UK Infrastructure Bank Bill [HL]
Tuesday 24th May 2022
(2 years, 6 months ago)
Lords ChamberUK Infrastructure Bank Act 2023 View all UK Infrastructure Bank Act 2023 Debates Read Hansard Text
Baroness Penn (Con)
My Lords, it is a great pleasure to open this Second Reading. The UK Infrastructure Bank Bill is the final stage in establishing the UK Infrastructure Bank as an operationally independent and long-lasting institution.
Before I go into the provisions of the Bill, it may be helpful if I provide some context to the bank. In 2018, the National Infrastructure Commission produced the first national infrastructure assessment—NIA—which recommended that a new UK-wide infrastructure bank be established to manage the loss of funding from the European Investment Bank. In 2019, the Government undertook the infrastructure finance review—IFR—consultation, which found support for a new, enduring body to deliver infrastructure finance support tools in line with the NIC’s recommendation.
Responding to the national infrastructure assessment, the Government published the National Infrastructure Strategy in 2020, setting out their plans to bring forward a UK infrastructure bank. A policy design document was produced in spring 2021 and the bank was launched at pace in summer 2021. In the design and set-up of the bank, the Government have delivered three crucial requirements from the original National Infrastructure Commission recommendation.
The first recommendation from the NIC was that the bank should be operationally independent. This is something the Government take very seriously, and which is important to support the bank’s credibility in the market as a long-lasting institution. Respondents to the infrastructure finance review told the Treasury that independence increases efficiency and ensures commercial decision-making. However, the institution needs to operate in line with the Government’s overall infrastructure goals.
One of the reasons we have a Bill today is to protect that operational independence. Noble Lords will note that the bank is already operational but the Government cannot simply sell or dissolve the bank without further legislation. The Government are also unable to change the bank’s objectives without further primary legislation, or its activities or definition of infrastructure without further secondary legislation.
Finally, the Bill also gives the market a clear remit as to the extent of the Government’s powers over the bank. This builds on the bank’s existing operational independence, as set out in its framework document, which provides that the bank has authority to make its own investment decisions within its delegated limits without ministerial approval.
The second recommendation was that the bank should focus on addressing the market failure in economic infrastructure. An assessment from Vivid Economics for the National Infrastructure Commission showed that, in some cases, EIB activity crowded out private investment. Likewise, IFR respondents told us that the private sector would be able to fill some of the lending gap left by the EIB. Therefore, while the bank is designed to take on the role which the EIB previously filled in investing in new green technologies and development, it is not designed to replicate all the previous activities of the European Investment Bank. This is reflected in the two objectives the Government have set for the bank: to tackle climate change and support efforts to meet the net-zero target in 2050, and to support regional and local economic growth.
With regard to the climate change objective, significant public and private investment will be needed to achieve the UK’s infrastructure policy goals, and low-carbon investment will need to be significantly scaled up to deliver net zero. This is highlighted by the fact that the UK’s core infrastructure—power, heat and transport networks—accounts for over two-thirds of UK emissions. Without the bank, the private sector is likely to focus its investment on lower-risk technologies and sectors. The bank can play an important role by crowding in private finance to invest in higher-risk and nascent technologies, and in scaling subsidy-free business models —both of which will be key to transitioning to net zero. Linked to this, the bank’s focus on rapid progress on its net-zero goals overlaps with the Government’s renewed focus on energy security.
On the second objective, to support regional and local economic growth, disparity in infrastructure across the country has been identified as a key driver of economic inequalities. Central to the Government’s ambitions to level up is setting up new institutions boosting productivity, pay, jobs and living standards by growing the private sector and supporting it to deliver opportunities in parts of the country where they are lacking. Without intervention, the private sector is likely to continue to target geographic areas that have historically received higher levels of private capital. Respondents to the IFR highlighted that any government institution in replacement to the EIB should seek to consider regional balance. The bank aims to remedy geographic inequality and drive improvement in long-term productivity across the country by crowding in private capital to areas that have been left behind, strengthening regional and local economies.
Further, the bank responds to the need identified in the levelling up White Paper to boost local decision-making to allow communities to make the improvements that are most needed. An additional source of government-backed finance for local authorities will give local decision-makers increased power in deciding which investments in infrastructure will have the most impact on their local economy.
Finally, on the recommendation to set up the bank at pace, noble Lords will note that the bank was launched in summer last year, less than a year after the Government announced plans for the bank in the National Infrastructure Strategy. Since its launch, the bank has already completed six deals, including financing the UK’s largest operational solar farm in south Wales. The bank has also invested in Teesworks, a £107 million investment in Tees Valley Combined Authority’s project to transform the former Redcar steelworks site to service the offshore wind sector and support around 800 high-quality jobs. The bank will work towards achieving a double bottom line, whereby investments help to achieve its core policy objectives while generating a positive financial return to ensure the financial sustainability of the institution and reduce the burden on the taxpayer.
On the provisions in the Bill itself, we are legislating for the bank to complete its set-up as an operationally independent institution. The Bill is broadly split across three areas: enshrining the bank’s objectives and activities in legislation to provide clarity for the bank and the market as to the bank’s long-term purpose as an enduring institution; providing for financial assistance, including, crucially, giving the bank the power to lend directly to local authorities and the Northern Ireland Executive; and, finally, supporting the bank’s operational independence by setting out clear accountability for how it is to be run, including reporting and board requirements.
First, on the bank’s objectives and functions, Clause 2 sets out in statute the bank’s objectives of tackling climate change and regional and local economic growth, and in doing so provides clarity to the market as to the bank’s policy objectives. I have already set out the rationale for the bank’s two objectives, but it may be worth elaborating slightly when it comes to climate change. I know that questions have been asked as to whether the bank’s objectives allow for investment to improve the UK’s natural capital. The Government undertook a review of the bank’s environmental objectives, which concluded that there is significant scope for the bank to invest in nature-based solutions while achieving the bank’s existing objectives. This was further emphasised in the Treasury’s strategic steer to the bank, which I will come to shortly.
Clause 2 also sets out three activities that the bank can perform to deliver its two objectives. The bank’s activities are: providing a range of financing tools for private sector investment; financing local and mayoral authorities across the UK; and providing an expert advisory service to help local authorities. The bank’s activities also allow for it to invest in mixed-infrastructure projects, such as a transport hub that includes some housing.
Finally, Clause 2 also sets out the definition of “infrastructure” for the bank. The bank has been set up to invest in economic infrastructure, as per the recommendation of the National Infrastructure Commission, as this was where there was greatest need for government-backed lending. The definition of infrastructure has been adapted from that used in previous legislation, but with the social infrastructure aspects of previous definitions removed and the addition of climate change technologies and facilities. This ensures that the bank will be able to invest in a range of economic infrastructure sectors and in emerging new green infrastructure technologies to deliver on its objectives.
Although the bank’s objectives will be able to be amended only through future changes to primary legislation, Clause 2(6) allows for the bank’s activities and definition of infrastructure to be amended via secondary legislation. The Government believe that this strikes the right balance between ensuring long-term clarity on the objectives of the bank while allowing for the possibility that a future Government may wish to change the emphasis of the bank’s activities for policy reasons and may desire to alter the definition of infrastructure to support this change. It also allows for the fact that the bank’s approach may need to evolve to reflect changes in the market for infrastructure. Both these powers are taken under the affirmative procedure, in line with the Delegated Powers and Regulatory Reform Committee’s guidelines, and to allow for parliamentary scrutiny.
Turning to the financial assistance provisions, Clause 5 allows the Treasury to put the bank into funds, including through the National Loans Fund. As I mentioned previously, the bank has been funded with £22 billion of capital initially, and the level of financing for the bank will be reviewed ahead of spring 2024 to ensure that it continues to meet its objectives in the most affordable way. Within the definition of the bank’s activities, the Bill will also, crucially, remove the existing legal barriers that currently prevent the bank lending directly to local authorities.
Finally, I turn to the governance measures in the Bill. Clauses 3 and 4 allow the Treasury to issue a strategic steer and a power of direction respectively. Given that the Government remain accountable to Parliament for the bank and for any element of risk that the activities take, it is right that the Government have some degree of influence over the bank. The Government recently issued their first strategic steer to the bank, in which they set out the expectation that the bank should develop strong relationships with the devolved Administrations and their institutions, for example the Scottish National Investment Bank.
A power of direction is not uncommon in arm’s-length bodies and is not designed to be used often. Where the power is used, statute will require that it follows consultation with the bank’s directors and is published to ensure ministerial accountability for the content of the direction. The legislation for the Bank of England, in the Bank of England Act 1946, and Her Majesty’s Revenue & Customs, in the Commissioners for Revenue and Customs Act 2005, both include a power of direction. This will not interfere with the bank’s day-to-day operations or investment decisions.
With a body in statute, it is important to set out how the governance of the bank will work in practice to ensure transparency and accountability to Parliament. As is usual practice, Clause 6 will ensure that the bank’s annual reports and accounts are published in Parliament. Clause 7 sets out the process for appointing directors and other practical aspects such as the size of the board, which is consistent with similar bodies such as the Bank of England. We also think that it is appropriate to have a statutory review after 10 years, and subsequently at least every seven years, to ensure that the bank is still meeting its objectives. This is set out in Clause 9.
I greatly look forward to the debate we shall now have on Second Reading and hearing the expertise of noble Lords in the Chamber. I beg to move.
Lord Teverson (LD)
My Lords, I declare my interest as a trustee of the Green Purposes Company, which has custodianship of the green share in the Green Investment Bank. I suppose that takes me on to my first questions: what is the purpose of the Bill, and do we on these Benches welcome it? I suppose we sort of do. It is the right thing to do but what an irony, in a way, that it comes after the Green Investment Bank, from 10 years ago, was privatised a few years later and we somehow have to replace it with another bank that has as its major objective the green purposes that were in the Green Investment Bank, which was then in the public sector to deliver net zero by 2050. I correct myself —I think it was 80% at that time.
I am also interested that the Minister was able to say, without any hint of irony, that one of the reasons for the Bill was that the bank was enduring, as if there was a temptation there of Governments—particularly Conservative Governments—to privatise these institutions and they had to save themselves from doing so again and repeating the activity by making sure it was fully embedded in the Bill.
One of the reasons I think there is an opportunity missed here is that as Liberal Democrats we look across the channel at the KfW, the bank in Germany, which has a much broader remit and is so much more successful in that economy, from the Mittelstand of German companies right the way through to a global objective. This is a very small step. One of the things that came back from the Government in the past, when we were a member of the EU, was that we were not able to extend to that degree because of Commission and EU rules and regulations. Now that we are free of that, here we have a very constrained bank that looks at very specific areas. We welcome those areas, and I will take the argument on from there as it is, with its own restricted remit.
One of the things that comes out, and I am sure will be dominant in our conversations and debates in Committee and on Report, is the fact that the Bill rightly identifies climate change and net zero as objective 1. Clearly, we all welcome that. I accept that the Minister has tried to talk around this, but there is another equal emergency: biodiversity and the decline of nature in this country and globally. Although, as she correctly says, the climate change remit can cover certain things, such as nature-based solutions, it seems strange that in this world now we somehow deny the equal importance of the biodiversity emergency and the objective of improving that. That is one of the key things that must happen in the Bill. We need to have that biodiversity crisis of an equal stature. They are interrelated in all sorts of ways. We know and have seen in previous debates, particularly during the passage of the Environment Act here last year, that those two crises are interconnected. You cannot solve one without the other, and we need both to be present in the Bill.
From a much more economic point of view, which I know the Bill is about as well because it is about private as well as public investment, we should not forget the circular economy. I would be very upset and find it strange if the bank did not see as one of its objectives to move the UK from a linear economy to a circular one. It seems clear to me that this ought to be an objective that we have nationally and that the infrastructure bank is able to help to deliver, whether it be local authorities or private companies.
