Enterprise and Regulatory Reform Bill

Baroness Ford Excerpts

Monday 3rd December 2012 Grand Committee

[Lord Skidelsky]

I support the amendment proposed by the noble Lord, Lord Teverson. I would have put my name down on it if I had had the upfront certainty that I would be able to be here. The noble Lord has hit the nail on the head; the bank will not be allowed to borrow until the national debt is a declining proportion of national income. The Government’s debt reduction target is already three years off, so on current plans the earliest date at which the bank would be allowed to borrow would be not 2015 but 2018—and it may not be 2018 either. We are faced with the prospect of a bank that will not be allowed to borrow in any foreseeable future, and that borrowing restriction will undermine the bank’s ability to support the targets for reducing greenhouse emissions as stated in the Climate Change Act 2008.

We are setting up a public bank uniquely without the ability to borrow, and the noble Lord, Lord Teverson, is right in saying that that is not the model for KfW. According to the Deputy Prime Minister, it should be able to attract about £15 billion of co-investment. In other words, the bank would pay 20% of a project and the co-investors stake the remainder without the bank itself having to borrow. That would be a way round the borrowing restriction.

If the Green Investment Bank were allowed to borrow now at a conservative leverage, it would be able to leverage its £3 billion up to £18 billion. If the Deputy Prime Minister is right, that £18 billion would in turn be able to attract up to £90 billion in private sector co-investment, so these are the possibilities that would be opened up by easing that borrowing requirement. There is a huge difference between an investment of £18 billion over five years and an investment of £90 billion.

The problem this amendment is designed to address is that the debt may not fall for a long time, so the Green Investment Bank may not be allowed to borrow. It is not just a question of the problems of start-up, to which the noble Lord, Lord Teverson, rightly alluded; the problem is that the Government’s policy is not well designed to reduce the national debt. I have argued this point for a number of years because a policy of deficit reduction is not the same as a policy of debt reduction.

To conclude, the amendment would enable the Green Investment Bank to borrow by 2015, irrespective of what is happening to the national debt, and potentially earlier if there were a need to boost growth. This means starting the EU state approval process as soon as possible. For that reason I give my enthusiastic support to the approach of the noble Lord, Lord Teverson.

[Baroness Ford]

This is a really interesting amendment, which also touches on the previous amendment. I am not sure that I support the amendment of the noble Lord, Lord Teverson, but not because I do not support its intent. I think it is hugely important that the Green Investment Bank, if it is to have any attraction, is better capitalised than the Government are proposing. However, allowing the bank to borrow is one thing, but you have to ask, who would lend to it?

Before I came into your Lordships’ House, I spent many years in the capital markets. The capital markets will not lend to this bank unless one of two things happens: either it is guaranteed by government—plainly, that is behind the Government saying that they have to wait for a certain period—or it has a strong balance sheet of its own. No one will lend to it just on the basis of thinking that it is a great idea in the same way that no one will buy a bond unless it is backed by a cash flow. That is what the bond market buys; it buys cash flows. It does not invest in speculative infrastructure, however worthy. Therefore, it is really important that we do not get carried away by just wishing that things were different, and that we push the Government to come forward with practical propositions about increasing the funding available to this bank. Until there is a track record there and until there are infrastructure projects that are capable of securing a rating from the rating agencies, there will be no bond issuance, and until it has a very strong balance sheet or the Government give a guarantee to underpin that balance sheet, there will be no lending from the capital markets either. I hate to pour cold water on this but we have to connect with reality here.

[Lord Teverson]

I thank the noble Baroness very much for that contribution. I should point out that the borrowings of KfW, which is owned by the German länder and the federal Government, are guaranteed by that Government and still manage to escape public sector classification. I thank the noble Baroness very much for bringing up that point, which I forgot to mention.

[Baroness Ford]

KfW is covered by the covered bond regime, which we do not have in the United Kingdom.

[Lord Oxburgh]

My Lords, I, too, support the amendment. I shall not detain the Committee by repeating the points that have been excellently made by previous speakers. It is simply worth pointing out that, because we are signatories to a variety of European constraints on emissions reduction and because we have our own Climate Change Act, inevitably there has to be massive investment in green infrastructure in this country over the coming decade. We managed to lose out almost completely, if you like, in the previous phase, when we saw significant investment in, for example, onshore wind in this country, where virtually all the high-end technology came from abroad. We really have to be ready to cope with this requirement for capital internally and in time.

I am sure that by the Minister’s bed he has a copy of the current, recently introduced Chinese five-year plan, in which he will remember that no less than a third of the objectives relate to energy management, energy efficiency, investment in renewables and low emissions technology. There will be a massive world market here, and we can drag our feet again or we can participate in it. I see this amendment, taking on board entirely the point made by the noble Baroness, Lady Ford, as simply facilitating and making sure that we are there in time. Brussels has many virtues, but speedy reaction is not one of them. Getting on with this now will not only begin to manage that problem but will indicate again to the capital markets that the Government are serious.

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[Lord Marland]

I am grateful for that landscape of the new bank and the large elements of agreement from the noble Lord in drawing his conclusion. To cut to the quick, this is obviously about how we are going to attract co-investment. In meetings with the noble Lord, Lord Smith—and with the noble Lord, Lord Adonis, who sadly is not with us but we have discussed this—he was very clear that this will not be a problem, as indeed I am because of a number of countries that I visited. There is a huge market out there. We had the Kuwait Investment Authority over last week, which was celebrating being in the UK for 60 years. It readily indicated that it would like to invest alongside us in the future.

On the timetable, I refer to the noble Baroness, Lady Ford, who indicated that she would agree that this is very much a matter of track record. No fund can set up shop and on day one expect to be deluged with investment, even if the board and chief executive are very well recognised.

[Baroness Ford]

There are two concepts here and it is important to get clarity. Track record is important for co-investing. The noble Lord, Lord Teverson, is absolutely right. At the moment, we have a green investment fund. The way to get additional leverage from that fund is by co-investing, and there have been lots of good examples in the past 25 years of different types of bodies doing that in the United Kingdom. However, track record is important for co-investing. However good your track record, unless you have established cash flows to sell in terms of a bond or balance sheet with government underpinning, you will not get borrowing. There are two slightly different concepts.

[Lord Marland]

I could not have put it better myself. In fact, I could not have attempted to put it as well as the noble Baroness did. It is absolutely clear, and it sets a clear mandate. We have already discussed this issue, and it will come up again, but I am confident that there will be co-investment. At this point, I see this as an enabler for co-investment. There are plenty of opportunities for green investment. I therefore invite the noble Lord, Lord Stevenson, to withdraw the amendment.

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[Lord Teverson]

Perhaps I may ask the noble Baroness about one matter. One of the things that I understand investment banks often do is raise bonds against projects. It is not a question of the recourse of liabilities to them; they raise bonds on the asset value of the project. There are ways of doing it in that way.

[Baroness Ford]

There are ways of doing it. I do not wish to detain the Committee and perhaps I should have a cup of coffee with the noble Lord to explain; I mean that in a helpful way. Bonds are raised against the cash flows from projects. They are raised against an infrastructure project only if the Government underpin it—hence, PFI.

[Lord Brooke of Sutton Mandeville]

I encourage the Minister to try to turn not a duckling, but a cygnet, into a swan. A cygnet, in banking and legal terms, would have a greater significance than a ducking.