Headline in the Daily Express of the article in which the £800bn appeared

Labour’s Green Prosperity Plan will be based around Great British Energy, the new entity which will have equity of £1.7bn according to the Fiscal Plan in the Labour manifesto.

Labour were stating until some months ago that they planned to borrow £28bn per annum on the UK national debt over the life of the coming Parliament if elected, to fund the Net Zero transition. That would be £140bn. This plan was dropped as regards the method of borrowing. The presumption – backed by the 2024 Mais Lecture and the recent statements of Darren Jones – is that the £140bn spend remains a policy. Keir Starmer has said that ‘private money’ would be used. It is therefore rational to conclude that the method of financing this expenditure will be a re-run of Private Finance Initiative (PFI) both in its structure and its eventual costs.

There is a working model for PFI to be applied to Net Zero and it is the EU’s InvestEU scheme. Two public entities come into play in InvestEU, just like two public entities come into play in Labour’s Green Prosperity Plan – Great British Energy and the National Wealth Fund.

The presumption is that Great British Energy will play the same role in the UK scheme as the European Investment Fund plays in InvestEU, while the other new quango – the National Wealth Fund – will play the same role in the UK scheme as theEuropean Investment Bank plays in InvestEU.

We can therefore use the InvestEU financing template to extrapolate what will happen in the UK scheme, and use the experience of New Labour’s PFI to extrapolate what it will cost.

The structure of InvestEU is laid out in Annex 3 of the Technical Analysis in Managing Euro Risk: Saving Investors from Systemic Risk on pp. 111-6.[1] This shows how the European Investment Fund takesthe highest level of risk, and how its engagement is used to ‘crowd in’ other financiers, including the European Investment Bank. At the time the scheme was called the European Fund for Strategic Investments or EFSI.

The key issue is multiples – how much the European Investment Fund engages, how much the European Investment Bank lends, and then how much money other financiers lend. It is important to note that the European Investment Fund does not lend: it issues guarantees to other financiers or issues undertakings to other financiers to buy shares in the subject enterprise, an undertaking called an ‘equity commitment’, and just referred to as a ‘commitment’ below. It is these other financiers who put up the cash at the level that represents the highest risk of loss in the enterprise, but it is the European Investment Fund that bears the risk of loss. The European Investment Bank puts up money, but the European Investment Fund does not.

The amounts that the European Investment Fund had engaged up to the end of 2021 were calculated for the purposes of The shadow liabilities of EU Member States, and the threat they pose to global financial stability’.[2] The salient pages are pp. 152-3 in Chapter 8.4 ‘European Investment Fund (EIF) and InvestEU’. It was €76bn of guarantees/commitments when the EIF’s capital was €7.4bn. The ratio of guarantees/commitments to capital was therefore 76/7.4 = 10.27. The guarantees/commitments leveraged the EIF’s capital more than ten times over.

This €76bn of guarantees/commitments enabled a total of €612bn of finance to be raised by InvestEU projects and spent. The ratio of guarantees/commitments to finance raised was therefore 612/76 = 8.05. The total of finance raised leveraged the EIF’s guarantees/commitments more than eight times over.

Please note that the €76bn enables the borrowing of that same amount within the €612bn: the amounts are not cumulative.

If we apply the same metrics to the UK scheme, the equity of £1.7bn of Great British Energy can be leveraged 10.27 times so that it issues £17.4bn of guarantees/commitments – 1.7 x 10.27.

Then these £17.4bn of guarantees/commitments can be leveraged 8.05 times to raise a total of finance of £140bn – 17.4 x 8.05.

This is exactly the amount Labour were initially planning to borrow on the national debt and spend on Net Zero.

The presumption is that The National Wealth Fund would play the same role within the UK scheme as the European Investment Bank does in InvestEU – it lends money into the same projects but at the next level of risk down from the European Investment Fund, whose guarantees/commitments are issued towards financiers who on paper are the shareholders with the highest risk position. The position taken by the European Investment Bank and by the UK’s National Wealth Fund might be called subordinated debt, or mezzanine debt, or something like that. The National Wealth Fund would be lending in the order of 7% of the £140bn total, or £9.8bn, 7% being the European Investment Bank’s approximate share in the finance raised by InvestEU.

To sum up, the total finance of £140bn for the UK’s scheme would be raised as follows:

  • £17.4bn – from private parties who put up the cash against the guarantees/commitments issued by Great British Energy
  • £9.8bn – loans from the National Wealth Fund
  • £112.8bn – loans from other private parties, possibly members of Defined Contribution pension plans
  • £140bn total finance raised

We can expect HM Treasury to be asked to issue an indemnity to Great British Energy/the National Wealth Fund for their potential losses as their capital bases are too small to absorb them:

  • Just as HM Treasury has issued a blanket indemnity to the Bank of England for its losses under Quantitative Easing/Tightening;
  • Just as the EU has issued an indemnity to the European Investment Bank/European Investment Fund for their losses under InvestEU, and the amount of this indemnity was €16bn for the EU Budget period 2014-20 and €26.2bn for the EU Budget period 2021-7.

Now we come to how much UK consumers and businesses end up paying. For that we can look at New Labour’s PFI. £50bn of capital expenditure is projected to translate into £278bn of cost through to 2053.[3] That is a ratio of expenditure to cost of 278/50, or 556%.

Given how similar the structure of InvestEU is to the financing model for Labour’s Green Prosperity Plan, we can apply the PFI multiple of 556% to the expenditure of £140bn and extrapolate a total cost of £140 x 5.56 = £778bn.

[1] B Reynolds, D Blake and R Lyddon, Managing Euro Risk: Saving Investors from Systemic Risk (Politeia, London, 2020)

[2] R Lyddon, The shadow liabilities of EU Member States, and the threat they pose to global financial stability’ (Bruges Group, London, 2023)

[3] Office for National Statistics ‘Current-PFI-PFI2-projects-as-at-31-March-2023’