The success of the government’s flagship green deal initiative depends on Paul Davies. Here, the man behind the Green Deal Finance Company tells Keith Cooper how he’ll get investors to stump up £10 billion
Paul Davies is apologising for his ‘tatty’ Friday look. Dressed down, tieless, wearing a frayed shirt and black jeans, it’s more eco-chic than smart city gentlemen, in a sartorial sense of course. The fashion of this senior partner at Pricewaterhouse Coopers is well-suited to his new role, however. The man now striding down the steel staircase of the world-leading consultancy’s London Bridge headquarters is fast becoming the face of green finance.
We’re heading into blistering morning sunshine to a riverside coffee hut, conveniently within eyeshot of a screen beaming Olympic action to the masses. The canoeists are up next, a sport with which he admits he’s all too familiar. ‘I’ve taken a trip in an Olympic canoe,’ he says as we settle into our seats. ‘A disaster! We lasted 15 seconds before it capsized. I thought I was going to die.’
Self-deprecation aside, Mr Davies’ reputation as an expert in eco-finance has only grown since he appeared in sustainability circles last year. He’s now well known as the chief architect and official spokesperson of the Green Deal Finance Company, an organisation likely to play a pivotal role in the government’s ambitious green deal scheme. Under the deal, due to launch in October, ‘green deal providers’ loan the upfront cost of eco-improvements to residents. Repayments will appear as monthly charges on their electricity bills. The deal’s ‘golden rule’ means these payments must not exceed the value of the savings made.
Ministers want and need £14 billion of private sector investment to get the deal going, the lion’s share of which - £10 billion - appears to depend on Mr Davies’ GDFC. No wonder so many eyes in industry, policy and politics are trained on this slight 50-year-old.
His attention fixes first on coffee orders before giving me the lowdown on why he thinks the GDFC is so essential. ‘The green deal is in effect a loan and because of [the] golden rule we basically need £10 billion of low-interest finance,’ he explains. ‘We will be working behind the scenes to raise that money.’ Most green deal providers are unable to loan such significant sums themselves and ‘you know what the banking market is like,’ Mr Davies adds. ‘This leaves the bond market. It is the only source of low-cost finance to make this work.’
The GDFC will not finance green deal providers directly. It will instead help them offload the loans they arrange for homeowners by bundling them up into bonds, which are then sold to institutional investors such as pension funds. With their loan capacities replenished, providers will be freed to sail forth once more, offering green deal services to even more homeowners, as well as tenants of social and privately rented housing. And so the cycle continues.
As the coffees arrive - was that a soya latte he ordered? - Mr Davies settles into explaining why such a complex organisation is needed. The company’s set-up costs alone are likely to top £40 million, according to some predictions. ‘We need a structure that can leapfrog what would normally be a five-year process,’ he begins.
‘The bond markets typically look at things that have worked for a number of years, which are credit-worthy. But we need the finance straight away. To get the bond market going, you also need volume. So what the company aims to do is aggregate [loans] nationally.’ He has set his sights on raising £5 billion on the bond market over its first five years but aims to begin with an initial £1 billion tranche.
The finance company’s marketing material is unapologetic in its ambition to become the sole go-to organisation for green deal bond finance. The market would be best serviced by ‘one central finance company’, its website claims. That company is clearly itself. Mr Davies insists this ambition does not mean it wants to monopolise the market absolutely. It will instead ‘enable’ access to the bond finance market while avoiding the expense of establishing multiple competing finance companies. At £40 million a pop for set-up costs, he may have a point.
His vision for the GDFC enjoys some support within sustainability finance circles. Sean Kidney, chair of the Climate Bonds Initiative, which aims to create a market for green bonds, believes the GDFC could be great for the green deal if Mr Davies pulls it off. He argues that it would create a ‘bit of a monopoly’ but that such a step is necessary. ‘We don’t have the luxury of waiting for the market to grow organically,’ Mr Kidney says. The finance company is, however, being seen as a clever ‘around-about-way’ of accessing government money without increasing public sector borrowing,’ Mr Kidney adds. ‘The model relies on a lot of support.’
