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Select Committee on Public Accounts Twenty-First Report

2 Delivering a public service through a private company

12. The Carbon Trust is a private sector company delivering a public service but has 'not for dividend' status and re-invests its profits back into the business. As at 31 March 2007 it had five subsidiary companies. Most of its administrative functions had been contracted out, together with the management of the accredited energy consultants used to provide energy advice.[11]

13. Establishing private companies to deliver public services remains relatively unusual. The Department had listened to feedback from businesses, which had suggested that potential clients would have greater trust in the independence and nature of the advice received if it were from a private sector company, rather than a non-departmental public body or other public sector organisation. The private sector model had also given the Carbon Trust greater financial flexibility and ability to leverage funds from business than would have been the case if it had operated in the public sector. The Department lacked clear evidence, however, to establish whether reductions in carbon dioxide were directly achieved as a result of the Carbon Trust's intervention or due to wider fiscal and customer pressures on organisations.[12]

14. By providing part-funded or wholly funded advice and interest free loans to organisations, the Carbon Trust had sought to raise business awareness of the benefits of improving energy efficiency and reducing carbon dioxide emissions. One measure of its success would be when it no longer had a role. Over the next five years, the Carbon Trust has planned a shift in the balance of its activities, away from providing publicly funded support to large businesses, towards innovation, new low carbon technologies and new ways of doing business. It estimated that the work already undertaken to support emerging technologies would reduce carbon dioxide emissions by between 13.7 million and 20.7 million tonnes by 2050.[13]

15. The Carbon Trust relied on 414 consultants to provide energy advice to organisations, rather than employing in-house staff for such work. Increased demand for specialist advice would require the continued use of consultants. It might be possible to provide standardised services such as advice to organisations with energy costs below £50,000 a year, more cheaply by staff based in the Regional Development Agencies. The Carbon Trust was exploring this option.[14]

16. The National Audit Office had found that energy consultants delivering energy advice services on behalf of the Carbon Trust were generally less satisfied with the Carbon Trust than customers receiving services. 47% of consultants were dissatisfied with the report templates and other materials provided by the Carbon Trust, 39% expressed dissatisfaction with the Carbon Trust's willingness to listen to their ideas and 33% were dissatisfied with how efficiently the Carbon Trust operated. The Carbon Trust listened to ideas and advice from a wide range of stakeholders including its consultants but acknowledged that its recent process of re-accrediting consultants might have contributed to some consultant dissatisfaction. It needed rules in place to maintain the timeliness, quality and consistency of advice provided to its customers but had made some changes to increase flexibility, for example, around report presentation.[15]

17. The Carbon Trust had encouraged the private sector to spend around £2 on low carbon technology for every £1 it had committed to this work, and around £10 for every £1 it had spent through its venture capital investment programme. Achieving greater leverage from the private sector was both a challenge and an opportunity for the Carbon Trust. One example where the Department believed that the Carbon Trust was being successful was on the Partnership for Renewables project, which aimed to develop onsite renewable energy projects with local authorities, hospitals and other public sector bodies. Here the Carbon Trust was expecting to be able to leverage in from the private sector approximately 50 times the amount of money committed by the Government.[16]

18. The Carbon Trust was operating a "carried interest" scheme as part of the remuneration package for two of its investment managers.[17] The managers had contributed 25% of the capital of the fund advisory partnership, Carbon Trust Investment Partners, a total of £50,000 (Figure 2). In a hypothetical situation whereby the £10 million Clean Energy Fund, which was currently being managed by Carbon Trust Investment Partners, paid out 300% of the value of the fund over seven years, the Carbon Trust would earn £26 million and the two investment partners would earn a total of £2 million. This would represent an exceptional level of performance in this area compared to that of other venture capital technology funds. In this scenario the investment made by the two investment managers would increase by a factor of 40 over seven years. Assuming a more realistic scenario, whereby the Fund paid out 165% of the value of the amount invested over seven years, the Carbon Trust would make a return of £15 million and the two investment managers would make a total return of £195,000, 3.9 times the amount that they invested. The Department was focused on ensuring that sufficient "Chinese walls" existed between the investment managers and the people awarding grants to support early stage development of low carbon technology. The Carbon Trust would put in place further safeguards to address the potential risks of these arrangements but they reflected usual market practice for venture capital investment funds.[18]

Figure 2: Carried interest arising from any investment fund would be shared between Carbon Trust Fund Management Holdings and Clean Tech Venture Partners