DD2081 Novation of London Green Fund Funding Agreement

1. The London Green Fund (LGF) was set up in 2009 to provide loan and equity finance for waste infrastructure, energy efficiency and decentralised energy schemes (as set out in MD128). It is managed by the European Investment Bank (EIB), the EU bank, who procured three sub-fund managers and have since managed the money and relationships with the sub-fund managers on our behalf. The three sub-funds are the London Energy Efficiency Fund (LEEF, managed by Amber), Foresight Environmental fund (FEF, managed by Foresight) and Greener Social Housing (GSH managed by the Housing Finance Corporation, THFC).

2. The idea behind ‘Financial Instruments’ such as the LGF is to use EU funds more effectively across member states by making repayable loan and/or equity investments, rather than grants that are spent once.

3. The original funding for the LGF came from the London 2007-13 European Regional Development Fund (ERDF) programme (£60m), London Development Agency (LDA) (£32m) and London Waste and Recycling Board (LWARB - £18m); and responsibility for the LDA’s investment in the LGF was transferred to GLA in 2011 (as set out in MD851). The three sub-funds have fully invested the original capital (some returns can be reinvested) and have supported 18 projects with a total value of just over £520m. They are summarised in Annex A.

4. Once all construction works are completed the projects should :
• Save nearly 300,000 tonnes of CO2 per annum;
• Divert 440,000 tonnes of waste from landfill per annum;
• Save 19,500,000 kWh of energy per annum; and
• Create nearly 2000 jobs.

5. Holding Fund management fees to manage the money and relationships with sub-fund managers and associated costs (such as travel) have averaged just over £580k a year with subfund managers’ fees totalling approximately £7m . The size of these fees is limited by EU rules.

6. With original funding committed, it is deemed no longer necessary to pay an EIB team based in Luxembourg for remaining routine administrative tasks that can be carried out by the GLA itself, at no extra cost to the GLA. Following discussion between the GLA, LWARB and EIB officials, the previous administration’s Investment and Performance Board therefore agreed in principle last year to transfer residual management and monitoring responsibility for the LGF from the EIB to the GLA. The documents to be novated from the EIB to the GLA are summarised at Annex B.

7. The cash balance held by EIB as of December 2016 is £6.35m. The three sub-funds have different repayment schedules and timescales as set out below in the forecast cashflow table below:

8. LEEF and FEF close in 2021, GSH is not scheduled to close until 2043. The ongoing cost of managing and monitoring the LGF will be absorbed by existing GLA European and Finance teams.

9. Osborne Clarke have been instructed as external legal advisers for the novation work, on behalf of the EIB and the GLA. TfL Legal are also advising. The total cost to GLA for the external legal work – payable from the proceeds of the LGF itself - is expected to be up to £30,000 split between the GLA paying 84% and LWARB 16% as agreed in the original Funding Agreement with the EIB.

10. The objective of the novation of the LGF management and monitoring responsibilities from the EIB to the GLA is to manage remaining cashflows relating to the LGF economically and effectively, now that its initial capital is invested.

11. LEEF funds returned to the GLA can potentially be re-invested through the forthcoming ERDF and EIB backed Mayor’s Energy Efficiency Fund (for which a similar remit to LEEF is envisaged). A procurement exercise to select the fund manager for this new fund is currently in progress.

12. Work has also been undertaken by PriceWaterhouseCoopers on behalf of LWARB and EIB to determine the scope of a further ERDF and EIB backed waste fund, which could be supported by any equity returns from FEF.

13. Such a fund is likely to be based around support for ‘circular economy’ SMEs, rather than equity investment in waste infrastructure sites. A separate Mayoral Decision is being drafted on this.

14. GLA’s management of the LGF will take into account all of the requirements set out in the Equality Act 2010 including the public sector equality duty in section 149(1) of the Equality Act 2010.

15. This provides that, in the exercise of their functions, public authorities must have due regard to the need to:

• eliminate discrimination, harassment, victimisation and any other conduct that is prohibited by or under the Equality Act 2010;
• advance equality of opportunity between persons who share a relevant protected characteristic and persons who do not share it; and
• foster good relations between persons who share a relevant protected characteristic and persons who do not share it.

