Edinburgh and London are dreaming in green

VINCE Cable was in bullish mood on Tuesday as he outlined to MPs in the House of Commons his vision for one of the government's flagship projects.

The Business Secretary, happy to distance himself from recent maulings of Rupert Murdoch and the Lib Dems' collapse in the elections, explained how he saw the coalition's Green Investment Bank (GIB) as an "enduring institution". It would be an opportunity for the UK to lead the world in the transition to a low-carbon economy, he said.

Furthermore, the public funding element was being raised from 1 billion to 3bn, which the government believes will leverage a further 10-15bn from the private sector.

But following Cable's address, MPs were still unclear about one thing: where will the bank be located?

Members from Bristol, York, Nottingham and Wales, recognising an opportunity to grab a piece of an important developing sector, demanded that the Department for Business, Innovation and Skills (BIS) consider their cities as a location for the new bank. "This is slightly in danger of getting out of control," observed Cable after Nick Smith, the Labour member for Blaenau Gwent, became the fourth MP to plead his case, insisting that if the Secretary was considering Bristol, he should also add to the list the region across the channel in Wales.

Mike Crockart, Edinburgh West MP and one of the leaders of a campaign to base the bank in Edinburgh, also put his case to the Cable. But he was safe in the knowledge that a slick presentation put together by the Edinburgh Chamber of Commerce and Nathan Goode, a partner at Grant Thornton, had already been presented to Cable, the Treasury and MPs in March and April.

Cable responded by praising the "high level of professionalism" delivered in the business case but remained tight-lipped about when a decision will be taken.

"There will be a proper process, and it's important that we consider all serious applications upon their merits carefully," he said.

But questions were raised as to how effective the bank will be with its limited funding and its narrowed remit, which will exclude small, innovative renewables firms in favour of big, "safe" projects.

Big money is needed, and quickly. According to a recent report published by PriceWaterhouseCoopers (PwC), the investment in the construction of renewables projects required to meet government targets alone is 10bn, with the Department of Energy and Climate Change (DECC) estimating that as much as 110bn will be required to develop the necessary transmission and generation facilities.

Paul Brewer, a renewables and government specialist at PwC Scotland, said the initial 3bn capital in the GIB will be used as a "first loss debt" which takes the risk out of investing in projects for both banks and developers"The GIB will take the debt with the most exposure to risk to get the lenders into the project, and help developers, like Scottish & Southern Energy and ScottishPower, to reduce their level of equity," he said. "Eventually, the bank will then be able to use these loans as assets.

"It will take time to build the bank up, and it will be at least 2015 before the bank can borrow from capital markets. That is the next phase. But it is still worth remembering that 3bn is a lot of money."

Until then, the focus of the bank's approach to investments will be largely cautious and commercial, with projects in areas such as emerging marine energy forced to wait until after 2015 before they can take advantage of finance from the GIB.

Sir Adrian Montague, a former chairman of nuclear power group, British Energy, and the new chairman of the advisory committee behind the bank, dismayed the industry when he said the GIB would focus exclusively on investment in offshore wind, non-domestic energy efficiency and "some waste projects".

Cable himself admitted that, in the bank's initial phase at least, "it will be difficult to support small and medium-sized enterprises directly".

Niall Stuart, the chief executive of Scottish Renewables, said that the bank has been "refocused" in a way that excludes smaller innovative firms that had been looking to the GIB to source much-needed support.

"The main purpose of the GIB is to remedy market failure. It's not clear that there is market failure in those areas in terms of finance," said Stuart. "The bank should instead be supporting companies like (wave energy firms] Pelamis or Aquamarine Power, who are developing what could be game-changing technologies."

In the meantime, Cable will take the next few months to decide where to locate the bank.

Despite challenges from other cities, Edinburgh and London are considered to be the front-runners, with Scotland's demonstrable expertise in areas like project management finance and its proximity to major renewables power projects understood to put it ahead of its other regional rivals.

Rob Cormie, the managing director of merchant bank Quayle Munro, is confident that Edinburgh is the best location for the new bank.

"Edinburgh makes a compelling case to be the location of GIB for three very simple reasons: the greatest wind and tidal resource in Europe; a highly skilled and developed financial services industry covering a full spectrum of capital from equity through to senior debt; ever-increasing investment from key industrial partners who see Edinburgh as key to the success of their business.

"It would demonstrate to the wider UK public that government does not just invest in London and sees great benefit in investing outside of the capital.

"The GIB has been designed to assist offshore wind. The major players included SSE, ScottishPower, Mainstream Power, RWE, Powergen, DONG, etcetera, none of which are based in London. Bristol is not credible. They have a financial services business based on retail and credit cards and not investment."

Graham Birse, the deputy chief executive at Edinburgh Chamber of Commerce and a key member of the Edinburgh Green Investment Bank Group, was disappointed that Cable wasn't more forthcoming on where the bank would be located. He expects a decision to be made by the end of the year.

But the question of location is not just a practical issue. It is now political. The fight for Edinburgh raises uncomfortable questions for the coalition government over whether it should hand what is meant to be a UK-wide operation to a part of the country that is agitating for, if not separation, then more devolved power.

Alistair Kennedy, capital projects solicitor for Tods Murray, said Westminster should think carefully about Edinburgh or risk stoking discontent in Scotland.

"If it is the case that there is a concern at Westminster in this regard - which is not something which has been indicated publicly - the UK Government would likely weigh that up against the possibility that locating the GIB elsewhere in the UK would serve to provide ammunition for a pro-independence argument," said Kennedy.

Birse admitted that the Scottish Government's emerging stand-off with Westminster was a "factor", although the BIS had not made it explicit in its criteria. "It's there but no one mentions it," he said, adding that the campaign group would have been "naive if we hadn't thought of it before".

But he argues that the coalition would likely dangle the establishment of the new bank in Edinburgh as a way to demonstrate to Scotland the value of giving up its separatist notions."Ministers have the opportunity to demonstrate their confidence that Edinburgh can deliver on behalf of the UK and become the centre for green investment for the forseeable future," said Birse.

"But on the other hand, it could give the UK Government an opportunity to show what benefits there are of being part of a secure union."