Who’ll buy my lovely green bank?

His hope is to convince a buyer to pay up to £4bn for the bank. It has already invested, or committed to invest, £2.6bn in nearly 70 projects, ranging from offshore wind farms and energy-efficient street lights in Glasgow to Drax power station’s controversial conversion from burning coal to burning wood chips shipped in from the American south.

The auction, which is being handled by Bank of America Merrill Lynch and UBS, is being billed as a potential coup for Whitehall. It would be the fastest privatisation in history, and more lucrative than the £2bn sale of Royal Mail, which gestated for more than two decades before it finally passed into private ownership in 2013.

Javid said: “We expect there to be significant interest in the market, as a range of financial institutions and pension funds seek to tap into this successful asset class and green their own portfolios.” But he may be dis­appointed in the reception for what Shaun Kingsbury, GIB chief executive, has called a “special business”.

Potential buyers who have pored over its accounts and plans have uncovered a raft of issues that could complicate the sale or lower the price.

Among the concerns is the GIB’s ambitious plan to expand into the developing world. Others say its spread of investments from giant offshore wind farms to dozens of small projects does not sit easily with the more focused models of potential suitors.

All seem to agree on one point: the GIB is vastly overstaffed. According to its website, the bank employs more than 85 investment professionals, plus a further 40 or so support staff. The running costs are £24m a year, three-quarters of which is pay.

Critics draw a comparison with similar, private outfits such as Borealis, the Canadian giant that specialises in infrastructure including the high-speed Channel tunnel rail link and gas distribution networks in Scotland. The firm looks after roughly $70bn (£49bn) of assets, more than 16 times the GIB’s asset base, with less than half the team.

Ben Warren, head of energy and environmental finance at EY, said: “The cost base is massively out of kilter with the traditional fund management model.” A potential investor put a finer point on it: “As it is currently set up, it is an uneconomic entity.” That is not technically true. Last year the bank turned its first profit — £100,000.

The GIB disagrees strongly that it is bloated. It points out that most of its assets are being built and developed, and are thus more complex, while specialists such as Borealis focus on ones that are already operating. “Our costs are far below the market,” said Kingsbury, who last year took home £506,000, making him one of Britain’s best-paid civil servants. “We fully expect the new owner to retain staff, as we think we are well placed. It is getting us great results and great returns. We might need more people.”

Cost is not the only point of contention. Structure is another.

The GIB has two offices. One, in London, is in Millbank Tower, a stone’s throw from the Houses of Parliament. The other is in Edinburgh, which won a hard-fought competition against 34 cities to act as host. When it won, former Scottish first minister Alex Salmond claimed it showed “Scotland’s position at the vanguard of the renewables revolution and follows an excellent and professional bid campaign”.

That history makes shrinking the bank problematic. Warren said cutting jobs and closing offices would be “quite political”, adding: “The government will not want to be seen to be selling the bank, which is then asset-stripped and people-stripped by a private sector investor.”

So who might have a crack at the GIB? Sources close to the situ­ation cite Macquarie as an early favourite. The Australian giant is already one of the world’s biggest and most savvy investors in such projects. A team of UK specialists could be subsumed easily into its operation.

Converting Drax to burn wood is one of the projects backed by the Green Investment Bank

JEZ COULSON JEZ COULSON

Chinese state-backed investors are thought to be considering their options, as is the Abu Dhabi Investment Authority. It is unclear whether either has the stomach to take on such a big and politically sensitive beast. And Masdar, Abu Dhabi’s state renewable energy investor, already has a partnership agreement that gives it access to GIB’s deals, raising further doubt about whether it would make sense to then take over the company.

Strong recent demand for infrastructure assets, including the £2bn sale of London City airport, encouraged the government to push for a sale of its entire stake in GIB this year, according to sources close to the sale.

The head of a London-based infrastructure fund said there were other risks that made the GIB a particularly tricky asset. “It is not straightforward,” said the fund manager, who has held early talks with the bank . “People will need some convincing.”

The GIB was set up to be a catalyst for private capital to back green projects. As a policy bank, the perception was that it was closely-aligned with government and energy policy, giving comfort to private financiers. Indeed, for every £1 that GIB has invested, £3 of private money has followed. Privatisation would appear to undercut the GIB’s unique position.

A senior industry source said: “If you’re not a policy bank any more, what is the attraction? That is the conflict of turning this into just another private investor in green stuff.”

Sources close to the bank dismissed the criticisms as bidders attempting to talk down the price and said a sale would have no effect on its key strength in policy expertise.

Some of the bank’s earliest backers claim it is already veering away from its original goal. Nick Mabey, chief exec­utive of E3G, a not-for-profit organisation that helped to form the GIB, warned that as a private entity it would not have Britain’s interests at heart. “Why would a purely private bank focus on hard-to-do projects with the largest public interest? The bank wasn’t created to maximise profits but to deliver investment at the best price.”

The government has tried to address this by creating a “special share”. The purpose is to ensure the GIB stays true to its core investing criteria once it has passed into private hands. The share, carrying no economic interest or rights, would be controlled by a committee appointed by a group of professional bodies.

The measure gives veto power over any request to change the bank’s articles of association, which mandate that each deal meets one of five “green” goals, such as increasing biodiversity or lowering greenhouse gases. The power does not extend to individual deals, but it could nonetheless prove a stumbling block for a buyer hoping to run the bank in the way it sees fit.

To cloud the picture further, the government has dramatically reined in subsidies for green technologies and put greater emphasis on a new generation of gas-fired power stations. There are fewer projects to go around.

Which is perhaps why the GIB’s pitch relies so heavily on its plans to invest aboard. “Once state-aid restrictions fall away, we will be able to use our great skill set, with a wider geographical remit. Expansion overseas is the icing on the cake,” said Kingsbury.

Last year, the GIB agreed terms with the Department of Energy & Climate Change to take £200m of its budget to invest in east Africa, South Africa and India. Investors who want to buy the whole GIB will have to spend up to £2bn and stump up a further £2bn for future funding. The final figure depends on how much the government decides to sell. The minimum is expected to be 75%.

Kingsbury is confident the bank will fetch a healthy price. “Investors see the macro theme over 10, 20, 30 years. We have built one of the best teams that has been the most active in the UK. Many of the people we have spoken to in the last six months are sophisticated investors; we think they will find it easy to get to a number.”

Preliminary marketing has drawn the interest of investors from America to the Middle East, he said. Whether any of them will be willing to write a large cheque for Britain’s experiment in state-sponsored investing is another matter entirely. Perhaps Javid could pitch in on the sales effort.