UK Infrastructure Bank Bill [HL]

Debate between Baroness Noakes and Lord Vaux of Harrowden

Report stage
Monday 4th July 2022 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I have Amendment 24 in this group, which is an amendment to the Minister’s Amendment 23. It is always rather strange speaking to an amendment to an amendment when the amendment itself has not been spoken to—but I will do my best.

First, I congratulate my noble friend Lord Holmes of Richmond on his Amendment 6. It is well drafted and encompasses what we understand by additionality in the context of the operations of the UKIB. In Committee, it was widely agreed that additionality was so important that it should be in the Bill. I think it was also agreed that the boundary between what is in this Bill and is in other documents outside the Bill, including the framework document which is not even referred to in the Bill, has been set in the wrong place. When I say that the Committee agreed these things, I do not suggest that the Government agreed, but the vast majority of the Committee was aligned on these matters.

The Minister has been generous with her time with noble Lords, and I thank her for the meetings she arranged and for her letter of last week. She gets a gold star for effort, but I am afraid that that is not matched for content. On additionality, my noble friend claimed that the absence of an agreed definition in the Bill could stop it developing over time. That is nonsense. Additionality, as a basic concept, has barely shifted in the many years that I have been involved in public sector matters. The essence of it is about, and always has been about, something that should occur that would not otherwise have occurred but for the particular intervention or action. It is a universal principle that can be adapted to a number of circumstances.

I then suggested to my noble friend the Minister that, rather than try to produce a specific definition, she could put a high-level definition in the Bill and take a Treasury power to issue guidance to UKIB. That too was brushed aside. The Treasury likes to keep stuff in documents, such as the framework document, which it alone controls. I remind noble Lords that, as my noble friend the Minister informed us in Committee, the framework document is not even legally binding.

Nevertheless, I recognised that the Treasury is something of an immovable object on this issue, so I decided that it would be better to pursue the Minister’s offer of a way forward and include additionality issues in the periodic reports which are required by Clause 9. I thought that half a loaf would be better than no loaf, but I have to say that Amendment 23, which my noble friend has tabled, is a serious disappointment. It represents no more than a quarter of a loaf.

Amendment 23 adds an additional reporting requirement to Clause 9 but it is a lop-sided approach to additionality. Its focus is on the extent to which UKIB’s investments in projects have encouraged additional investments in those projects. It therefore will cover the extent to which projects have enabled crowding in, but it does not explicitly cover crowding out, which has always been my biggest concern, because a bank with a high capital ratio and a low cost of capital can easily outcompete private sector financing. I do not believe that if UKIB were to finance the whole of a transaction to the complete exclusion of the private sector in circumstances where 100% private finance could have been obtained, it would be captured by my noble friend’s amendment—it would not come close to being captured by my noble friend’s amendment. Such a transaction would not have encouraged or discouraged private sector finance; it would have bypassed it completely. That is why my Amendment 24 refers to investments having been made by UKIB

“despite an adequate supply of private sector financing”.

My noble friend the Minister will doubtless say that it is not in UKIB’s strategic plan to do transactions without private sector financing. It was never in the strategic plans of the European Investment Bank to crowd out private sector financing, but it did it anyway, in collusion with private sector borrowers, who were quite happy to take soft loans from public sector lenders who were much easier to deal with than hard-nosed real bankers in real banks.

My noble friend the Minister has also referred in correspondence to the impact of the Subsidy Control Act, which became law earlier this year. I have to say that the Act, which refers to subsidy decisions, sits rather uneasily with the practice of doing investment deals in the context of a bank. I accept that at a high level it would apply to UKIB. I just think that the language is very difficult to interpret in the context of what UKIB would do. My main concern is that there would never be an enforcement action against UKIB because the crowded-out private sector financiers are exactly the same people who want to be invited to any crowding-in party. It simply will not be in their interest to try to get the Act enforced against UKIB.