The GDFC model does indeed depend on significant government support, as Mr Kidney describes. It has asked for a £300 million loan, mainly from the Green Investment Bank, which is being set up by the government with the capacity to loan £3 billion to green businesses. Of this, £40 million is earmarked for start-up costs; the rest as seed investment to secure the credit rating it needs to attract bond investors. A sliver of just £7 million has so far been agreed, despite Chris Huhne, when he was climate secretary, lauding the company as ‘an exciting initiative with the potential to reduce interest rates on green deal finance’.
The £7 million loan was agreed by the Department of Energy and Climate Change in August, with the narrow remit of establishing the GDFC’s loans administration system and securing its credit rating. Government foot-dragging has been a source of frustration to some of the suppliers, contractors and energy companies which are supporting the GDFC. Their anger spilled out in a letter to the deputy prime minister in June, in which they warned that delaying start-up funding put the whole green deal in jeopardy. ‘Work on financing the scheme has been halted… putting the green deal scheme at significant risk,’ it added.
While understanding his members’ irritation, Mr Davies himself is sanguine about the government’s support, despite the embarrassment of his own timetable slipping - the GDFC was slated to secure its credit rating in June 2012. But if he suffers any personal frustration, Mr Davies is not showing it. ‘We got the loan later than we envisaged so things have gone back slightly [compared to what] we originally planned,’ he admits.
‘We submitted a business plan to government back in November or December last year. What the extra time has meant, while we have been effectively waiting for the loan, is that we’ve managed to expand the membership, get a board in place and are now looking like a strong, proper company. It is now properly established and formal.’
The strength of the government’s interest in the success of the GDFC is reflected by the fact that DECC officials have sat in on its weekly meetings since its inception. With the finance company’s board set up, they attend its meetings too, Mr Davies adds. He speaks not one word of criticism about the government’s role in the GDFC, adopting instead the universal language of business relationships: ‘It is very partnerial,’ he insists. ‘We want to work with the government.’
As the burning sun forces us to retreat to the shade of a tree, Mr Davies pauses the interview to watch a ship passing under Tower Bridge. He appears fascinated by the engineering behind the still-functioning mechanics of this century-old bridge - and wonders how its construction was funded.
In more relaxed mode, he explains how DECC’s interest became piqued by his finance company idea. ‘I was involved in some workshops organised by DECC and put forward my vision for the GDFC. [Energy company] Centrica’s representative said: “that was my vision too”.’ It was shared by others. ‘DECC officials were very keen on the idea, accepting his offer to set it up, he adds. ‘I happened to be relatively vocal on the subject,’ Mr Davies admits. ‘I probably had too many espressos. They said: “That’s useful but you have to get the whole market involved”.’
A collaborative effort
Mr Davies assembled a band of top-level consultants to create the finance company. PWC is collaborating with investment bank Goldman Sachs and two of the top five ‘magic circle’ law firms - Clifford Chance and Linklaters - to scaffold its legal and financial frame. ‘These are people who have done this before, who I knew or shared the vision.’ As a not-for-profit ‘mutual’, the GDFC exists to serve its ever-increasing and eclectic membership of energy companies, banks, landlords and local authorities and construction firms. The number of members has grown from a handful in October 2011, to 50 today and now includes all of the major energy companies. Gentoo and Places for People are the first housing associations to join.
Mr Davies’ arrival on the sustainability scene has been welcomed by social landlords, which have sometimes struggled to get their voices heard. ‘My background is not finance, but Paul’s approach has made that stuff accessible,’ says Sally Hancox, director of Gentoo Group. ‘He makes time to talk to me, and also seems to understand the different things people bring to the party. The role social housing can play isn’t an obvious one, but Paul seems to get it.’
