Britain to privatise Green Investment Bank

* Bank will have greater freedom to borrow-government

* Government, bank to engage with potential investors

* Bank says has started to operate profitably (adds details on valuation, prospective bidders)

By Nina Chestney and Anjuli Davies

June 25 (Reuters) - Britain is to begin selling stakes in its Green Investment Bank (GIB) to bring it into private ownership and to help it to grow, the government said on Thursday.

Since the bank was created as a commercial venture at the end of 2012 to back green energy projects and to spur private sector investment it says it has invested 2 billion pounds ($3 billion) in 50 projects worth over 8 billion pounds including waste management plants and offshore wind farms.

The move to privatise the bank also comes a week after the government said it would scrap all new subsidies for onshore wind farms a year earlier than previously planned.

Business Secretary Sajid Javid said the government would sell a majority stake, though no decision has been made on the exact size.

However, Javid said the move would give the bank greater freedom to borrow, removing state aid restrictions and allowing the bank to attract more capital. In order to be free of state aid restrictions currently in place the government would need to sell 70 percent or more of the bank.

"In 2012 we set up the Green Investment Bank to support important investment in the UK's green infrastructure and since then it's gone from strength to strength," British finance minister George Osborne added.

"That is why we can now begin exploring options for moving the bank into the private sector to enable it to access larger pools of capital and act more freely to invest in a broad range of green sectors."

Based on the 2 billion-pound figure for total loans, a 70 percent stake could theoretically be worth 1.4 billion pounds, but the government has pledged to sell its stake by the end of the current government's five-year term, by which time valuations of projects currently underway could vary greatly.

It is also unclear how much of a further 1.8 billion pounds of potential capital that the government initially pledged for the venture will have been committed to loans by the time of the privatisation, although new lending continues apace.

"We are now very close to our expected long-term investment rate of 800 million to 1 billion pounds per year," said Shaun Kingsbury, chief executive.

"While capital from the UK government was an important start it will not be enough to sustain our level of investment. From the outset it was always part of the plan that we would need to raise additional capital from the private sector to supplement government funding."

Prospective investors could include pension funds, institutional investors and sovereign wealth funds who have in the past teamed up with the bank when it announced its offshore wind fund in April.

Meanwhile in its annual review on Thursday the bank said it started to operate profitably in the financial year just ended, making a profit before tax in the second half of the year of over 3 million pounds and a full-year profit of 0.1 million pounds.

The bank has a range of funding options. It will keep investing its current share capital from the government; recycle that capital; continue to raise money for its fund and work to attract new equity investors, Kingsbury said.

But Nick Mabey, chief executive of E3G, a thinktank that originally developed the idea of the bank, said selling a majority stake would be "reckless".

"Privatisation threatens to destroy investor confidence which in turn will damage both energy security and the UK economy. On no account should more than 49 percent of the public stake in the GIB be sold now," he said.

The bank said it has appointed advisers - Swiss bank UBS is working with the Green Investment Bank, whilst Bank of America Merrill Lynch is advising the government - but was still in the early stages of its work to attract investors and did not expect to make a futher announcement in the short term. ($1 = 0.6373 pounds) (Reporting by Oleg Vukmanovic and Nina Chestney; Editing by Greg Mahlich)