UK Infrastructure Bank Bill [HL]

Baroness Penn Excerpts

Committee stage & Lords Hansard - Part 1
Tuesday 14th June 2022 Lords Chamber

[Baroness Penn (Con)]

My Lords, this first group of amendments all cover the financial aspects of the bank. Amendment 1 in the name of my noble friend Lady Noakes and Amendment 53 in the name of the noble Lord, Lord Teverson—I shall not quibble about the wording of the amendments; I understand their purpose —would subject the UK Infrastructure Bank to all financial services regulation and the senior managers and certification regime in turn. This goes against the exemption that Parliament approved for the bank last year.

The Government’s view is that adopting this position at this stage would create a disproportionate regulatory approach that would unnecessarily add to the cost, complexity and burden of a relatively small and new organisation. Financial services regulation was not intended for public sector institutions with a policy objective. UKIB does not require regulation in the same way as commercial banks. The practice of regulatory exemptions in this way follows precedent for similar institutions operating in the public sector—for example, the European Investment Bank.

It may be helpful to note that even though UKIB has a general exemption from financial services regulation, UKIB’s framework document is clear that, as far as reasonably practicable and as appropriate, UKIB will abide by the principles of the senior managers and certification regime and relevant elements of the FCA’s Principles for Businesses. As part of its compliance framework, UKIB will adopt and implement policies to safeguard itself against fraud, theft, corruption, bribery, insider dealing, market abuse and money laundering. It is therefore important to emphasise that the general FSMA exemption UKIB has been granted already does not mean that UKIB is absolved of all compliance obligations. Rather, the exemption means that UKIB has flexibility to adopt a bespoke approach to its governance that is proportionate to its activities.

Amendments 42 and 38 in the name of my noble friend Lord Holmes of Richmond would increase UKIB’s powers to borrow from international capital markets and give UKIB an unfettered ability to determine its own investment levels without Treasury authorisation respectively. With regards to Amendment 42, I assure my noble friend that UKIB already has these powers under company law.

Further, UKIB has a maximum financial capacity of £22 billion, including an overall borrowing limit of £7 billion. Within this limit, UKIB can borrow up to £1.5 billion a year from either the Debt Management Office or private markets, including international markets, depending on the best value for money and subject to standard approval processes.

Similarly, the spirit of Amendment 38 mirrors the Government’s ambition for the UK Infrastructure Bank: that it should have operational independence in its day-to-day operations and investment activities. The framework document outlines that UKIB has the freedom to set the pricing of its transactions. It is already using this power.

[Lord Vaux of Harrowden (CB)]

I am sorry to interrupt, and I thank the Minister for giving way. She has referred to the framework document a few times. Can she clarify exactly what its legal status is?

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[Baroness Penn (Con)]

For the sake of the rest of the Committee, it may be worth me answering the noble Lord’s question during a subsequent group. I could make a good attempt now, but I think we will have a lot of discussions about the status of the framework document in the coming hours, so I want to make sure that I give the Committee the absolutely accurate answer. I undertake to do that during this Committee session.

As I was saying, the framework document outlines that UKIB has the freedom to set the pricing of its transactions, and it is already using this power. This is alongside the freedom UKIB has to set the terms and structure of its interventions, subject to delegated authority limits in place to protect the taxpayer for very large investment sizes or novel, contentious or repercussive transaction structures. UKIB can already determine the level of its own investments in line with its capitalisation and annual limits, which are agreed in its framework document. UKIB also already has the power to set the level of its lending rates.

Going any further than the existing freedom UKIB has, as this amendment seeks to do, would not be compatible with its status as a public body and would take it outside the framework through which the Treasury assures Parliament about the appropriate use of public money. With £22 billion of capital, it is right that the Government exercise some spending control to ensure it continues to meet value for money.

I further reassure noble Lords that the Government will review UKIB’s progress and financial performance by spring 2024 to ensure that it has sufficient capital to deliver its ambitions. By that stage, the bank will have closed a broader range of investments and developed a strong pipeline of further projects. I can tell my noble friend and the noble Lord, Lord Teverson, that, as part of this review, the Government will also consider again the question of UKIB’s regulatory position to ensure that it continues to be appropriate.