Members have now formed into sub-groups, turning the GDFC into something of a talking shop. Green deal providers gather to exchange ideas, as do local authorities. ‘There is a lot of uncertainty around the green deal,’ Mr Davies says. ‘Members can offer advice to each other on how to answer those questions.’
The bigger, the better
The mutual nature of the GDFC should also help maintain the momentum of the green deal, making it attractive to new members, Mr Davies says. ‘If you help people get excited about the green deal, it encourages more people to get involved and costs come down. The larger we are, the better,’ he says. Its structure ‘ticks all of the right boxes’, Mr Davies insists. ‘It is owned by the industry, including all the large players. It is open to all.’ Such a structure does seem to fit with DECC’s original exhortation to get the industry on-board. Members’ initial investment in the mutual is minimal; shares are sold for a nominal £1.
So what exactly is Mr Davies role in the GDFC? He is variously described in the media as the ‘face’, a ‘spokesperson’ and a ‘founding member’ of the finance company. What’s his preferred title? ‘PWC is technically an advisor, and as a founding member I have been pretty involved,’ he says. ‘But I think you could call me the primus inter pares - the first among equals.’
Such a title could send mixed signals about Mr Davies’ role. Is he emphasising equality or primacy as he applies a term to himself which is most commonly applied to prime ministers? His choice of words turns out to speak volumes about his education, career, motivation and involvement in the green deal. He was educated at Oxford, the alma mater of a host of prime ministers, including Tony Blair, David Cameron and Margaret Thatcher. Davies also studied the qualification of choice for students with ambitions for political service: Oxford’s undergraduate degree in philosophy, politics and economics.
So did he ever want to become prime minister? ‘It’s always in the back of the mind,’ Mr Davies says, with a pause and a skyward glance. ‘But I decided to go into banking to get a grounding in finance. I’m still getting that grounding,’ he smiles. ‘But actually I have now migrated into the political sphere. Our time in there is spent on projects in the public sector infrastructure,’ he says gesturing towards PWC’s offices. ‘We do restructures for schools, housing and financing transport. All basically large-scale government projects. That is satisfying my PPE yearnings.’
A colourful career
Mr Davies’ professional career comprises two main chapters, the first of which is likely to make eco-campaigners feel queasy. He joined HSBC immediately after leaving Oxford in 1984, working there until 1996 on oil and gas projects. He then spent two years in Hong Kong, helping to arrange shipping industry finance for oil tankers and ferries. Mr Davies was finally able to fulfil his ‘PPE ambitions’ after joining PWC in 1996, to work on public sector finance projects. His most notable achievement to date, he says, was helping secure £1.6 billion for a scheme to widen the M25 in the middle of the credit crunch.
His involvement in public projects is now what gets him up in the morning, he says. ‘The reason I do what I do is that I enjoy the projects. I am motivated because they are good things in their own right.’ He sees the GDFC as a project in the same vein as the fossil fuel industry schemes on which he toiled previously, perhaps reflecting the free market ideas of a man grounded in the finance industry. ‘The green deal definitely has scope to be transformational. [Energy efficiency] pays for itself, but we have to ask the question: why haven’t people done it in the past? One reasons is that they haven’t got the finance.’
The GDFC will help evaporate such a barrier, he suggests.
Mr Davies’ formative years at Oxford seemed to stoke his interest in environmental issues. When he was pacing the cloisters of Oxford’s New College in the 1980s, one of his former tutors was the economist Dieter Helm, now professor of energy policy and a well-known advocate for using the free market to solve environmental problems. ‘Last summer, I was reading his book, The Economics and Politics of Climate Change, on a beach in Thailand. When I came home, I thought: “I could make a personal contribution to all of this”.’
His beach-side reading provides a well-argued impetus to his drive to get the GDFC off the ground quick-smart. ‘The science suggests that it is probably more likely than not that rapid climate change will result later in the century with potentially quite catastrophic results,’ is the book’s grim prediction. ‘Time is, according to the scientists, of the essence.’ Such a lesson seems to have been well-learned by Professor Helm’s former student.