One of the biggest challenges in net zero is energy efficiency—making our economy, from households through to commercial properties and infrastructure, much more energy efficient as time goes on, so that we do not need to build more and more energy generation and can manage demand. I would be interested to understand from the Minister how the bank can be involved in that process in particular. It seems to me to exclude building efficiency, which is one of the malaises of the British economy and our built infrastructure. How can we meet that as well?
Although the Minister mentioned the institution, the National Infrastructure Commission is not mentioned in the four pages of the Bill—it is one of the exclusions. I readily accept that the UK Infrastructure Bank comes out of recommendations from that commission, but it seems very strange to me that the Government have this commission, which I think reports to the Treasury, yet somehow this bank’s direction is driven purely by the Treasury and there seems to be no connection at all with the National Infrastructure Commission. Surely there needs to be some pathway that is obvious and transparent from the recommendations of those reports, which are high quality and well put together, and should be a long-term way of improving our infrastructure investment in this country. There should be a connection somewhere there as well.
The other major issue is risk appetite. One of the things we learned from the Green Investment Bank—which was not perfect—was that, because there was such pressure from the Treasury that it should, if you like, turn a profit and build up its own reserves in the early years, its actual investment was quite conservative. In fact, you could question how much, in its very early days, it substituted the private sector or found the capacity where the private sector would not come in—providing additionality. I am not sure that it did.
Here too, I am far from convinced that the UK Infrastructure Bank will have a motivation to fill the areas that the private sector is not willing to or, indeed—perhaps more importantly—drive forward slightly more risky innovation in infrastructure, zero carbon and nature-based solutions. I think it will be risk-averse, and I would like the Minister to assure me that there will be a reasonable risk appetite. None of us expects the UK Infrastructure Bank to throw money away and be in debt, but we surely want it to be a leader in stimulating innovation moving forward, not just replacing private capital. I would be very interested to hear that. All the Treasury controls will mean that this bank is cautious.
Lastly, I will talk about supervisory boards. I was quite shocked that there was going to be a 10-year review; I cannot imagine that there will not be amendments tabled on that. Reviewing an institution after 10 years is ridiculous; it is two Parliaments and is probably beyond the life of half the Members here in the Chamber —I do not know. I am sorry, I should not have said that—but it is not satisfactory.
One of the things I have since learned through my work with the Green Investment Group, which I congratulate on everything it has achieved recently, is that you need some sort of supervisory board or independent body to check, post investment—I am not talking about investment at committee level—that the bank has met its objectives and remit. It is important that there is scrutiny beyond the Treasury and, of course, very loose scrutiny from Parliament, which does not really work. We will certainly bring that forward as one of our amendments, to make sure that the bank meets its objectives.
In 2012, the Green Investment Bank was legislated for, and 10 years later we are starting again. We on these Benches wish the bank good luck. I would like to understand, as my noble friend Lord Bruce asks, how it ties up with things such as the Scottish investment equivalent. We would be interested to hear that, but we wish it well. It is limited—we hope that it can broaden its remit—but we start again for success, we hope, in infrastructure and for net zero.
Lord Bourne of Aberystwyth (Con)
My Lords, I declare my interests as set out in the register. I am, of course, a member of Peers for the Planet. It is a great pleasure to follow the noble Lord, Lord Teverson. We have been on the legislative barricades on the subject of Cornwall before, but I agree with much of what he said about the Bill, and I will go into that.
First, however, I very much welcome the Bill, although I think it can be strengthened, and I shall be setting out some questions for the Minister. The Bill’s aim, as stated, is to put the infrastructure bank on a statutory footing and to ensure that it is an independent institution. I shall have something to say about that, too. It is a company wholly owned by the Government—a registered company under the Companies Act 2006. It has a dual-track approach, to be entirely fair: it is not just about tackling climate change, although that is central; it is also about supporting local and regional growth. I agree with both aims, which are key. Net zero by 2050 is central to everything we need to do as a Government and a country, and for the bank to have a leadership role in that it is important, as it is on levelling up. To have public sector finance with leverage-in of private sector finance is very valuable.
I very much agree with what the noble Lord, Lord Teverson, said, about the need to address the climate change goal on a broader front—by addressing nature challenges. The Climate Change Committee set those out very clearly in its independent assessment in 2021. We are near an ecological tipping point and we need a nature-positive economy. The report of the Dasgupta review, which the Treasury asked for, is seminal in that regard and much of the principle contained there should be in the Bill, front and centre. A basic difficulty I have with the legislation is that, on the one hand, there is not enough at the front of the Bill and, on the other, we are told that directions are coming forward under Clause 4 from the Treasury, independently of Parliament. We seem to be getting the balance wrong there and I should be interested to hear what the Minister has to say about that.
Moving on, the Bill’s definition of infrastructure under Clause 2(5) is not exclusive but, I think, needs to be more all-encompassing. For example, it includes gas and sewerage but not energy efficiency. Why not? It would be simple to include it and I think we should. We need to accelerate what we are doing on energy efficiency to be anywhere near getting to the net-zero goal in 2050 and I cannot see any compelling argument why it should not be in Clause 2(5). We need more detail on that.
I also press the Minister on the nature of the bank’s objectives and activities. I understand that the objects are set out in the company’s constitution and that can be altered only by primary legislation, as the Bill makes clear—that is absolutely right—and infrastructure can be altered only by an affirmative piece of secondary legislation. I go along with that as well. So far, so good, but Clause 4 allows the Treasury to give a specific or general direction to the bank about how to deliver its objectives. If that were limited to the issue of devolution, to which I will come shortly, all well and good, but I do not think it is. It does not appear to be under the legislation.
What is the interaction between objects, which can be altered only by primary legislation, and directions under Clause 4, which can be altered by the Minister—the Minister, incidentally, who also appoints all the directors? There is double control there, and it seems to me to get the balance wrong, particularly if we are stressing the importance of the bank’s independence, as the Minister rightly did. At the same time, Clause 4 says:
“The Treasury may give a specific or general direction to the Bank about how it is to deliver its objectives.”
As I said, that is the same person who was appointing all its directors. It does not look that independent to me.
I will also ask about the financial capacity. Twenty-two billion pounds sounds like a lot of money; it is made up of equity, debt and guarantees. it is a lot of money, but it does not seem as much when compared with other countries, such as Germany. Are we convinced that £22 billion is sufficient? I am also interested in hearing how that sum was arrived at, what evidence was taken and how that was assessed.
As I said, I am also interested—I am sure other noble Lords will be too—in the territorial extent and application, and the interaction with Wales, Scotland and Northern Ireland. I am pleased that the Government are quite clear that there is a devolved aspect to be dealt with. In fairness, Annexe A in the Explanatory Notes is helpful in that regard, indicating which matters are reserved and which are devolved. Of course, there is inevitably a grey area. This is the physics of it. What is also important is its chemistry: what provision are we making for discussion with the Welsh Government in the Senedd, the Scottish Government in Holyrood and the Northern Ireland Executive in Stormont? I hope that there are some measures which will be taken to ensure that, as a union, we protect all parts of the country in relation, not least, to the levelling-up part of the aims of the bank. I would be grateful if the Minister could indicate how she expects the interplay between the four parts of the United Kingdom to play out.
I have just two more points. First, on any potential conflict between aims, the Government have said—understandably and rightly—that energy security is important. We must look at energy security in terms of the operation of the bank. How does that interplay, though, with the need to ensure that we protect against high-carbon projects? Again, this perhaps comes back to the point of needing something in the legislation about a “do no harm” principle so that we can ensure that both aims are protected and one does not prevail over the other—otherwise, there is danger there.
Finally, I very much approve of the levelling-up part of the agenda in relation to the bank. The headquarters in Leeds is very welcome. It is a much more constructive move than the somewhat childish suggestion that the House of Lords goes to Stoke-on-Trent; it seems much more realistic and in line with what we should be doing. I am pleased about some of the earlier decisions on investment, which seem to be spread in south Wales, Teesside and so on—that, too, is valuable.
I am sure there will be many more points as we go through Committee and Report, but that was an overall view of the objectives and some general questions to my noble friend the Minister.
Lord Thomas of Cwmgiedd (CB)
My Lords, I too welcome this Bill and agree with much of what has been said by the noble Lords, Lord Bourne and Lord Teverson, on two issues: first, the need to clarify the relationship on devolution and, secondly, the broadening of the objectives so that they really do cover environmental aspects beyond climate change. However, other noble Lords are much more expert than me on those matters, so I want to direct my observations to three specific points.
First, to take up a point made by the noble Lord, Lord Bourne, it is very important that we clarify what is meant by “directions” under Clause 4. I welcome the idea of the Bank’s independence. If you are looking after future generations, you must have a body not subject to political pressures. The Climate Change Act, in its balance, has at least provided a mechanism for doing that. What is meant by “directions” and, more specifically, what is meant by a “specific” direction? Does this mean that when the bank wants to invest in a project, it can be told that it must not do it by the Treasury? I very much hope, therefore, that the Minister can clarify this; otherwise one will have to look for some means of defining what is meant by “specific”.
The second point, which again has been touched on, relates to the appointment of directors. I am delighted to see that the Government accept that this Bill, when enacted, will be part of environmental law. The Treasury loves to appoint people with complete discretion—one can see that in the lack of restrictions on whom it can appoint to various boards—but now that we are dealing with environmental law, can Her Majesty’s Treasury not look at the Climate Change Act and the Environment Act and see that the board as a whole needs a range of qualifications? I particularly urge the Minister to have regard to Schedule 1 to the Climate Change Act and Schedule 1 to the Environment Act—I do not want to take up time reading them out —which require the board as a whole to have certain of the qualifications necessary to ensure that it has the expertise to carry out its functions. I do not see how a board that has the twin objectives of dealing with climate change and perhaps broader environmental issues, and the development of regional infrastructure—within that I include development in the devolved nations—can do that without people with specific expertise. It plainly needs financial expertise, but in the case of the non-executive directors, in particular, whom the Treasury can appoint, there should be a model that is consistent with environmental law, not with the Treasury’s general attitude, which is that it loves to control everything. I think it ought to realise that there is now a greater force than it.
Finally, I turn to Clause 8. The Explanatory Notes dryly explain that:
“This clause is intended to ensure that the duties imposed upon the Bank by the Bill are technically enforceable as a matter of law.”
In looking at environmental legislation—this is true in every country in the world—we have long learned that there is an inherent conflict of interest between the short-term and the long-term, and plainly in this Bill there is also a potential conflict of interest between economic development, and climate change and environmental protection. Indeed, this is recognised in paragraph 4.2 of the framework document:
“The Company’s dual objectives of investing in projects to help mitigate and adapt to climate change, and to support regional economic growth across the UK have huge potential synergies. But occasionally these objectives will be in tension with each other, especially in the near term”,
which is a way of the Government conceding, in careful language, that there is an inherent tension in what is to be done by this bank.
Therefore, I return to the point raised by the noble Lord, Lord Teverson: how do we ensure that the bank meets its legal duties? The Explanatory Notes explain that Clause 8 is to do with ensuring that the articles of the company are consistent with what the Bill provides. I find it astonishing that we need a clause for that purpose, bearing in mind the control the Treasury has over the bank, but that is conceded when the notes state:
“It is not envisaged that these provisions will be needed in practice.”
However, we do need these provisions in practice: we need something to ensure that the duties of the bank are not merely aspirational, which is so much of what is said these days, but enforceable.
