UK Infrastructure Bank Bill [HL] — House of Lords, 2022-05-24
Topic: Domestic Commerce
Richard Gilbey (Crossbench, Unknown): My Lords, I was privileged to be a member of the EU Financial Affairs Sub-Committee when it conducted its inquiry into the impact of Brexit on our membership of the European Investment Bank. One of the key recommendations in our report was that the Government should consult on establishing a UK infrastructure bank to replace our access to EIB finance, so I am delighted that the Government have chosen to do so That said, I have some concerns about what the Government are proposing in this Bill. While I am sure that we are all extremely grateful that the Bill does not run to the usual hundreds of pages, it could be improved with a bit more content. I hesitate to use this first sentence after the speech of the noble Lord, Lord Davies, but the principal function of an infrastructure bank should be to correct market failures that prevent a good project obtaining private finance in the market. That might mean the bank taking on new-technology risk, for example, or term risk where a project is longer term than is usually covered by the private sector. It should aim to act as a cornerstone investor, fostering confidence for other investors and facilitating projects that would not otherwise achieve sufficient funding to crowd in private finance, as we heard earlier. There are good examples of this. I think it is generally accepted that the UK offshore wind sector would not be where it is without the EIB investment behind it What it should not do, and here I strongly agree with the noble Baroness, Lady Noakes—I hope all this agreement is not going to go to her head—is become a replacement for private sector finance; in effect, competing with and crowding out private sector finance that would otherwise be available. Again, there are examples of this. The EIB’s investment in the Thames sewer is almost certainly an example of it and, frankly, the examples of the investments made so far by the UK Infrastructure Bank do not give an awful lot of confidence at this stage It also should not, generally, be the sole financer of a project. To have the credibility to crowd in private sector finance, the UK Infrastructure Bank will need to develop real depth of expertise and due diligence ability—a real strength of the EIB, incidentally. That requires investment. The EIB employs 3,000 full-time staff, including financial professionals, engineers, economists and environmental experts with significant engineering and scientific expertise. If the UK Infrastructure Bank is to succeed, it will need to build similar skills. So, can the Minister provide some information around the resources the bank currently has and what it is intended that it should have The effectiveness of the UK Infrastructure Bank should be measured not on how much it has invested, loaned or otherwise provided—anyone can spend money—but on how much private sector finance it has generated or facilitated that would not otherwise have been available, or investments that could not otherwise have been made. That should be specifically included in the review of the bank’s effectiveness and impact in Clause 9. Like others, I agree that 10 years is a ridiculous length of time before the first review The UKIB policy design and framework documents issued by the Treasury actually cover the crowding in of private sector finance quite well and, given the comments of the Minister earlier, the Government obviously agree with me on this. Perhaps she could therefore explain why this critical objective is not even mentioned in the Bill, despite the importance given to it. The policy design and framework documents are actually quite good, including six pretty sound operating principles and four related investment principles. Again, these are not mentioned in the Bill. In some cases, they are actually contradicted by the Bill. They appear to have no legal status and could be changed at any time without scrutiny. If I may, I will comment on three of the six operating principles The first is: "Achieving policy objectives via sound banking … whereby investments help to achieve the core policy objectives … whilst generating a positive financial return to ensure the financial sustainability of the institution and to reduce the burden on the taxpayer." This is reinforced further in the investment principles. Again, the Bill does not mention this requirement to generate a positive return, and the definition of "financial assistance" is so widely drafted that it would allow grants and other similar funding that has no return. While the EIB also does not have to make a positive return, it has been consistently successful in doing so. I think making that a requirement for the UK Infrastructure Bank would be a very good financial discipline. Whatever is decided in that respect, I think it is important that the financial requirements that apply to the bank are included within the objectives in the Bill, and that any future change to that principle should be subject to parliamentary scrutiny The next operating principle I will touch on is: "Additionality: the Bank will prioritise investments where there is an undersupply of private sector financing and, by reducing barriers to investment, crowd in private capital." Again, I have talked to this before: it is not in the Bill and it really should be there as a key objective The next one to look at is "Operational Independence", which the noble Baroness majored on quite strongly in her speech. The bank "will operate within a strategic framework set out by government but will have operational independence in its day-to-day activity including investment decisions." The National Infrastructure Commission stressed the importance of governance to safeguard the operational independence of the institution, and it was also a common thread we heard in evidence to the EU Financial Affairs Sub-Committee when we were doing our inquiry. Private sector finance will not have confidence to co-invest if there is a perception that an investment opportunity, or indeed the institution itself, is subject to the whims of political expediency. That is especially important given the long-term nature of infrastructure investment. But the Bill does not include anything that safeguards the bank’s operational independence. In fact, it actively undermines it. The Bill allows the Treasury to revise or replace its statement of strategic priorities at any time, with no scrutiny or even consultation. Worse still, the Bill allows the Treasury to give specific or general direction—again, at any time—about how the bank is to deliver its objectives, with which the bank must comply. That would allow the Treasury to direct the making of a particular investment, or on particular terms. The only safeguard is that the Treasury must first consult with the directors, who, I again remind noble Lords, are all appointed by the Treasury Operational independence means having the ability to refuse to finance government vanity projects. As currently drafted, for example, the Bill would allow the Government to mandate the financing of ludicrous ideas such as the bridge to Northern Ireland, and the bank would have to comply. That is not operational independence in any sense that I understand it. This area of the Bill really needs work Those three operating principles, along with the other three—partnership, impact and credibility, and flexibility; the Government’s own principles, not mine—are very important and should be put on a statutory basis in the Bill, with any changes subject to proper scrutiny. Where the Bill contradicts the principles, it should be amended I will touch briefly on devolution, as one or two noble Lords have. The bank will operate across the whole UK, which I welcome. However, as usual, the Government have given no role in the Bill to the devolved Governments beyond seeking legislative consent, we are told. Living in Scotland, I am no great fan of the current Scottish Government but devolution is a fact, regardless of one’s views of the Government whom the devolved nations have chosen. It would be appropriate for the devolved Governments to at least be able to appoint non-executive directors to the board to reflect their legitimate interests. Could the Minister comment on that I have one last question. I have not been able to find anything that would allow the bank to raise finance externally as loans, bonds or equity. Other similar organisations can raise finance on the capital markets, which has the dual benefit of raising greater capital and introducing valuable private sector disciplines. It would also reduce the scope for government meddling. For example, Germany’s KfW, which we heard about earlier, funds itself almost entirely from the international capital markets, being able to obtain cheap finance because of its AAA rating due to its government backing. The EIB does the same, relying on the backing of member government guarantees. Its subsidiary, the European Investment Fund, has minority private sector ownership. What consideration have the Government given to the UK Infrastructure Bank being able to raise external finance alongside government finance As I said at the start, I support the creation of the UK Infrastructure Bank, but we have work to do to ensure that the Bill enables it to be successful.