Green Investment Bank needed for waste infrastructure

The UK's environmental sector has been waiting a long time for the government to establish a Green Investment Bank (GIB). This wait has seemed like an eternity but hopefully State Aid clearance will soon be granted from Brussels and the GIB can properly open its doors for business. And there could well be a lot of business when it comes to waste infrastructure (waste of course being one of the bank's priority sectors).

There is a dominant media narrative that in the last decade unregulated banks took excessive risks and caused the recent great financial crisis. Risky mortgage lending on both sides of the Atlantic inflated huge housing bubbles which have popped and depressed the real economy by reducing household wealth.

There is however an alternative narrative (see e.g. Friedman and Kraus), which contends that, on the contrary, misguided regulation was the proximate cause of the financial crisis and subsequent recession.

Regulation tends to homogenise behaviour. Organisations subject to a fixed and rigid regulatory framework will have an optimal strategic response to that framework. When everyone is subject to the same regime, they will likely adopt the same (or similar) responses to that regime. In the case of the banking industry, regulations rewarded banks for holding mortgage based securities. This led to an overallocation of resources into the housing sector. Across the US and Europe, housing bubbles have now burst. The alternative view of events contends that regulation was central to the inflation of these bubbles.

The bubbles have burst and values have fallen, but the impact may have remained largely a financial crisis with little knock on effect to the real economy. Accounting rules though mean that banks have to reduce the values of the assets on their books as these fall in the market. Regulations stipulate (rightly) that banks must hold capital to cover their obligations. If the values of their portfolios are falling then they must increase their capital cushions to cover these losses. This has constrained banks' ability to lend to the real economy.

Banks play an important role in financing new investment. A lack of investment is now holding back the real economy and contributing to the ongoing economic slump. New capital regulations are being introduced in response to the dominant media narrative. These may peversely prolong the slump by continuing to dampen banks' ability to finance new investment.

What does all this mean for the waste sector? We are on the cusp of a major boom in residual waste infrastructure to meet Landfill Directive requirements. There is around 12 million tonnes of residual waste infrastructure in the UK which has secured planning permission but is yet to be developed. The key constraint preventing the uptake of this development is likely to be finance. With the banking sector being forced into retreat by financial regulators, it is going to be crucial for the GIB to step up to the plate and help bring forward the infrastructure investment we need.