There are various mechanisms of enforcement. The Climate Change Act contains one; a legal duty enforceable in the courts is another. For example, one could think of giving the Office for Environmental Protection some role in enforcing the obligations of the bank. However, one cannot buy a share in this bank and go to a shareholders’ meeting, and one cannot bring an action as a shareholder against the directors, because there will not be any shareholders. The only people who can enforce this are Parliament—and I shall not make any observations about that—or the Treasury, which has an inherent conflict of interest: the short-term and long-term considerations.
Therefore, I very much hope that we look particularly at Clause 8. It is a very good clause in one sense, but we need to put something in the Bill to ensure that the bank’s duties are not simply aspirational but are actual duties in a legal sense and can be enforced by someone with a motivation to enforce them.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in this Second Reading debate and I congratulate the Minister on the manner in which she introduced it.
It is often more helpful to look at the practical to see how something works, rather than what is potentially set out on paper. To that end, I ask my noble friend to give the House some details on the offshore wind deal that the bank did recently. What made this deal unattractive to the market and applicable to the UK Infrastructure Bank? Similarly, what analysis sits behind the proposed crowd-in figure of £18 billion. In many ways, it strikes me as somewhat conservative. Also, what analysis sits behind 20 basis points in terms of advantageous lending? Why is 20 basis points considered the sweet spot to attract people to this vehicle rather than others?
The noble Lord, Lord Teverson, rightly alighted on the question of risk. As other noble Lords have commented, this will be critical to how the bank operates, succeeds and is seen in broader circles. So I ask my noble friend to set out some commentary on the risk appetite of the bank; how will it differ from other existing lenders?
On crowding in, how will the bank enable angel investors and other sources of investment to be drawn into this model, as set against existing models? Similarly, what analysis has been done to ensure that crowding out will not be a feature of this approach?
On operational independence, I ask my noble friend to clarify whether the bank is free to lend and conduct other activities, such as guarantees, at any level and that there will be no Treasury involvement in the quantum of any business or deals the bank does.
As other noble Lords have commented, there is a lot to be said on definitions. Would the Minister not agree that having nature-based solutions in the definitions of infrastructure in the Bill would be a thoroughly good thing, not just in light of Dasgupta and COP, but closer to home? I gently direct her to the recent report on nature-based solutions of your Lordships’ Science and Technology Committee, on which I was privileged to serve.
Finally, could my noble friend confirm that, if the plan is not clear, there is certainly a possibility that the route to privatisation is already seeded in this legislation? To that end, what is the proposed timeline and what would the bank’s book look like at that stage?
We clearly have an infrastructure challenge, and thus opportunity, in this country. If the bank can play a positive role in that, it is all to the good. But does my noble friend not agree that, while economic infrastructure is critical, it fails to achieve a significant part of its objective and transform our nation in the way it might if it is not also firmly and fully tied to social infrastructure?
Baroness Noakes (Con)
My Lords, this Bill is about an organisation which has the Treasury’s fingerprints all over it. The Treasury will control almost every aspect of what the UK Infrastructure Bank will do. It may well have operational independence, whatever that means, but its whole existence is circumscribed by what the Treasury tells it to do. The Bill features a statement of strategic priorities under Clause 3, and directions issued by the Treasury under Clause 5. Outside the Bill, there are already many documents, including an extensive framework document and a strategic steer letter from the Chancellor. The Treasury will appoint most of the board and will have, as one of those non-executive directors, its own representative on the board, who is to be given significant rights beyond those of a normal non-executive director. We should be in no doubt that this body will be the plaything of the Treasury, and it is surprising that its new chairman, for whom I have very high regard, would agree to be its front man.
Noble Lords will know that I am not in favour of a big state. We should not create new public bodies unless there is a clear problem to which existing institutions, both public sector and private sector, could not provide solutions. I am not convinced that this test has been met. I acknowledge that the Treasury has consulted on the creation of the UK Infrastructure Bank but there are always lots of people who want access to money on soft terms, or to pursue their obsessions. They will be the same people telling the Government that £22 billion is not enough.
The green lobby can be relied on to say that the transition to net zero will cost a very large amount of money. Those who used to access the European Investment Bank want similar access to cheap long-term money and they will doubtless say that it is not enough to compensate for what they used to get from the EIB. The mere mention of levelling up is always accompanied by a begging bowl. We should be very wary of those who just want more access to taxpayers’ money. At the end of the day, it is just government expenditure in different clothes.
Noble Lords might have gathered that I do not like this Bill very much, but I am nothing if not a realist. To that end, I will focus on some specific concerns. First, the intention, as set out in the framework document but not in the Bill, is that this so-called bank should achieve additionality, which is expressed in the framework document as prioritising
“investments where there is an undersupply of private sector financing and, by reducing barriers to investment, crowd-in private capital”.
It will not be difficult to crowd in private capital. The UK Infrastructure Bank will sit there with a bit over 40% of its capital in equity form and it will also have access to National Loans Fund debt. That will give it a very low cost of capital compared with proper banks and it would be very surprising if it failed to attract private money to ride in on the back of that. The bigger issue, which has been mentioned by my noble friend Lord Holmes of Richmond, is whether private capital will be crowded out. This is not even mentioned in the various documents that I have seen.
The arbiter of whether there is an undersupply of private sector financing will be the company itself. If the UK Infrastructure Bank gets that judgment wrong, it will take risks and fund propositions which could as easily be delivered by wholly private sector investment. The Economic Affairs Committee, on which I sit with the noble Baroness, Lady Kramer, is conducting an inquiry into the investment required for the transition to net zero. We have had evidence that there is a lot of investment money out there and that the barriers are more about clarity on government policy and on market models. The danger of crowding out is a very real one.
What will the Government do to ensure that the company does not crowd out the private sector? There appears to be no mechanism whereby the private sector can raise issues if they feel that the financial muscle of the UK Infrastructure Bank has been used inappropriately. My noble friend will be aware that if private sector companies want to be crowded into attractive deals, they will be very cautious about complaining too loudly about being crowded out. How will the Government ensure that the private sector is not steamrollered by this new pseudo-bank?
My second concern is the periodic review set out in Clause 9—the noble Lord, Lord Teverson, has already referred to this. I support the need for a review, but the Treasury should not undertake it because, given its very close involvement with the UK Infrastructure Bank, it comes very close to marking its own homework. As the noble Lord suggested, 10 years is just far too long before the first review.
In addition, the review’s scope deals with effectiveness in delivering objectives, but additionality, which I referred to a few minutes ago, is described in the framework document only as an operating principle and not as an objective. That implies that crowding in or out of the private sector will not be covered in a review under Clause 9. We will need to look at Clause 9 in some detail in Committee.
I have two specific questions for my noble friend the Minister. The first concerns the role of the Comptroller and Auditor-General and the National Audit Office. As I understand it, the C&AG has been appointed as the company’s current auditor. The framework agreement is silent as to whether this will continue or, if a commercial audit firm is appointed as the company’s auditor, whether the NAO will continue to have access rights to the company. It is important that the needs of parliamentary scrutiny and accountability are properly set up for all public bodies when they are created, and we have to ensure that the C&AG can examine the economy, efficiency and effectiveness of the way the UK Infrastructure Bank operates at any time. I hope my noble friend will confirm that that is indeed the case for the UK Infrastructure Bank.
My second question is on the interaction between the UK Infrastructure Bank and financial regulators. The framework document refers to the possibility that the company’s activities will be within the scope of the PRA and the FCA. Can my noble friend explain what in practice this is likely to mean? What activities are likely to engage the financial regulators and what are the implications of that? For example, will the company be subject to the rulebooks of the PRA and the FCA?
The Green Investment Bank lasted only a few years before it was sold off to Macquarie. That reflected a sound Conservative principle that the state should not do what the private sector can do equally well or better. In that light, I wish the UK Infrastructure Bank success so that a future Chancellor of the Exchequer can privatise it.
Baroness Young of Old Scone (Lab)
My Lords, I always like following the noble Baroness, Lady Noakes, who I have disagreed with—I was just working it out on the back of an envelope—for 44 years. I declare my interests as chair, vice-president or commissioner of a range of conservation and environmental charities as listed in the register.
I welcome the establishment of the UK Infrastructure Bank and the opportunities it provides for building back better across the UK regions. As many noble Lords have said, the dual mission to enable investment for net zero and for the levelling-up process is good, but I agree entirely with the noble Lord, Lord Teverson, and others that the Bill is lacking, since it fails to task the bank with supporting wider environmental goals, specifically the Government’s environmental flagship target of recovering species by 2030. I call on the Government to add this vital third objective of species recovery to the bank’s objectives in the Bill and to ensure that it is strategically equipped to help deliver the Government’s nature recovery objectives.
Giving the bank a role in broader environmental delivery would also help support the other two objectives that it already has. It is universally recognised internationally and in the UK that climate change and biodiversity decline are two sides of the same coin and need to be tackled in an integrated way; net zero cannot be achieved without fixing biodiversity decline and biodiversity decline cannot be reversed without fixing net zero. Investment in both net zero and biodiversity recovery projects delivers jobs and improvements in the quality of place that are necessary for the levelling-up agenda. The whole thing is inextricably linked, and we need these three objectives to work together.
I will give noble Lords some examples of where biodiversity improvement and climate change action help with the levelling-up agenda. Projects to improve woodland, peatland and parks could not only deliver climate change and biodiversity benefits but support over 16,000 jobs in the 20% of UK constituencies with the worst labour market outcomes, such as Copeland, County Durham, Wolverhampton and Ashfield. Restoring the UK’s coastal environment could result in benefits, both in adaptation and mitigation, worth £50 billion by 2050 and create over 100,000 new jobs. We need all those objectives to be part of the bank’s role. The Bill’s Explanatory Notes mention opportunities for investing in nature, but Explanatory Notes are not enough. This needs to be not just in the background as a hope but in the foreground as a third statutory objective.
The Minister kindly arranged a briefing with the chief executive officer and staff of the bank yesterday, for which I thank her, although I took part from a Costa café at Blackfriars, which was slightly unsatisfactory. At the briefing, we were told that the Treasury did not want to give the bank such a third objective on the grounds that the bank’s task was to fill gaps in the market and at the moment there is no established market in biodiversity delivery. The Minister said there might be a reconsideration of objectives if natural capital markets emerged, but she has just told us that that would require primary legislation—so I put that in the “too difficult” box. We need the objective now. The Bill is clear that the bank will have a role in crowding in private funding, developing markets where they are insufficient and applying covenants and conditions in its lending to help drive markets, so I believe that it should have a statutory role in market development in tackling biodiversity decline as well as climate change.
We also heard about the Treasury’s strategic steer. I must admit that I am slightly nervous about strategic steers from the Treasury. It mentions natural capital and biodiversity, but, if that is important enough to be in a strategic steer, why is it not important enough to be a statutory objective? It is intended that the strategic steer will be revised approximately once per Parliament and will be used by the bank to inform its strategic plan. Steers can alter from time to time and from Government to Government, while statutory objectives are less easy to quietly lose sight of. The bank is due to publish its strategy next month. We will be able to judge from that strategy the proof of the bank’s reflection on the Treasury steer in its commitment to biodiversity. Can the Minister gee up the publication of the strategy a bit to allow the House to judge the effectiveness of the steer process so far, before the House needs to reach a final view on whether such a third statutory objective is vital, as I believe it is? Let us see the strategy and what it says about biodiversity.
