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UK to launch £2 billion "Green" Investment Bank

Source: Reuters - Mon 22th Mar 2010

The Labour government will unveil a 2 billion pound "green" investment bank in Wednesday's budget to help Britain's transformation to a low carbon economy, a government source said on Sunday.

Chancellor Alistair Darling has said there will be no pre-election giveaways in the budget, with polling day expected on May 6, but he wants more investment to encourage future sources of economic growth after an 18-month recession.

The green bank, designed to help finance projects such as railways, offshore wind power generation and eco-friendly waste management, will be half-funded from government asset sales with the remaining one billion pounds coming from the private sector.

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"The high risk profile of these investments, which are in new and unproven technologies means an initial government investment is needed to draw in investors" the source said.

"By providing an initial investment of government capital it will reduce the risk profile for investors and increase the incentive for the private sector to enter the market at the scale and pace needed."

It is estimated that Britain needs well over 150 billion pounds to modernise its energy mix. It also has to meet climate change targets - cutting greenhouse gas emissions by a third and sourcing 15 percent of its energy from renewables by 2020.

The government could sell the rail franchise from London to the tunnel linking Britain to mainland Europe, the student loan book, a toll road crossing near London or betting company, the Tote, to finance the investment bank, the source said.

SUSTAINABLE RECOVERY†

Policymakers have grown increasingly concerned that companies are still struggling to secure finance for investing in innovative areas even though the worst of the credit crunch is over and the banking system has stabilised.

Getting credit flowing freely again is regarded as crucial to engineering a sustainable recovery. Bank of England figures last week showed lending to firms shrunk at its fastest annual pace in at least a decade in January.

With government borrowing for 2009/10 expected to come in as much as 10 billion pounds below December's 178 billion pound forecast, the budget on Wednesday could contain further small, targeted measures aimed at new industries.

However, with the budget deficit heading for a record 12 percent of gross domestic product this year, Darling is expected to bank most of the undershoot.

"A little bit of government help can unlock a lot of private sector investment, and that is going to be the focus this week" Darling told BBC television on Sunday.

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