Isra-Mart srl: Concerns mount over Green Investment Bank

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The government's Green Investment Bank (GIB) has had its actions so limited that it will not be able to support the coalition's much-vaunted Green Deal to refurbish millions of homes to save energy.

The details have emerged in a draft document drawn up by the Treasury and the Department for Business, Innovation and Skills (BIS), and presented to the advisory board at their most recent meeting.

The proposals, seen by the Guardian, have also caused consternation because the government is proposing to help set strategic priorities, a move one critic said opened up the risk of "pork-barrel politics" if ministers insisted on pushing ahead with certain schemes to curry favour with voters ahead of an election.

At worst, some people close to the talks fear the government could fail to get state aid approval from the European commission to provide funding for the bank because it will be seen as too close to ministers.

There is also concern about the increasingly "negative" language, including a downgrading of the funds being offered by the Treasury from £3bn to "up to £3bn".

Another recommendation that is likely to cause controversy is that the bank would be instructed to invest on commercial terms, and to make a profit every year, raising questions about whether it will be able to invest in important areas that are currently too risky for private lenders.

Ben Caldecott, head of European policy at the low-carbon investment advisers Climate Change Capital, said: "If it's only ever going to act as an investor of last-resort investing on market terms, and if it's going to avoid passing-through its lower cost of capital [from government], that could undermine its ability to deliver its objectives."

The draft paper, intended for the European commission, which must approve the bank's public funding, has emerged following a torrid week for the environmental movement and businesses after the chancellor used his autumn statement on Tuesday to announce green regulations would be reviewed to clear the way for development and economic growth.

In answer to criticism of the coalition's apparent U-turn on its early promise to be the "greenest government ever", George Osborne later defended his record, telling MPs: "I am the chancellor who funded the first ever Green Investment Bank."

The same week, Chris Huhne, the climate secretary, admitted to MPs in departmental questions that the date at which the bank might start borrowing money had been delayed from 2015 to 2016 at the earliest. There is also growing concern about the indebted government's willingness to guarantee any bonds or loans, which private investors say will make it much harder for the GIB to offer the low-cost finance needed by some industries and new technologies.

Caroline Flint, Labour's shadow energy and climate secretary, said: "The Green Investment Bank - a plan Labour set out in government - is vital for creating jobs and supporting growth in the green economy. But, for all of George Osborne's empty boasts, we [have] found out that because the government is set to borrow a staggering £158bn more than they planned a year ago, we won't have a proper Green Investment Bank, with full borrowing powers, until 2016 at the earliest. Day by day, David Cameron's promise to run the greenest government ever is falling apart."

Other details in the draft proposals, discussed by the government's advisory panel at their November meeting, include the expected cost of setting up the bank is £82m. Assuming the full £3bn is paid, the document suggests the bank will get £865m in 2012-13, £1bn in 2013-14, and £1.225bn in 2014-15.

The bank will initially be asked to spend at least 80 per cent of its funds on four sectors: offshore wind (which could take approximately half the funds available), waste processing and recycling, energy from waste generation, and non-domestic energy efficiency. In future it could also fund home energy efficiency schemes such as the Green Deal.

Ministers would appoint the bank's chairman and chief executive, who would then help appoint of the rest of the board. The bank would be expected to make a 3.5 per cent average return on investment over five years - below what is currently the most risk-proof returns - and make a profit every year, though this last point could be negotiated with the Treasury, it says.

Another proposal that has caused concern is that the bank cannot invest more than five per cent of its funds in one scheme, leading to concerns it cannot take a major lead in developing offshore windfarms and other expensive schemes in the early days to give private investors more confidence in the sector.

A Department for Business spokeswoman said she would not comment on a leaked document. But she said the Green Bank would "drive growth and keep the UK ahead of the game in the transition to a low carbon economy".

She added: "Government investment will mobilise significant private finance, providing in the region of £18bn of additional investment in green infrastructure."