We also heard at yesterday’s briefing that the bank already has a principle of doing no net harm to climate change objectives in fulfilling its levelling-up objective. That is another reason why having biodiversity under broader environmental objectives is important. Can the Minister assure us that the bank will have a principle of doing no net harm to biodiversity and the broader environment in pursuing its statutory objectives? It must not fund projects which impede the delivery of the Government’s climate change or biodiversity targets, as enshrined in the Climate Change Act and the Environment Act. I believe that these no net harm principles should be statutory rather than just reliant on Treasury guidance or the bank’s sense of duty, which could evaporate. In the light of all this, should the Bill’s definition of “infrastructure” also be reviewed, as other noble Lords have said, to include nature-based solutions and enable the bank to consider these types of investments as part of its strategy to meet climate change and adaptation goals?
The Bill also raises other questions in my mind. It has already been raised that there is a big hole in the Government’s energy policy and energy security strategy, in the lack of focus and funding on energy efficiency measures, especially the retrofitting of the current housing stock. This is a vital element in meeting the net-zero challenge, but the Bill is absolutely silent on whether the bank will be able to focus on energy efficiency. Can I urge that the bank has a clear role in developing the market and funding for this major retrofit programme, with its significant contribution to jobs and warmer homes, which are also vital for the levelling-up agenda?
Lastly, the Bill requires periodic reviews of the bank, as other noble Lords have said. but the first one is required only
“within 10 years of the Act coming into force”.
That is too long. I would not go as far as the noble Lord, Lord Teverson, and say that I want it reviewed before I die, but noble Lords will kind of get the gist. I know that the bank will need a little time to establish itself and demonstrate impact, but 10 years is a bit of a stretch of the imagination.
I was very interested in the concerns of the noble and learned Lord, Lord Thomas, about the appointment of directors. I must admit that I was a bit concerned that, as far as I can see, none of the current non-executive directors of the bank has an environment or climate change background whatever—so the noble and learned Lord has a point.
In summary, the Government have elsewhere committed to clear objectives for net zero and halting biodiversity decline, as well as to the levelling-up programme. The three are interlinked, with natural capital projects, ecosystem services markets and nature-based solutions all capable of contributing to jobs, improvement in place and social justice. It is illogical that this important bank is tasked with only two of these three interlinked objectives. We should have a greater ambition for it.
Baroness Hayman (CB)
My Lords, it is a pleasure to follow the noble Baroness, Lady Young of Old Scone, and to speak in this debate. I declare my interests as co-chair and a director of Peers for the Planet.
It is also a welcome change to be discussing legislation where we do not have to argue the need to put net zero and the Climate Change Act on the face of the Bill. This is an innovation, and one that I hope will be repeated, but, as the Minister will have understood from the speeches made already today, there is another front opening up: the front of nature recovery and the importance of that being in the Bill. This bank is a central part of the UK’s infrastructure ecosystem and represents an important delivery tool for both levelling up and decarbonising the economy; for helping to scale up the markets for much-needed technology such as battery storage; for supporting new jobs through the circular economy; and, I hope, as others have said, for turbocharging the energy efficiency and retrofit measures that are so necessary, given the dire state of our building stock.
The current objectives set out in the Bill of helping to tackle climate change and promoting regional and economic growth underpin its strategic direction, and the bank’s background documents recognise the “huge potential synergies” between these objectives. But there is, as others have said, another synergy that is not spelled out in the Bill: the key opportunity the bank has to deliver for nature recovery and for the UK to be a world leader in nature-based investment. That investment could be for natural flood management, peatland restoration and repairing coastal habitats; and it could be for projects which protect and enrich our biodiversity, improve our resilience to climate change and provide opportunities, through the employment they give, to address regional inequalities. Ensuring alignment between the objectives of levelling up, tackling climate change and aiding nature recovery would in fact make it easier to achieve the economic growth we all seek.
There have been estimates that agriculture and nature-based investments could generate financial returns of £4 billion a year by 2050. Investors are starting to seize these opportunities, but there is a huge funding gap, estimated by the Green Finance Institute at £56 billion over the next 10 years. This is referenced in the “strategic steer”—a phrase to which I think we will return during the course of the Bill—given to the bank by the Chancellor, which also identifies
“several barriers to finance that need to be addressed for a mature commercial market to develop”.
To bridge this gap, it notes:
“Private sector involvement in the market will need to scale up significantly”.
I hope that UKIB can be part of and help to drive the development of this crucial market, because the work that government has already undertaken firmly underpins the argument that nature should be more clearly embedded within the Bill. In 2020, the Natural Capital Committee called for
“all publicly-funded infrastructure … to invest in maintaining and enhancing natural capital.”
The Treasury-commissioned Dasgupta review echoed this, and the Government’s response committed to embedding environmental considerations and a “nature-positive approach” across infrastructure portfolios. Similarly, there is strong evidence that accelerating the development of nature-based projects through UKIB would make a meaningful difference to economic growth and levelling up, as well as climate adaptation. We have an opportunity to secure greater ambition on nature now by including it on the face of the Bill. We need to recognise the urgent need to respond, most recently articulated by the first monitoring report of the Office for Environmental Protection, which advised the Government:
“Do not delay in making the changes necessary to protect, restore and improve our environment.”
Setting natural capital alongside the existing objectives of climate change action and supporting local economic growth—as well as ensuring a robust approach to these objectives in the operational, transparency and governance provisions of the Bill—would not only serve to implement the recommendations of the Government’s experts; it would set a clear trajectory for the bank and a strong example both domestically and globally that infrastructure can help to deliver a nature-positive future, and in so doing contribute to net-zero targets and the regeneration of UK regions, and bring economic growth to the UK.
The Minister set out in her opening remarks the Treasury’s view that support for nature-based solutions can be delivered through the bank’s existing policy framework without the addition of a specific third objective. Like others who have spoken, I am far from convinced that this is correct, so I look forward to exploring at further stages in the passage of the Bill how we can include tackling biodiversity loss and nature recovery as a clear, mandated objective for the bank. Having listened to other noble Lords, I also look forward to the debates that we shall have on the governance of the bank and the role of the Treasury in ensuring its independence.
We have an opportunity to ensure that the UK Infrastructure Bank will be a world leader in supporting nature’s recovery, a subject on which I heard the Minister’s colleague the noble Lord, Lord Goldsmith, speak eloquently at an event only today. I hope that we will grasp that opportunity; I look forward to future debates, and to strengthening the Bill as it proceeds through the House.
Lord Sarfraz (Con)
My Lords, I agree with all that has been said by noble Lords today and I am grateful to my noble friend the Minister for hosting a very useful briefing yesterday. The bank has made its first six investments, two of which are in infrastructure funds managed by third parties. It would be very helpful to get a sense of how much direct investing, versus fund investing, the bank intends to do. Your Lordships will remember how the CDC—now British International Investment—changed its investment strategy several times between direct investing and fund investing; it would be helpful to understand what lessons the Government have learned from that experience.
There are many specific questions around the bank’s overall investment strategy: deal sizes, deal types, allocation by stage and geography, and value added after investment. All this is be made clear in the bank’s strategic plan, which we have not yet seen and is to be published in June, but I hope that my noble friend will consider sharing more specific detail on the bank’s investment strategy before Committee. For example, the bank has held consultations with over 100 organisations; it would be useful to see a summary of the findings if one is available.
Meanwhile, I have two very specific concerns. The bank’s big strategic objective is to help to tackle climate change. This is a wonderful thing but it is important to be clear what methodology, techniques and standards the bank will use to measure its impact. Perhaps the Minister can address this point.
Secondly, as the noble Lord, Lord Teverson, said, Clause 9 means that it is entirely possible that, in 17 years, the bank’s shareholder will have reviewed its performance only twice. That is just incredible. I do not know of any individual company, foundation or endowment—not anyone—who would conduct such infrequent reviews of their investments. If this was a private bank, its shareholders would demand a lot more in terms of reporting. There is no reason why the Government should not do so as well.
Lord McDonald of Salford (CB)
My Lords, like all noble Lords—with one signal and articulate exception—I too support the establishment of the UK Infrastructure Bank. The Bill to give the bank a statutory basis is part of the essential and, I hope, accelerating effort to put the environment at the heart of everything that the Government do.
The bank has just two strategic objectives. The first is that its investments must help to tackle climate change. I have one point to make—speaking in the middle of the debate, it is not an entirely novel point, but I hope that the Minister will be persuaded by repeated advocacy—but that point needs a strategic context. The context is the massive strain that humankind is putting on the planet where we live.
To expand that context, I cite David Attenborough. A few years ago, he came to address the leadership conference of the Foreign Office. An ambassador asked him what the clearest thing he had learned was, after all his decades of travelling the world and filming nature. Sir David contemplated this, then answered as follows: “It is impossible to exaggerate the impact of humankind on the planet.” He illustrated this with a story from Madagascar. In 1961, he was part of the first expedition to film the indri, the largest lemur in the world. They had to be very patient but, eventually, they got their footage. Sixty years later, two amazing things have happened. First, this shy animal has got completely used to human beings. When guides take you into the mountains now, they whistle and the indri appears for its photo. Simultaneously, people have completely destroyed its environment. The indri is now critically endangered because the mountains it needs to live will not be available to it for much longer.
Although climate change is absolutely vital, I join others such as the noble Baroness, Lady Hayman, in advocating for nature to be on the face of the Bill. Climate change is important but biodiversity loss, plastic in the oceans, air pollution and deforestation are all vital too. Let us put nature and its restoration in the strategic objectives.
Lord Ravensdale (CB)
My Lords, I welcome this Bill. I start by declaring my interests as a project director with Atkins and a director of Peers for the Planet.
To meet the Government’s strategic objectives of net zero and levelling up the UK, large amounts of infrastructure investment will be required. As a simple example, it is estimated that, to decarbonise our electricity system, we will need to install between nine and 12 gigawatts of new capacity every year—more than double what we have managed in recent years. I will concentrate my remarks today on the objectives of the bank, starting with levelling up.
Today marks the opening of the new Elizabeth line. Crossrail is a fantastic engineering achievement, and it will be an enduring tribute to our longest serving monarch. However, it serves to illustrate the gulf in infrastructure investment between the regions. In my home region of the Midlands—I note here that I am co-chair of the Midlands Engine APPG—spending on transport is £289 per head for the east Midlands and £492 in the west Midlands, compared to £882 in London. The Midlands is a region of 11 million people. In order for the Government to level up and meet the aspirations in their White Paper, these disparities will need to be addressed and vast investment funnelled into the regions. We need a Crossrail for the Midlands and north too. That is me with my begging bowl—in response to the noble Baroness, Lady Noakes.
It was very welcome to see the letter from the Chancellor on his strategic steer to the bank, as indeed were the Minister’s opening remarks. This referred specifically to
“the need to end the geographical inequality which is such a striking feature of the UK and it is important that UKIB supports this ambition.”
However, the wording in the Bill that relates to levelling up is somewhat ambiguous, referring only to supporting
“regional and local economic growth.”
My reading of this—perhaps the Minister will correct me—is that it leaves much open to interpretation. Almost any infrastructure investment anywhere in the country could be argued to support economic growth in the region or local area in which it sits. A new transport scheme in London, for example, would meet this criterion by supporting local and regional economic growth in the city.
As the Minister highlighted, the effects of agglomeration work against infrastructure spend outside of the metropolis. The economic return is simply much better in areas that already perform well, so those projects have a much better chance of proceeding. Inequality becomes entrenched and self-fulfilling. That is why the recent reforms to the Green Book were so welcome.
Given that the bank will also be working to address these areas of market failure, it is key that its mission is clear in the Bill. Wording such as “regional developments”, or references to “disadvantaged areas” or “geographical inequality” in this objective, would address this issue. I look forward to hearing from the Minister about it in her summing up and will potentially come back to it in Committee.
Secondly, the bank has an objective of helping to tackle climate change, referring to the Climate Change Act 2008. There are some great synergies between these two objectives, as other noble Lords have already pointed out. I highlight the Midlands Engine’s industry-led Ten Point Plan for Green Growth, which seeks to map out a strategy to level up the region by focusing on our strengths in low-carbon technologies and the natural capital we have in the region.
