the value of taxpayer money.
Public support can also be used to finance technical assistance. For example, the British Business Bank (BBB) provides capacity building help for small businesses, to make finance markets for smaller businesses work more effectively. As it is obligated to ultimately meet government policy goals, it could be deployed to support clean growth start-up firms, in line with the aims of the Industrial Strategy. A 2017 Aldersgate Group report showed how capacity-building support has proved extremely useful in SMEs trialling new circular business models.
Government commands huge spending power through its procurement policy. The public sector procures £270bn a year of goods, works and services. This too could be allocated towards green technology, such as an all-electric public fleet and greater use of renewable energy, from Central government to local authorities. This would create significant new and reliable demand, helping to establish supply chains and the conditions for many new businesses to flourish.
If government is committed to increasing the amount of investment in clean growth, it needs to put its money where its mouth is. That’s the fastest way to get the private sector to invest at the scale we need.
Alex White is Senior Policy Officer at the Aldersgate Group