The obligation in section 149(1) is placed upon the Mayor, as decision maker. Due regard must be had at the time a particular decision is being considered. The duty is non-delegable and must be exercised with an open mind.

Key risks and issues

16. The GLA is responsible in the first instance for any ‘irregularity’ (as defined in the EU regulations) in the LGF as identified through EU-related expenditure checks, although the legal agreements provide for repayment of such irregularities by those with whom the EIB (and after the novation the GLA) has contracted where appropriate. For example, in the case of a procurement error by a sub-fund manager. In the novation agreements it is proposed that the EIB will be responsible for any acts or omissions which happened prior to the novation taking place.

17. The LGF has been repeatedly checked by UK and European auditors with no confirmed adverse findings. There is one outstanding audit report from the European Court of Auditors (the auditors of the EU), the findings of which are now being considered by the European Commission. There are unlikely to be further audits during the fund’s lifetime.

Links to strategies

18. The projects approved for funding contributed to London’s 2007-13 ERDF Operational Programme targets and the previous administration’s environmental and economic development strategies.

Impact assessment and consultation

19. EU rules require that all Financial Instruments are subject to independently-drafted ‘ex-ante’ assessments into their viability prior to their set-up. The LGF was subsequently evaluated as part of the 2007-13 London ERDF programme evaluation.

20. Approval is sought for the novation of the LGF funding agreement, associated responsibilities and documents from the EIB to the GLA. Once the agreements are in place, the funds held by the EIB will be transferred to the GLA and available balances will be pooled and invested alongside GLA cash to maximise interest earned. Interest earned will be ring-fenced to the LGF.

21. The transferred responsibilities will be undertaken by existing staff within the GLA's EPMU and Finance teams at no extra cost, saving costs to the LGF of EIB management fees which to date have averaged circa £580k per annum.

22. Legal fees for the contract novation are currently estimated at £30k. These are one-off costs and will be borne by the LGF.

23. Sub-fund managers' fees and costs are funded by investment returns and there will be an annual charge to the LGF until 2021/22. The fees comprise a fixed element and a variable component linked to agreed performance criteria. Sub- fund manager fees have first call on the returns earned and to date have averaged £1.4m per annum.

24. Paragraph 7 to this report sets out a schedule of forecast returns to the LGF and these are sufficient to meet the abovementioned calls on the fund. Returns accrue to the ERDF, GLA and LWARB in proportion to the amounts originally contributed. As required by European Commission Regulations, the exit strategy of the LGF sets out how returns will be used. However, any future decisions on changing the use of GLA and ERDF returns will be subject to the GLA’s internal decision making process, additionally, for ERDF returns any decisions will also have to comply with European Commission restrictions on the use of ERDF resources.

25. Any cash transferred and future returns attributable to LWARB will be handled in accordance with the new funding agreement between GLA and LWARB.

26. This report indicates that the decisions requested of the Director concern the exercise of the GLA’s general powers, fall within the GLA’s statutory powers to do such things considered to further or which are facilitative of, conducive or incidental to the promotion of economic development and wealth creation, social development or the improvement of the environment in Greater London (its ‘principal purposes’); and in formulating the proposals in respect of which a decision is sought, officers have complied with the GLA’s related statutory duties to:

• pay due regard to the principle that there should be equality of opportunity for all people;
• consider how the proposals will affect the health of persons in Greater London and health inequalities between persons in Greater London, the achievement of sustainable development in the United Kingdom, and climate change, and its consequences; and
• consult with appropriate bodies.

27. As part of the novation, the GLA will be required to become a limited partner in respect of two of the sub-funds. GLA has the power to do this pursuant to section 12 of the Local Government Act 2003 which states that the GLA has the authority to invest for any purpose relevant to its functions and section 30 which permits the GLA to do ‘anything’ that it considers will further any of its principal purposes (as summarised in paragraph 26 above). Therefore, the novation will be from the EIB to the GLA rather than to a GLA subsidiary.

28. Osborne Clarke are appointed as external legal advisers to the GLA and the EIB on the LGF novation. Officers must ensure appropriate due diligence is undertaken by the GLA prior to the novation. Officers must ensure all relevant documentation is put in place before the GLA undertakes this role.

Annex A – Projects Supported by London Green Fund

Annex B – London Green Fund documents to be novated