To strengthen the environmental objective of the bank, there is a great opportunity here for the Government to recognise biodiversity and nature as a specific objective in addition to net zero. To echo what the noble Lord, Lord Teverson, said, placing biodiversity on an equal stature with climate change is absolutely vital. I will not expand on this as it has already been eloquently explained by many other noble Lords. I hope the Minister recognises that this area is important enough to include in the Bill as its own separate objective.
Lord Davies of Brixton (Lab)
My Lords, I thank the Minister, the noble Baroness, Lady Penn, for the helpful meeting yesterday, at which we explored the background to the Bill. Unfortunately, I am still not entirely clear as to why we need this Bill to establish an institution that is already up and running. I still think that, to some extent, it is because of what it looks like: “Look: we’re doing something.” It is legislation as performance. But no harm is being done and we all support the objectives, so why not? That is what I wrote here—until I heard the comments from the noble Baroness, Lady Noakes, who presented quite a convincing case from a rather different perspective.
Lying behind this is this concept of market failure, which has been little explored in this debate. It is not a new concept; we can go back to the 1930s and the Macmillan gap. Governments and their advisers have often come up with this concept that the market is failing and that government needs to establish institutions that will fill the gap. With new objectives, this is just another iteration of quite an old idea.
We have been given some examples of the sort of projects this bank will support. There are several, but the two that stick in my mind are emission-free buses for the West Midlands and, as mentioned earlier, the largest solar farm. I struggle with this. Why are we not doing these anyway? Why does it require this bank to achieve these things, which should be happening? I do not think the Minister or the Government as a whole have really told us or explained what the market failure here is. They just use the phrase market failure without identifying what exactly it is. We are told we have the most effective financial market in the world in the City of London, but it cannot provide Birmingham with emission-free buses or build a solar farm without the Government intervening. That seems a pretty fundamental problem.
This is the result of a period of discussion and debate about infrastructure and how it should be financed, but I really do not feel that what we have here has got to the bottom of the issue. The important point, again to quote the noble Baroness, Lady Noakes, is that this is a creature of the Treasury. However you dress it up, the money will be guaranteed by the Treasury, so it will effectively be gilts. However you describe it and whatever the technical structure, the Government will stand behind the money in this bank, so it is effectively gilts. It is just a way of feeding government money into created structures, and it strikes me as a complicated structure to achieve something relatively straightforward in a planned economy. As the noble Baroness said, it is government expenditure in different clothes.
My particular concern is whether there is some relationship or interface with the plans the Government have for pension funds. Last summer we had a joint letter from the Prime Minister and the Chancellor of the Exchequer. They wrote an open letter to those who look after our £2.6 trillion pension fund industry and said they should be investing more in
“the fruits of UK ingenuity and enterprise”.
They called on UK investors to
“back British success stories, and secure higher returns and better retirements.”
We will come back to this issue; we are promised some legislation or government action on these proposals this summer. What is the relationship between this bank and the money in people’s pension funds? My strong view is that pension funds are there to provide pensions and that if the Government think that infra- structure is required, it is the Government’s job to provide the infrastructure.
Baroness Boycott (CB)
My Lords, it is a pleasure to be part of this debate. I add my voice to those saying that we can no longer see biodiversity as separate from climate change. Everywhere you look, the two are not just different sides of the same coin; they are indeed the same. As we acidify the oceans, we lose the phytoplankton that absorbs carbon, which then affects the whole system. Each thing compounds the other, so while of course it is a fantastic opportunity to deliver some of the Government’s key strategic ambitions, it is incredibly important that delivery on nature is included as one of the bank’s strategic objectives.
The World Economic Forum recently said that global annual investment in nature-based solutions will need to quadruple to avoid the planet’s environment being pushed literally to the point of no return—it will not be able to regenerate. In the UK, we put very little investment into nature-based solutions, which is very unimaginative. We can find good examples but they are small. Most of the Government’s focus is on a few solutions such as tree planting. Wider nature restoration is so underinvested, with just 0.02% of UK GDP spent on restoring nature in 2018-19. Fantastically that, according to Wildlife and Countryside Link, was less than was spent on pothole repairs. Given that roads caused the problem in the first place, this is a bad state of affairs.
Like every other noble Lord in this House, with one exception, I welcome this bank. I am sorry we need it; we should be doing this stuff in the Treasury anyway, as has been promoted by Dasgupta and others. It is very important to see how many co-benefits come from linking up our delivery on tackling climate change and levelling up with delivery on nature. There are jobs and opportunities, and the restoration of all the beauty around us.
The Government’s response to the Dasgupta review, which many noble Lords in this House have debated over the last three years, recognised that
“more needs to be done … if we are to deliver a nature positive future.”
They are committed to
“ensuring economic and financial decision-making, and the systems and institutions that underpin it”.
So it is disappointing that, in view of the catastrophic decline in nature, as highlighted by the OEP, the Government have not taken the opportunity, following their review, to add a third natural capital objective to the bank’s overall objectives. Will the Minister reconsider this decision and help the UKIB to be a world leader in driving investment on this? Certainly, many noble Lords will be tabling amendments on this crucial point.
The Chancellor provided a strategic steer to the bank in March, setting out the detail of the Government’s priorities. He said:
“I’d encourage you to prioritise opportunities that align with the government’s renewed focus on energy security. Examples of relevant opportunities may include helping to bring forward low carbon energy projects that accelerate the UK’s transition to clean energy and improve the energy efficiency of buildings and homes.”
This is great. He also said:
“The Bank should work closely with central government to ensure its activities are complementary to … Net Zero”.
However, the Bill’s definition of infrastructure includes gas and roads, so I am concerned that these projects will be those that are actually funded and that they will cut across many commitments to net zero.
Nature investments have a much higher cost-benefit ratio than traditional infrastructure, with £4.60 returned for every £1 invested in peat-land and £2.80 returned from woodland, as highlighted by Green Alliance. The WWF reports that agriculture and nature-based investments could generate financial returns of £4 billion a year by 2050. Will the Minister consider including natural capital projects within the definition of infrastructure in the Bill? The returns speak for themselves, as does the commitment we need to bring. This is part of levelling up; these are projects in which communities will be involved. They are obviously more complicated to administer, so everything about the structure and directorships of the bank, or the questions of experts on its board, is crucial. If we miss this opportunity, however, we will ultimately fail in our goals towards net zero.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a great pleasure to follow the noble Baroness, Lady Boycott. I declare my membership of Peers for the Planet and my position as vice-president of the Local Government Association.
I start with the irony highlighted by the noble Lord, Lord Teverson. To anyone listening to our debate from the outside, welcome to the see-saw. Today, we have a powerful demonstration of the utter failure of our system of governance. One Government set up the UK Green Investment Bank plc in 2012; a few years later, it is sold off to an Australian investment bank, Macquarie, with an extremely dubious reputation, through a process that the Public Accounts Committee concluded was deeply flawed. Now, we are essentially re-creating that thing that we destroyed a few years ago. We come to this debate having considered earlier today a report on children’s social care, which highlighted that one Government created an extensive network of Sure Start centres. They have now been destroyed and we are looking to re-create something similar again.
We have an archaic, dysfunctional constitution, delivering governance that see-saws between creation and destruction, taking with it jobs, knowledge, skills, institutions and infrastructure. We talk a lot about the failures of the British economy, sometimes blaming British workers. Why do we have a productivity problem? Perhaps we have an extremely unproductive, ineffective system of governance. It is easy to blame individuals but the underlying problem is the structure.
I have focused on that point—some noble Lords may feel that I have laboured it—because the Minister highlighted the problem in her introduction. I wrote down some of the adjectives she used; she said that they are aiming to create something “long lasting”, “long term” and “enduring”. There is a positive point to be made here, because if there is any part of our government structure that can engage in an act of co-creation, see different sides of politics get together and, I hope, agree on something that will endure for the long term through different Governments, weirdly enough, in our constitution, the House of Lords might just be the place where it can be done. I hope and am confident that the Minister will approach Committee and Report in that light.
We have possibly seen a positive sign in getting a perhaps ideologically unlikely alliance between the noble Lord, Lord Davies of Brixton, and the noble Baroness, Lady Noakes, who are both questioning whether we should be creating a bank to do this at all. Like the noble Baroness, Lady Boycott, I would not want to start from here; I would not want to see the Government putting money into all this and seeing all this happen anyway. Given that we do start from where we are, however, we have a chance to try to do something positive. However, I agree with the noble Lord, Lord Bourne of Aberystwyth: £22 billion sounds nice when you say it quickly, but when you look at the goals being set before it and recall that the 2019 Green Party manifesto talked about spending £100 billion a year on tackling the climate emergency, that perhaps sets the scale for what we are talking about here.
Many noble Lords have already covered—I will not go over the same ground—the essential need to write the biodiversity crisis in alongside the climate emergency. I note pretty much total agreement between the noble Baronesses, Lady Young of Old Scone and Lady Hayman, and many others who have made that point. However, as you might expect from a Green, I would like to go much further, because even just focusing on climate and nature does not go nearly far enough. We have clearly identified and documented nine planetary boundaries that we are breaking, and we need to think holistically and systemically in the way set out by the sustainable development goals that our Government and all global Governments have agreed to—to look at this in a complete, holistic way. The Bill might be a place where we can start to do that. More than that, it might be a place where we can start to do doughnut economics.
I come down to some specifics of how we might look at changing the Bill to do this. When I talk about doughnut economics, I am talking about tackling the huge social crises that we face, as well as the environmental crises. Clause 2(3)(b) says that the objectives of the bank are
“to support regional and local economic growth.”
To pick up some points made by the noble Lord, Lord Ravensdale, why are we just talking about growth? Who is the growth for and where are the benefits of that growth going? Surely what we need for levelling up is to tackle poverty and the massive issues of public health—such as the differentials in expected lifespan that we see in different parts of the country—and social infrastructure, as the noble Lord, Lord Holmes of Richmond, who is not currently in his place, said. We need to look at Clause 2(3)(b) and find a way of saying how this delivers for the people of Britain in our most disadvantaged areas. Just saying “growth” does not do that.
Clause 2(5)(a), which I think we will be talking about a great deal, refers to
“water, electricity, gas … or other services”.
Many noble Lords have highlighted the urgent need to conserve energy, home energy efficiency et cetera—we talk about this endlessly. I am not a lawyer but, at a stretch, one could perhaps define “services” as including reducing the demand for those services. None the less, it is clear that we need to write that into the Bill.
More than that, one of the huge issues we face socially at the moment is food security—something which the Government are now increasingly acknowledging. This is where we can really start to join up the social and the environmental. Yesterday, I happened to be at the global conference on biocontrol, which was looking at the ways in which we can use biological knowledge to control pests and diseases of crops, getting away from chemical pesticides. This is an industry which is very much dominated by small and medium enterprises, which are significantly undercapitalised and have huge problems getting through regulatory barriers. That might be a great area for the UK Infrastructure Bank to get involved in. Building up the infrastructure of our agriculture and supporting agroecology meets both environmental and social objectives.
On Clause 2(5)(b), we again come to the point about social and environmental impacts. I do not believe that this new bank should be investing in one new road; new roads are not benefits to people, and they are certainly not benefits to the environment. I can guarantee that there will be an amendment coming from me on that basis.