For all these reasons, I am very disappointed that this Bill, which I have never regarded as a shining example of Conservative economic values in any event, is going to ignore the concept of crowding out, which ought to be something dear to any Conservative Government’s heart. I shall not move my amendment when we reach it in the Marshalled List, but I live in hope that there are still some Conservatives in the Treasury who might have a change of heart before this Bill reaches the other place.

[Lord Vaux of Harrowden (CB)]

My Lords, I rise to speak to Amendment 24 in the name of the noble Baroness, Lady Noakes, to which I have added my name. The noble Baroness has already eloquently explained the rationale for this amendment, so I will try to keep my speech reasonably short.

Like the noble Baroness, I was strongly drawn to Amendment 6 in the name of the noble Lord, Lord Holmes, which would insert the critical additionality principle into the principles of the Bill. That would be the preferable approach, but, like the noble Baroness, Lady Noakes, I have been persuaded, reluctantly, to go along with the Government’s approach of making this something the bank reports on.

That leads me to amendments in the final group about the timing of those reports, which are, at the moment, seven years apart. If this is to be the way we deal with additionality, the report timings need to be shorter.

UK Infrastructure Bank Bill [HL]

Debate between Baroness Noakes and Lord Vaux of Harrowden

Committee stage & Lords Hansard - Part 2
Tuesday 14th June 2022 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I rise to move Amendment 12 and hope we can pick up a little speed with it. At Second Reading, I raised the issue of the UK Infrastructure Bank’s activities having the effect of crowding out private sector investment. My view is that there can be a role for state-sponsored organisations such as the UK Infrastructure Bank only if there is a market failure which needs to be addressed. The Government appear to agree with this, as the framework document for the bank includes an operating principle that the Bank should

“prioritise investments where there is an undersupply of private sector financing”.

That is, however, only in the framework document; we are coming back to our theme in Committee of what should be in the framework document and what should be in the Bill. It is unsatisfactory for this issue not to be in the Bill. My Amendment 12 is modest, because it states merely that the activities of the bank as specified in Clause 2(4) must be carried out

“only where there is an undersupply of private sector financing”.

I go slightly further than the wording used in the framework document, which refers to prioritising where there is an undersupply of private sector financing, but I believe that the UK Infrastructure Bank should positively avoid those activities which are adequately supplied with private sector finance.

Amendment 14 in the next group, with which I suggested my Amendment 12 be grouped, sticks faithfully to the wording of the framework document and includes the other operating principles, to which we will come. If the Minister prefers the formulation in Amendment 14 when we get to the next group, I certainly would not object, because my priority is to have the issue of crowding out firmly in the Bill. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, this amendment goes to the core of what the UK Infrastructure Bank should be about, and I am in complete agreement with the noble Baroness, Lady Noakes, about the importance of the crowding out or crowding in of private finance, which was raised by many noble Lords at Second Reading.

I am stepping in to speak on this group because it impinges on the next, in which I have an amendment. The NIC says that the Bank should act as an “anchor investor” and should

“catalyse innovation, support due diligence functions and enable projects of public significance that may not otherwise take off”.

Most of us would agree that if the bank simply competes with or replaces available private finance, then it is a waste of time, damaging, distorts the markets and wastes taxpayers’ money. As the noble Baroness said, it must aim to solve market failures where otherwise good projects cannot be easily financed by the private sector. The Government obviously agree, but have not put this fundamental point anywhere in the Bill.

I support the principle behind the amendment proposed by the noble Baroness, Lady Noakes, but I am not sure that the wording fully captures the crowding-in concept. That may be because the framework document does not do it terribly well either. The amendment and the framework document refer to the bank undertaking its activities only where there is an undersupply of private sector financing. Crowding in happens where private financing is available but the private sector is reluctant to invest, perhaps because of a particular risk. In that situation, we would want the bank to be able to invest, precisely to facilitate the investment of the private sector—to remove the blockage preventing the private sector involvement.

As I said, in the next group, we will come to my Amendment 14, which tries to solve the same problem in a slightly different way by putting the operating principles, which expressly highlight the need for the bank to aim to crowd in private finance, on a statutory basis, but that may not be robust enough for some. The noble Lord, Lord Holmes of Richmond, has proposed Amendment 65, which is also aimed at the same problem, but with only a one-off report at the outset rather than an ongoing obligation, so I think that does not go far enough.

