Green’s Investment Bank

The Green party has announced a “Green Investment Bank” to help facilitate investment in green industries (release, discussion, paper).

I am not against it per se, and given they are saying that in the first year they will have a working group to determine the details there isn’t too much I can dig my teeth into here.  As a matter of principle I am:

  1. Against industrial subsides
  2. For policies that help to improve matching and adjustment to changing economic reality

This policy is doing a bit of both, so I would need details before I can say much.  But the money quote for me from the policy document is this:

The Green Investment Bank (the Bank) will primarily act as an independent and expert facilitator of green capital. It will match funders to projects that produce financial and environmental dividends providing additional capital, where needed, and cleantech investment expertise.

This is as close as we get to potential details.  Essentially, government will take on half the capital of firms that are approved as “Green firms” – this type of public-private partnership will ensure that the taxpayer takes on some of the risk, and get some of the reward, for a bet on New Zealand green technology.  This incentivises the entry of firms into this industry by both reducing capital requirements and, through the nature of the partnership, giving firms an implied subsidy (by passing downside risk to government) – in a political environment where this is a flagship policy, there will be an incentive for government to keep sending money after bad firms, in order to avoid failure.

Now these political economy issues are ones we can work past, by having transparency and specific types of contracting in the “investment bank”.  But, I’m still unsure why we need public ownership here – why should government be holding these “Green assets”.  This isn’t just a way of incentivising a specific type of investment (which in itself is something I am uncomfortable with – unless it is based on an explicit externality or market failure) but also a way to increase the net asset holdings of government.

This is not just a criticism of the Greens though.  By aiming to run constant surpluses and build up assets, National, Labour, and even ACT (to some degree) are looking at expanding the government’s claim on national wealth.  Perhaps this is something we should have a bit more of a public chat about ;)

Note:  The “source” of funding is a separate issue.  I don’t disagree with the Greens about higher taxes for resource extraction, which is merely the negotiation for the surplus of an already publicly owned natural resource/asset.  But remember, this “tax” could just as easily go into the general fund and fund completely different things – the “goodness” of the two policies aren’t conditional on each other.

  • The other Neil

    My points:

    I don’t like subsidies.

    As soon as I see ‘decouple’ I turn-off. A least be honest and say reduce the marginal impact. Geothermal is high risk and location specific.

    The NZ geothermal large scale (economic at current prices) has had approx $2bn profitably invested in it in the last 10 years without government subsidy. They are chasing an existing success. Direct use geothermal is a pipe dream (pun intended).

    Green economies are ‘job rich’ because of subsidies, when they go the jobs go (ask the Europeans).

    This policy will basically transfer $$ to private enterprise and risk to tax payers. I have first hand experience.

    The bank will be for profit, but not a competitor??

    The end.

    Kiwibank as an example. Really, it is profitable because to took NZ Posts profitable agency business.

    • http://tvhe.co.nz/ Matt Nolan

      These are fair points – it is hard to make much of it precisely without details, but the risks you mention are very real.

      • The other Neil

        I read the ‘Policy’ again. Apparently they are putting up fuel taxes to help fund this, so they will make us all poorer to make us ‘better off’.

        They quote The Clean Energy Finance Corporation as earning ~3% over its cost of funds. This completely ignores the required rate of return for the type of early stage high risk investment. On this basis the government should own everything. I guess that is part of their plan.

  • Paul Walker

    Why is it needed? If Green investments are soooooo great why are they not already happening? Or is the fact that they are not happening telling us they are not so great?

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  • Blair

    I’m not entirely opposed to this sort of thing. You have to start by reviewing the performance of the private sector. Banks have pulled back from this sort of thing for complex reasons – basically, the risk-weighing treatment is not as favourable as that for mortgages, credit derivatives, etc. The other thing is credit committees which have a problem with any project that hasn’t been done 4x before in-country. The head of the CEFC in Australia takes the view that once they have allowed a new technology to do the first few projects, they (the Clean Energy Finance Corporation) are obsolete; the banks can take over.

    I would prefer to see the environment supported through Pigovian taxes and removal of distortionary taxes, bribes etc in favour of dirty industries but as far as second best solutions go this sort of thing is not the end of the world.

    • http://tvhe.co.nz/ Matt Nolan

      “I would prefer to see the environment supported through Pigovian taxes and removal of distortionary taxes, bribes etc in favour of dirty industries but as far as second best solutions go this sort of thing is not the end of the world.”

      I am in that direction also – but even then there are two issues:

      1) Using a second best when a first best is do-able is strange.
      2) I don’t know if I would term this second best, stating it is second best involves assuming that it is constructed optimally and transparently – which is actually a big assumption for such a direct control type institution

      I’d also note that if the problems in the financial industry are due to mistakes in financial regulation, this would imply fixing up financial regulation – not have the government circumvent it by assuming it is a failure, thereby shifting risk onto taxpayers. A lot of policies involving finance seem to involve shifting risk onto taxpayers, and it concerns me.

  • http://utopiayouarestandinginit.wordpress.com Jim Rose

    What special insight do bureaucrats and politicians have as entrepreneurs?

    The average salary of the top 25 hedge fund managers in the world is about half a $1 billion.

    Do you seriously think a bunch of government analysts sitting at their desks in Wellington paid $100,000 a year can play the same game even on the small stage that is New Zealand?

    • http://tvhe.co.nz/ Matt Nolan

      No idea, there really isn’t enough detail in this policy to tell what is going on – and the justification that “other countries did it, and the money was used” isn’t particularly compelling.

      So far, none of the parties have really been particularly impressive – at least they have been relatively restrained.

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