Coming back to a couple of general points—I warn noble Lords that I will get more radical yet—the noble Lord, Lord Teverson, pointed out that the previous Green Investment Bank rather went for the safe, the money-making and the certain. We must ask the question: is this bank here to make money or to deliver for our society? Here I join with the noble Baroness, Lady Noakes, and the noble Lord, Lord Davies of Brixton, both of whom reflected on the dictatorship of the Treasury. Is this the right department to oversee this bank? This Bill is written for the purposes of levelling-up and for environmental improvement. Why not give joint control of the bank to Defra and the Department for Levelling Up, Housing and Communities? After all, that is what this is supposed to be for—I am not sure what the noble Baroness, Lady Noakes, will think about that; I wait to see her response.
I am not going to get into detail about this, but I note the point made by the noble Lord, Lord Bourne of Aberystwyth, and I very much look forward to the contribution of the noble Lord, Lord Wigley, on the issue of ensuring that this is not yet another imposition from Westminster on the other nations of the UK. Failing a level of control being taken away from the Treasury, I think that the points of the noble and learned Lord, Lord Thomas of Cwmgiedd, about the qualifications of the board were really important.
Finally, on climate considerations, I think that we need to include terminology around renewable electricity in Clause 2(5)(a). It is absolutely crucial that this does not include gas and does not go towards funding fossil-fuel investments. We have seen reports that BEIS is trying to define green investments as including gas as a transitional fuel. But that ignores the fact that we must shift to renewables now—renewables are the cheapest and best option. Fugitive methane means that gas must not be included in the activities of this bank.
Lord Wigley (PC)
My Lords, I am delighted to follow the noble Baroness, Lady Bennett, and I agree with very much of what she said—although it appears I am so predictable that she was projecting what I might raise in my own contribution. However, she put forward some intriguing ideas which I hope we can explore further in Committee.
This is a very thin Bill, but it has significant implications when linked to earlier legislation and to government guidance over the last couple of years. When this legislation reaches the statute book, it is important that we all understand how the infrastructure bank can be best used, in partnership with relevant authorities—devolved and local—and in tandem with their strategies and initiatives. We shall clearly need to examine what opportunities might arise in relation to the central question of climate change and, equally, what dangers may lie in it, partly from having unclear demarcations of responsibility and partly from real differences of objectives and strategies to achieve those objectives, which may relate to the perceived market failures which the noble Lord, Lord Davies of Brixton, mentioned a moment ago.
The bank is flagged up as a replacement for the European Investment Bank. We in Wales secured considerable benefits from the EIB, which helped finance a range of projects, spanning infrastructure projects of the sort which may well fit into this bank’s objectives but also projects in the higher and further education sector and cultural and research projects. I am far from clear from reading the Bill, together with the earlier guidance documents, as to the extent to which this range of activities is one which the Government intend the bank to deliver. Perhaps the Minister could clarify that when she sums up the debate.
I welcome the objectives of the Bill as spelled out in Clause 2(3)(b), namely
“to support regional and local economic growth.”
However, in doing so, what are the responsibilities on the bank to work with the grain of devolved government, regional government and local government, or can the bank launch itself in any part of these islands, following projects that may be totally at odds with the policy of local government in the area? I am aware that UK Infrastructure Bank: Policy Design, published in March 2021, in chapter 5 states explicitly that
“The Bank will operate across the whole of the UK, working closely with public and private sectors to support infrastructure investment in every nation.”
It also states:
“Building strategic relationships with the devolved administrations … will be a priority.”
I assume that our present Bill is intended to build on such sentiments, in line with the statement in that document in the same chapter:
“The UK Government will be engaging with representatives from the devolved administrations in the next phase of the Bank’s design.”
Please can the Minister confirm that the provisions of the Bill before us tonight have been thoroughly discussed with the devolved Administrations, that there is agreement on the content of the Bill, and a meeting of minds as to how its powers will be rolled out and applied in practice within the devolved nations?
The policy design also refers specifically to building a strategic relationship with the Development Bank of Wales. Can the Minister confirm how much work—if any—has actually taken place on this aspect, since so much that we hear places an emphasis on providing loans to local authorities? Is there a full meeting of minds between the Treasury and the Welsh Government on these matters?
In this regard, there may be a danger of unnecessary and unhelpful competition developing between Wales’s development bank on the one hand, which has been given responsibility for many of these functions, and, on the other hand, the infrastructure bank. I hardly need to remind the House that many of the strategic responsibilities within whose framework the UK Infrastructure Bank will work in England have in fact been devolved to Wales and Scotland, and to Northern Ireland when there is a fully functioning Government there. These include roads, planning, water, sewerage, aspects of rail transport, local government and—of course, of central relevance—environmental matters.
Can we be assured that in regard to its activities in Wales, the infrastructure bank will work in tandem with the Welsh Government’s strategic objectives and will neither try to undermine them nor run a competing regime, which would confuse the business sector, local government and the general public? We need clarity as to how the infrastructure bank will work with the devolved nations. Have the Government discussed the Bill’s content with the Welsh and Scottish Governments, and have they reached agreement with them regarding its implications for those two nations?
As always, the devil is in the detail. For example, what on earth is the meaning of Clause 2(5)? It reads—and I am selective in this quotation—
“Infrastructure includes … facilities relating to … other services”.
Okay, I have left out a couple of words, but that is what it says. What does it mean? Those words could mean absolutely everything or nothing. The Government seem to be uncertain about what aspects of infrastructure they intend to come within the remit of the Bill. In Clause 2(6), the Treasury is given the power to change the meaning of “infrastructure” to anything in the wide world it chooses to deem as infrastructure, subject only to a statutory instrument that can so easily be steamrollered through Parliament. For example, if the bank in its wisdom decided to finance a new trunk road—heaven forbid, I hear the noble Baroness, Lady Bennett, saying—which the local authority supported for economic reasons but the Welsh or Scottish Government opposed for environmental reasons, can the Minister give a categoric assurance that the bank cannot ride roughshod over the policy of the devolved authorities? What guarantee can the Minister give that the bank, by making finance available for one set of projects but denying finance for other projects, is not undermining or distorting the power of the devolved Governments to establish their own priorities?
I have a question relating to the vexed issue of the building of reservoirs in Wales, such as when Liverpool drowned the Tryweryn valley in order to get a supply of industrial water which it proceeded to sell, so profiteering from the transaction. Can we have an assurance that the infrastructure bank could never be used to bankroll such a project or be associated with it unless it was agreed by the Welsh Senedd and the relevant local authority? What about housing? Does not housing form an essential part of the economic infrastructure of an area, and certainly of the social infrastructure? Does not the retrofitting of old housing stock play a major role in withstanding climate change? Is this within the purview of the bank? Please can we have clarification on whether the infrastructure bank will be entitled to provide finance for building affordable housing and improving existing housing stock, particularly in rural areas threatened by chequebook invasions of retired people who undermine local people who wish to live in their home area, as happens in Wales, Cornwall and the Lake District? There are so many questions that need to be answered if this Bill is to go forward. I am certainly not opposing this Second Reading, but the Bill needs to be clarified when we move forward to Committee. I look forward to the Minister’s response with interest.
Lord Vaux of Harrowden (CB)
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.
Lord Sikka (Lab)
My Lords, I am grateful for the opportunity to speak. Since 2012, the Government have handed £695 billion of quantitative easing to speculators. Can the Minister explain why the QE route and the same volume of money are not made available for investment in UK infrastructure? Labour’s 2019 manifesto promised £400 billion over 10 years for investment in clean energy and infrastructure. Germany’s KfW, which has already been mentioned, has assets of €561 billion. In contrast, the funding available to UKIB is basically a pale shadow and seems a token gesture to show that the Government are doing something.
Can the Minister explain how much money each year the bank will spend on infrastructure, directly or through third parties? The capital structure of UKIB is £5 billion equity plus £7 billion debt, although another £10 billion may be provided by guarantees, which will not easily be part of the balance sheet. The Bill offers no rationale for this capital structure. Why does UKIB have to start with debt?
The cost of capital for the Government is always lower than the cost of capital for the private sector, yet UKIB will seek a more expensive £18 billion from the private sector, inevitably raising the cost of capital for some projects and making them unviable. Public bodies will end up effectively guaranteeing future corporate profits, in a kind of mini repeat of the PFI experiment we had for many years. Can the Minister explain why the bank is not entirely funded by the Government, especially as they stand behind the bank and will effectively be its guarantor? Would that not be a simpler capital structure?
The Bill is accompanied by just four pages of what is titled Impact Fact Sheet. On scrutiny, I could see no analysis of its operations or financing, or anything meaningful. In yesterday’s briefing we were told that the bank will be seeking a financial return on each of its projects, but the impact statement provides no clues about what this return means and why a return from infrastructure is desirable. If you are going to measure returns from infrastructure, that would involve measuring things such as social efficiency gains. What meaning do the Government attach to such phrases? There is no explanation given. I urge the Minister to provide a meaningful impact assessment for the Bill.
Baroness Kramer (LD)
My Lords, I was not involved with the creation of the Green Investment Bank, but I did have to sit around a table in 2015 to be lectured by Sajid Javid on why the creation of such a bank was, in the view of the Conservatives, a classic Liberal Democrat mistake. Not only did he sell off the Green Investment Bank but he was very clear that he also intended to sell off the British Business Bank and close down the industrial catalysts. It is interesting to see a Conservative Government today taking credit for a vision for which they had only withering comments not so long ago.
I recognise that the noble Baroness, Lady Noakes, has always been consistent. She did not approve of creating the Green Investment Bank or of a public bank as a mechanism for dealing with market failure. She may be a little disturbed to be joined by the noble Lord, Lord Davies of Brixton, and potentially by the noble Baroness, Lady Bennett of Manor Castle; I suspect a quick stiff drink may be necessary to cope with that new knowledge. However, we are where we are. My party will do everything that it can to make the UK Infrastructure Bank as effective as possible. I agree with the noble Lord, Lord Vaux, that there genuinely is market failure here, and that there is a role to play.
There are a number of areas which I want to explore. The first is not within the legislation but speaks to the issue of how effective this bank can be. It is very small compared with the challenges that we face in climate change and levelling up. In many ways, this replaces not only the Green Investment Bank but the European Investment Bank, and along with the British Business Bank it also has to replace the European Investment Fund. The EIB typically provided more than £5 billion per year of financing for infrastructure in the UK. I am grateful to the noble Lord, Lord Wigley, for testifying that it was effective at delivering infrastructure projects in Wales. The noble Lord, Lord Vaux, referred to its role in offshore wind. I saw quite a number of projects in which investors would co-invest with the EIB. It gave them confidence to go to much longer terms and to do much more subordinated lending, risks that they would not have taken without the engagement of the EIB. The EIF was also putting some half a billion pounds per year into UK equity and VC funds. This new bank has only £22 billion of financial capacity over the next five years, of which £10 billion is guarantees—a far less flexible and useful instrument.
The Government will say that the EIB had a much wider remit than the new bank, but let me say that the need for financing infrastructure development to tackle climate change and levelling up has soared in the time since we left the EU. The markets have failed to deliver on floating offshore wind, EV charging infrastructure, battery storage technology, marine and tidal energy, broadband rollout, carbon storage and capture, insulation —the list goes on. By the Government’s own figures, the OBR has said that we need something in the region of £1.4 trillion of investment by 2050 to deliver the climate change objective, and there is general consensus in the Government that we need something like £50 billion a year in additional private financing investment to achieve just the 2030 target for climate change.
We do not have the figures that we need on the huge additional demands of levelling up, especially for transport improvements across the regions. I thank the noble Lord, Lord Ravensdale, for making the point that we must emphasise the regions as we deal with this Bill. Major transport projects have recently been cancelled, including, ironically, the Leeds leg of HS2. That is now gone, for lack of financing. We have seen many rail electrification schemes cancelled. The noble Lord, Lord Wigley, will be very aware that electrification between Cardiff and Swansea was cancelled, again for reasons of finance.