We have different ways to try to achieve the end of ensuring that the bank fulfils its primary purpose of crowding in private sector finance and does not fall into the trap of crowding it out. I am agnostic as to how we achieve it, as long as we get that requirement into the Bill—and that we measure it, which we will come to in a later group. Does the Minister agree that this is a fundamental element and, if so, why is it not in the Bill? If she does not like our wording, could she suggest a different way to achieve it? Would she be happy to meet us to talk it through and try to work out how best to get it in?

--- Later in debate ---

[Lord Vaux of Harrowden (CB)]

My Lords, we have had various discussions around operational independence so far, most of which, until now, have addressed the ability of the Treasury to change the mandate within which the bank operates. Clause 4 goes directly to the heart of the Treasury being able to directly meddle in the activities of the bank. It gives the Treasury the right to

“give a specific or general direction to the Bank”,

at any time, and which the board must follow, with the only safeguard being a requirement to discuss it with the board first. As we have heard, it can be pushed through, and any statements of reservation from the board can be hidden. On the face of it, it completely undermines the operational independence of the bank if the Treasury can actually tell it what to do.

The Minister has previously assured us that the Government would only use this ability to direct in rare circumstances, and she has said that there is a precedent for this type of direction clause. However, the Bill does not put any such restrictions on the use of direction—none at all—beyond the fact that it must be within the objectives of the bank. Therefore, those directions could be about whether or not to make a particular investment, or even the terms on which those investments could be made. It would allow the Treasury to insist on the bank financing vanity projects—I used the example of the bridge to Northern Ireland at Second Reading—or even to indulge in pork-barrel politics by directing investment into particular locations for reasons that may not be totally unpolitical.

The bank should not be put into those kinds of positions, and this Bill should not allow that to happen. Frankly, on the precedent argument, I always recoil when I hear, “We did it before”; those precedents were for different organisations and in different circumstances. It is not impossible that we might have actually got it wrong at the time. Just because we have done it before does not mean that we should do it again.

I have given notice of the intention to oppose Clause 4 standing part. I think that the clause is inappropriate, but I can concede that there might be occasions when it might be necessary for the Treasury to be able to direct the bank—I cannot actually think of any specific examples, but I can see that it could be possible. If the Minister can provide good reasons or examples for this right to direct being needed, then I could get comfortable with allowing direction in those clearly defined, limited and restricted circumstances. However, it cannot be right that direction can be given on the current unrestricted and unscrutinised basis. As I have said, that is not operational independence; it is hard to imagine how anything could be less operationally independent.

So please can the Minister explain, quite specifically, why the Government feel that they need this right to direct, and under what real and specific circumstances they can conceive of using it? If so, we can then work around this and try putting some restrictions and safeguards into the Bill to achieve that.

I have also added my name to the four amendments in the name of the noble Baroness, Lady Kramer, which attack the same problem from a different angle: to allow the Treasury to make recommendations to which the bank must have regard, rather than to comply with directions. I would prefer to remove all unnecessary meddling by the Treasury, as it were, but this might be a reasonable compromise. Similarly, the noble Baroness’s Amendment 30 is another important way of trying to get this operational independence well imbedded in the Bill.

[Baroness Noakes (Con)]

My Lords, as noble Lords know, I criticised the concept of the UK Infrastructure Bank at Second Reading on the basis that it was the Treasury’s plaything and it had the Treasury’s fingerprints all over it. That was against the background of my not really liking public bodies being created to do things that I do not think there is any good reason for. I believe that once we have a public body set up—we accept that there is a reason to create a public body with access to privileged sources of financing—we have an obligation, as government, to put a proper control framework around it to ensure that public money is protected and that we have powers available to us to meet whatever circumstances might arise. So I part company with the two previous noble Lords who have spoken, because I think it is extremely important to have backdrop powers to be used when necessary.