Let us also talk about the remit. Housing, schools and hospitals are deliberately out of scope, according to the Explanatory Notes. Perhaps the Minister will tell me how the Government intend to achieve regional growth without major financing for housing, schools and hospitals. As so many people have said today, there is no mention of investment in nature, despite the high benefits of investment in agricultural improvement, woodlands and peatlands. We heard a series of helpful speeches on that. My noble friend Lord Teverson talked about the importance of biodiversity being given equal priority to climate change, the two interlinked, strengthened by comments from the noble Lords, Lord Macdonald, Lord Ravensdale and Lord Bourne, who referenced the Dasgupta report, and the noble Baronesses, Lady Young, Lady Hayman and Lady Boycott. I probably have not named everyone in that list.
There is also no mention in the Bill of energy efficiency. I thank the Government for the opportunity yesterday to ask questions of the new bank’s CEO, John Flint. He took the view that the retrofit of buildings, including home insulation, to meet climate change objectives could be included in the bank’s remit, provided the right investment vehicles could be found. I was rather dismayed that he did not seem to have much idea of what on earth those vehicles could be. We must have clarity on that issue and an emphasis on its importance. I hope that the Government will confirm that approach and inject some urgency into the new bank’s activity in this area. We know that to achieve net zero, we must deal with the demand side, including home insulation. This is even more vital given the soaring costs of energy and the cost-of-living crisis. I note that the European Investment Bank has identified energy efficiency as a sector that finds private finance particularly hard to access and is targeting support on the sector.
Of course, resources mean far more than money. We have a dire shortage of skilled workforce in the construction industry and in many aspects of relevant engineering. More than half the medium and small-sized companies in building report that they are struggling to find workers. Construction output has been declining as a consequence. Even R&D in this area is starved.
We no longer have a meaningful industrial strategy. The national infrastructure plan is not statutory and is frequently ignored by the Treasury. Even the Cycling and Walking Investment Strategy is statutory. It is unacceptable that the overall national infrastructure plan is not, particularly in the context of its need to work with the bank. The National Infrastructure Commission and the Construction Leadership Council are both pretty toothless. That must be dealt with. None is referenced in the Bill, although they would seem highly relevant. In other words, we have neither a functional strategy nor a credible delivery mechanism.
It is quite instructive to compare the legislation that created the Green Investment Bank with this legislation to create the infrastructure bank. We have moved from legislation that protected its purpose through use of primary legislation to a Bill riddled with Henry VIII clauses. There was even a clause in the GIB legislation to ensure its operational independence—it was in the Bill. The noble Baroness, Lady Noakes, cut to the chase when she said that this bank is, essentially, the plaything of the Treasury. The Government can by SI change the bank’s activities or the meaning of “infrastructure”—that is extraordinary. The Treasury, not Parliament, sets its priorities. Many noble Lords, including my noble friend Lord Teverson, the noble Lords, Lord Bourne and Lord Vaux, and the noble and learned Lord, Lord Thomas, focused on the Treasury’s ability to provide specific or general directions to the bank on how it is to deliver its objectives and then enforce them by injunction.
If the directors are not Treasury placemen before they are appointed, they become so by law as soon as they are appointed. Claims that this bank has operational independence seem completely inconsistent with the powers that the Treasury is given in the Bill.
Let me close with this. As so many here today have said, the infrastructure bank must be successful in crowding in private financing—and doing it by taking risk that the private sector finds unacceptable, so that it sits beneath that private sector financing. It hopes to mobilise something like £18 billion of private money in its first five years. I have already talked about that being inadequate but my question is: can it really take risks when it has only £4.5 billion in capital and a requirement to generate a commercial rate of return? Certainly in the short term—the first five years—it seems that those two parameters will make it very difficult for it to do something innovative that makes a significant difference.
However, Parliament and the public should be able to assess and react to that progress, or the lack of it. The idea that we will not even see the bank’s strategy until late June, after Committee stage, strikes me as very frustrating. We do not know what criteria it will use, how it will ensure additionality or how it will remedy market failure. It is, as so many have said today, including the noble Lords, Lord Sarfraz and Lord Vaux —speaker after speaker—completely unacceptable that the Treasury need not report to Parliament on the effectiveness or impact of the Bank for 10 years, and after that only every seven years. Frankly, that is disrespectful to Parliament.
We need a significant UK Infrastructure Bank but this Bill will need a great deal of amendment. As I listen to the House today, I suspect it will receive a great deal of amendment.
Lord Tunnicliffe (Lab)
My Lords, I am grateful to the Minister for introducing the Bill. It has received wide-ranging analysis by Members of the House, which I will not comment on directly. Rather dangerously, I think I recently found myself agreeing with the noble Baroness, Lady Noakes, over something. It is good to be on the opposite side again; I feel comfortable.
The Bill formalises not only UKIB’s objectives but a range of accompanying governance arrangements and reporting or review requirements. As we have heard, this process arose from a recommendation by the National Infrastructure Commission in its 2018 baseline report. The bank has been allocated an initial £12 billion in capital and will be able to issue £10 billion of government guarantees, in the hope of unlocking contributions from investors across the private sector. Although this total broadly matches the recommendation of the National Infrastructure Commission, it is, as has been commented on, small compared to the capital available to other national infrastructure banks, particularly that in Germany.
The capital allocated to the bank does not strictly form part of the Bill. Nevertheless, as we accelerate our green transition, there is every possibility that the bank will need additional resources in the future. When responding, can the noble Baroness outline how the level of capitalisation will be kept under review? Will it form part of the Budget process or will there be a separate mechanism? The bank will have to compete with other initiatives for additional funds. It would be interesting to hear the Minister’s view of how this may play out in the coming years.
Given some of the Government’s infrastructure-related decisions in recent years, it was perhaps unsurprising that the commission called for
“a new, operationally independent, UK infrastructure finance institution.”
The privatisation of the Green Investment Bank in 2017 appeared at that time short-sighted. MPs expressed concern then that the Government had not sought stronger assurances about that organisation’s future. At the same time as that sale, Ministers were deciding the nature of the UK’s departure from the EU. Despite the option of an ongoing relationship with the European Investment Bank—the EIB—they opted to leave that framework.
The Government have been clear that UKIB is not designed directly to replicate the work of the EIB. That is fortunate because, at the current level of capitalisation, it is not clear that it could. Between 1973 and 2017, the EIB invested in the region of €165 billion in UK projects. Its due diligence on projects unlocked billions in private finance too. This new bank may not have the capital to match the EIB’s clout or that of Germany’s infrastructure bank, but we hope that it will replicate some of those institutions’ processes, which will provide confidence to private investors.
I am grateful to the Minister for hosting an initial meeting with officials last week, allowing us the opportunity to discuss the Treasury’s hopes for so-called “crowding-in”. Will she comment on the Treasury’s target for external investment? Is she confident that private funds will arrive at the expected rate, particularly in the current economic context? The reviews required under Clause 9 of the Bill would help us keep track of progress but, at present, the first is not due for a period of 10 years. We understand the need for UKIB to ramp up its operations and that the impact of individual investments may not be measurable for some years, but is there not a case for accelerating that timescale? Everybody who has spoken on that issue seems to think there is; I am sure we will discuss that in the coming weeks.
However, the most important debates will focus on the Government’s definition of infrastructure and the scope of the two core objectives. We must get these core components right from the off, including a consideration of whether there should be three objectives. If we do not, the bank will be nowhere near as effective as it needs to be to make a genuine contribution to meeting the 2050 net-zero target. I am sure that we will also discuss UKIB’s operational independence, as mentioned by several noble Lords. It states over and over again that it will be operationally independent, but a number of noble Lords have commented on power of the Treasury to de facto control this bank.
On definition, we generally welcome the range of technologies and facilities included in Clause 2. We note the inclusion of a delegated power to amend the definition of infrastructure and welcome that regulations to update it will be subject to the affirmative procedure. Of course, not everything is included in the definition. The bank’s lending will not, for example, help to address the country’s chronic shortage of new housing. Some will be disappointed by that decision, given the Government’s ongoing failure to deliver a suitable supply of quality, affordable homes where they are needed most. More needs to be done to support first-time buyers and young families, who find property prices climbing far faster than they can save—a situation that will be exacerbated by the cost-of-living crisis.
While housing is not included in UKIB’s remit, it is sensible for its funds to support the rollout of infrastructure associated with residential and other forms of development. If the bank can lower the cost of financing these kinds of projects, that is good news for local authorities and partner organisations as well as the residents who will benefit from new services. However, can the Minister confirm that it is not the intention for this mechanism to replace others, such as the community infrastructure levy, which aim to ensure that developers cover most infrastructure costs arising from their projects?
At first glance, the two objectives outlined in the Bill are sensible. However, as always, the devil is in the detail. The bank itself has acknowledged in a discussion paper that
“occasionally these objectives will be in tension with each other.”
It goes on to say that where an investment is “primarily” focused on growth, it will ensure that it does not do “significant harm” to the climate objective. Does the Minister feel that this safeguard is sufficient?
Although the bank is and should be operationally independent, are the Government satisfied that UKIB will have the expertise needed to make informed decisions, or would the Minister welcome an outside body, such as the Climate Change Committee, having some form of advisory role? It is important that we understand how these potentially competing objectives will interact.
This matters because in the last Session your Lordships’ House debated climate-related amendments to what is now the Subsidy Control Act. Those amendments would have required public authorities to include consideration of climate-related issues in the so-called balance test when deciding whether to grant a subsidy. The Government fiercely resisted them. Given the urgency of the challenge we face, why are they not taking a consistent approach across departments? If we expect applications for finance from UKIB to meet certain green thresholds, why is that not applied to entities seeking taxpayer-funded subsidies from public authorities?
Overall, we welcome this initiative and wish the leadership of the UK Infrastructure Bank well. The institution has the potential to do a lot of good across the UK. However, given the bank’s relatively limited capital, and in the context of wider government policy, we should not kid ourselves that this sets us on course for 2050. We look forward to working with colleagues across your Lordships’ House to strengthen the Bill, and we hope the Minister will approach the process with an open mind.
Baroness Penn (Con)
My Lords, I thank all noble Lords who have contributed to such an interesting and wide-ranging debate. It showed the breadth and depth of the knowledge of this House, but also showed me that I have no chance of addressing all the points raised. I will write a detailed letter to noble Lords who I do not manage to reach.
The only other thing I would say at the outset is that I think there was a broad welcome for the bank and the Bill in the debate, although of course the devil will be in the detail. I am pleased that we were able to have an initial engagement session with my honourable friend the Economic Secretary to the Treasury and the chief executive of the bank, John Flint, yesterday. It is in that spirit of engagement and listening that we want to continue the Bill’s progress through the House.
I turn directly to trying to address as many of the points raised by noble Lords in the debate as possible. I start with the size and remit of the bank. The noble Lords, Lord Teverson, Lord Tunnicliffe and Lord Sikka, the noble Baroness, Lady Kramer, and others noted that the bank is small compared with other institutions and cited the KfW development bank in Germany. This might be the case, but I do not think that UKIB and the KfW are quite the right comparison. The KfW is an institution that has existed since 1948. It might be more appropriate to compare UKIB to similar institutions in Canada and Australia: the Canada Infrastructure Bank, which had an initial capitalisation of around £20 billion, and the Australian CEFC, which was capitalised with 10 billion Australian dollars.
However, as I mentioned in opening, we will undertake a review of the initial capitalisation of the bank ahead of spring 2024, as set out in the policy design document last year. The Government took a conscious decision to have a narrower remit for the bank in line with recommendations from the NIC, to address the point raised by my noble friend Lady Noakes, to avoid the high risk of crowding out funding from the private sector that would otherwise be there. There is a higher risk of that with institutions such as the KfW. It is also unclear how successful those kinds of institutions are at co-investing with the private sector. This is a different beast and has been designed to be so.
Many noble Lords, including the noble Lords, Lord Teverson, Lord Tunnicliffe, Lord Vaux and Lord Davies of Brixton, and my noble friends Lord Holmes and Lady Noakes, expanded this into asking about the risk appetite for the bank, what the market failures are that it seeks to address, the role the bank will have in ensuring additionality and the risk of crowding out, as I have touched on. The noble Lord, Lord Vaux, probably put the role of an infrastructure bank better than I am about to, but the Government see their role as maximising the bank’s impact to focus on intervening where its additionality to the market is greatest, and will limit its exposure to investments that could already be fulfilled by the private sector. The bank will have a higher risk appetite than the market where it sees that policy outcomes that the private sector has not considered can be achieved. However, it will also have to bear in mind the usual value-for-money considerations in doing this.
To try to answer directly the question about market failure from the noble Lord, Lord Davies of Brixton, infrastructure investment is prone to market failure as it is often complex, large, novel and long term, with risks around construction and technological or government policy changes. Based on historical trends, the most significant market failure is that there is a financing gap around new technologies, where there are high levels of risk for the private sector and unproven financial cases. For example, an analysis by Vivid Economics suggested that early-stage support provided for offshore wind through the European Investment Bank and the Green Investment Bank helped to make the sector more attractive to investors and more viable at scale. Looking forward, the UK Infrastructure Bank has the potential to deliver these benefits to scale up other new technologies.
On additionality, based on figures for similar institutions we estimate that the bank will crowd in an additional £18 billion of private finance from £8 billion of UKIB lending. Based on our internal modelling and analysis of comparable institutions—the Green Investment Bank, the European Investment Bank, the Australian Clean Energy Finance Corporation and the Canada Infrastructure Bank—we think that between two and two and a half times is a reasonable estimate. We have not included any additionality for local authority lending and the guarantee function, although we think there is likely to be some. The risk of crowding out, which I have touched on already, will also be considered as part of the review of the bank’s progress and financial performance taking place in 2024.
Also on the bank’s remit, the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Kramer, noted their disappointment that housing is not included. Homes England is the first port of call for housing projects, and the bank will work closely with Homes England to ensure that projects can access the appropriate support, and with similar bodies in the devolved Administrations—for example, where there may be a mixed-infrastructure project that involves housing. The noble Baroness, Lady Kramer, also mentioned schools. I assure her that the Government are investing more than £19 billion in education up to 2024-25.
On the specific question from the noble Lord, Lord Tunnicliffe, on the community infrastructure levy, I can confirm that the bank is not a replacement for CIL, which continues to ensure that our communities are served with appropriate social and economic infrastructure through necessary developer contributions.
I turn to a point where it is probably easier to mention the noble Lords who did not raise it than those who did, so I may not try to mention everyone by name: the question of a third objective and natural capital. I assure noble Lords that the Government absolutely agree with the Dasgupta review’s assessment that tackling climate change and nature loss are two sides of the same coin. As I said in my opening remarks, the Government conducted a review specifically to consider the potential of broadening the bank’s objectives to include other areas, such as improving the UK’s natural capital. The review recognised the significant potential for increased use of nature-based and hybrid infrastructure solutions, including for the water sector and greenhouse gas removals, and the opportunities for growth of the ecosystem services market. These opportunities will be important to meet our objective to leverage at least £500 million per annum in private finance for nature’s recovery by 2027 and more than £1 billion per annum by 2030.
Noble Lords will know that, aside from the bank itself, the Government are supporting the growth of these markets in a number of ways. This includes developing high integrity standards and frameworks for ecosystems services markets, allowing investors to participate with confidence; backing the maturation of the woodland carbon code and peatland code through the nature for climate fund and woodland carbon guarantee; designing our new environmental land management schemes for farmers and landowners to support the crowding in of private finance and ensure farmers are better off when they participate in private finance opportunities; and demand-side regulation to grow these markets—for example, mandating biodiversity net gain for development. The projects undertaken through UKIB financing will be subject to those net gain requirements. The nature recovery Green Paper sets out many of the Government’s specific plans in this area. All I can say to noble Lords at this stage is that the Government have considered this very carefully and concluded that the bank is able to invest in natural capital under its existing objectives. However, I am sure that I will hear much more from noble Lords in Committee on this subject.
The noble Lord, Lord Teverson, the noble Baroness, Lady Kramer, my noble friend Lord Bourne and others asked whether energy is excluded or included in the definition of infrastructure. Although the construction of new homes is generally out of scope, projects or technologies that support energy efficiency, including the retrofit of homes and buildings and the decarbonisation of heating in line with the Government’s heat and buildings strategy, are very much in scope. I hope that provides some reassurance.
A number of noble Lords asked about the “do no harm” requirement, which we have set out in the bank’s framework document. The Government are confident that this requirement will deliver the objectives that noble Lords have talked about in terms of having a clear policy not to invest in fossil fuel projects, as set out in the framework document, with some specific exceptions to the policy—for example, carbon capture usage and storage. Those “do no harm” objectives are set out in the framework document and strategic plans, which can be updated without the need for further primary legislation.
The noble and learned Lord, Lord Thomas, made a point about Clause 8 and the Environment Agency. The Treasury is clear that the purpose of the bank is to invest in a way that tackles climate change. That is set out in the Bill, the framework document and further in the strategic steer issued in March. If ever a scenario happened where the bank was carrying out activities not tackling climate change, the Treasury would use its Clause 8 powers or its powers as a shareholder. If the Treasury failed to do so, Parliament could make its voice heard and it would be subject to challenge in the courts, as the noble and learned Lord, Lord Thomas, recognised. I do not agree that the aims of this clause are only aspirational. The bank is also subject to judicial review on anything it does, including compliance with its climate obligations.
The noble Lord, Lord Tunnicliffe, asked about the expertise of external bodies such as the Climate Change Committee. The UK Infrastructure Bank has already worked with a wide range of stakeholders since its launch, including external bodies and market participants. It is keen to use expertise in its decision-making, including appointing its first lead climate adviser, Professor Andy Gouldson, an internationally recognised expert on place-based climate action, as part of its ongoing work to partner with regional and national experts to shape the work of the bank and ensure its long-lasting impact.
The noble Lord, Lord Teverson, asked about the relationship between UKIB and the NIC. The bank is intended to complement the work of the NIC. The NIC will continue to provide an expert assessment of infrastructure needs. Central government will identify the levers that they can use to meet the needs, and UKIB will provide financing to support projects that meet the needs set out by the NIC.
My noble friend Lady Noakes asked about the regulation of the bank. The bank is not regulated by the FCA or the PRA because it will not perform the functions of a bank ordinarily regulated by those institutions. It does not take deposits, it is only investing—for now—in capital provided by the Government, and it does not engage with retail customers. We are committed to reviewing this decision after three years, at which point we will decide whether the bank should seek authorisation or to continue to remain exempt. However, we have set out our expectation that the bank should abide by the highest standards of good practice, governance and conduct, even though it is not authorised under FSMA, and that it should comply with the spirit of the financial services and markets regulation. The bank has recruited with this obligation in mind. It will submit to the Treasury, for approval, how it has interpreted the principles of the senior managers and certification regime and relevant elements of the FCA principles for business.
Lord Teverson (LD)
Can the Minister clarify whether that means that the senior managers of the bank need not be approved in terms of financial regulation—the actual individuals, let alone the institution?
Baroness Penn (Con)
I believe that it means that the bank is not subject to any aspect of the Financial Services and Markets Act and the authorisation under that, but we expect the bank to operate in line with those obligations—for example, on senior management. The decision not to include it in FSMA regulation will be reviewed after a period of time to ensure that this is the right approach for the bank. I have more to say about whether it should have operated under FSMA regulation, and we can get into that in Committee if it is an area of concern.
My noble friend Lord Bourne, the noble and learned Lord, Lord Thomas, and the noble Lord, Lord Vaux, asked about the circumstances in which the power of direction might be used. As I said, it is intended to be used very rarely and only in circumstances where the Government need to take urgent and necessary action—for example, in cases of national security or to help support a business or sector in direct response to an emergency, as the Government did to direct HMRC to establish the furlough scheme during Covid. It is not intended to be used often and is similar to the power the Government have over the Bank of England, which has never been used.
Many noble Lords, including my noble friend Lord Sarfraz, the noble Baronesses, Lady Young of Old Scone and Lady Kramer, and the noble Lords, Lord Teverson and Lord Tunnicliffe, spoke about the review of the bank, required in Clause 9, after 10 years initially and seven years subsequently. This is not the only review or assessment of the effectiveness of the bank to which it will be subject. As I mentioned, ahead of spring 2024, a review of the bank’s capitalisation and effectiveness will take place. We will also undertake a review of the bank as part of the Cabinet Office-led review of ALBs by 2024-25, and the National Audit Office is currently conducting a value-for-money study on the set-up of UKIB which we expect to be published in the coming months. My noble friend Lady Noakes asked about the ongoing role of the Comptroller and Auditor-General and the NAO, and I confirm to her that they will have an ongoing role in scrutinising the bank.
My noble friend Lord Bourne, the noble Lord, Lord Wigley, and others asked about the bank’s relationship with the devolved Administrations. I cannot answer all the points raised by the noble Lord, Lord Wigley, but I can say that we have notified the devolved Administrations of the Bill and have requested legislative consent Motions from the Welsh Parliament, the Scottish Parliament and the Northern Ireland Assembly. We have engaged with the devolved Administrations through the set-up phases of the bank. The bank is already operating across the whole UK and has done its first deal outside England—a digital infrastructure deal in Northern Ireland.
The noble Baronesses, Lady Young of Old Scone and Lady Kramer, and my noble friend Lord Sarfraz asked about the publication of the bank’s strategy. Either before Committee or before we conclude our consideration of the Bill at this end of the Corridor, I will take that question away and see what can be done. I understand that the strategy is due to be published in June; when in June will be quite an important question in terms of the timing.
The noble Lord, Lord Vaux, asked about resources for the bank. UKIB is ensuring that it has the staff and resources to deliver on its objectives, and is recruiting rapidly. The bank will grow to having up to 300 staff.
The noble Lord, Lord Ravensdale, asked how the regional and local economic growth objectives would directly support levelling up. We have chosen not to further define the bank’s objective to support regional and local economic growth in the Bill, but we believe that the policy intent behind the objective is clear. This is given further clarity through the use of the strategic steer, narrowing down regional and local economic growth and encouraging the bank to focus its investments in line with the missions set out in the levelling-up White Paper.
The noble and learned Lord, Lord Thomas, the noble Baroness, Lady Young of Old Scone, and others talked about the need for a wide range of directors on the board, reflecting different skills and the interests of different nations and regions in the United Kingdom. Members of the UKIB board are still being recruited, based on the skills that they can bring to it and based on its mandate and objectives. The recruitment process is extremely thorough and will ensure that the right skills mix is in place for the board.
Before closing, I have a couple of points to make. It is the Government’s hope that this Bill will establish the bank in the market and ensure its longevity. We have already seen at first hand what the bank can do. Its private sector arm has committed to invest around £300 million, which could potentially unlock more than £500 million of private finance across the UK on a broad range of economic infrastructure, including the rollout of broadband to hard-to-reach areas and subsidy-free solar power. Meanwhile, its local authority arm has invested more than £100 million, supporting green bus routes and a green energy hub that will unlock thousands of jobs.
As I said at the outset, the debate we have had today shows the expertise on infrastructure that we have in this House. I look forward to a more forensic look at the Bill in Committee and on Report.