To give a brief answer to the earlier question about the framework document, it is essentially a memorandum of understanding and does have legal effect in so far as the bank can be accountable to it. I will see whether I can expand on that during discussion of subsequent groups.

I turn to the points raised by the noble Baroness, Lady Kramer. As she suggested, I may come back to her on the specifics when we get to the group beginning with Amendment 30, but I will reassure her now on one point. The Treasury must publish any direction that it gives to the bank. In this regard, what is set out in law in this Bill is the relevant piece of information, versus the framework document. That goes to some level of the discussion we will have when we consider what is set out in the Bill—it is the overriding thing to look at when it comes to UKIB’s operation.

[Baroness Kramer (LD)]

Perhaps the Minister could clarify one thing for me. As I read the two documents put together, the instruction must be published but not the fact that the bank has looked at it and deemed it to be improper, infringing “propriety” or

“of questionable feasibility, or … unethical”.

In other words, that opinion of the bank can be completely suppressed, as I understand it, by the language of the Bill and of this document. If that is not correct, it would be most helpful if the Minister could tell me.

[Baroness Penn (Con)]

I will definitely pick up on that further point of detail, which relates closely to the noble Baroness’s question about non-disclosure agreements, to which I will seek to get an answer as we undertake consideration in Committee.

I hope that I have set out why the Government have at this stage taken the approach to the regulation of the bank that they have, but, as I say, it will be kept under review, specifically by 2024. I therefore hope that my noble friend will withdraw her amendment.

[Lord Teverson (LD)]

I am sorry—perhaps I could intervene very briefly. I find it an interesting explanation from the Minister that they are not going to apply regulation because it is a smaller and younger bank. I suspect that would not apply to any other bank that was founded in the private sector. As the Minister said, the framework document goes through the senior managers and certification regime. But it says, regarding “governance and conduct”:

“This would include, as far as is reasonably practicable and appropriate for the Company, abiding by the principles of the Senior Managers and Certification Regime”.


I understand that, but either you apply it or you do not. You cannot sort of half-think about it. It is one of those things like “You’re either pregnant or you’re not”, or whatever—sorry, that is probably an inappropriate way to put it—so I do not understand how the framework document approaches this. Maybe I have it wrong; as I said, I am used to the old approved persons regime and not up to date on this, but I do not understand it.

[Baroness Penn (Con)]

I am not sure that I or the noble Lord would actually use the analogy that he did, but I undertake to write to him to clarify that point on the senior managers regime. Coming back to the point about it being a relatively small and young institution, I absolutely take the point that he made about commercial banks being in that position. It is not that element of UKIB alone which has influenced the decision; there are quite a few elements of the nature of UKIB. As the noble Lord, Lord Tunnicliffe, said, it is not a commercial bank in many senses.

Banks and other financial services institutions are typically regulated to ensure two objectives, including that depositors and other investors are properly protected —in particular, retail depositors and investors, which UKIB will not have—and that any systemic risks to the wider financial sector do not materialise. It is the Government’s assessment that these considerations of the FiSMA regulation are not currently a concern for UKIB’s specific context. Beyond it being relatively new and small, it does not take deposits or other investments; it is also guaranteed by the Treasury as its sole shareholder, so it does not present a wider systemic risk.

To confirm the understanding of the noble Baroness, Lady Kramer, although the Treasury is obliged to publish the direction that it issues, the bank is not obliged to say publicly what is in its response to any Clause 4 direction. I will still come back to her on the question of non-disclosure agreements.

[Lord Sharkey (LD)]

Perhaps I could ask again about which

“certain aspects of the Company’s activities may be subject to”

the FCA and PRA rules, as set out in the framework.

[Baroness Penn (Con)]

I will endeavour to also get back to the noble Lord during this Committee—but, if I do not, I will include my answer in my letter on his noble friend Lord Teverson’s question about what aspects of the senior managers regime we plan to apply to the bank.

[Baroness Kramer (LD)]

I am sorry to remain persistent on this, but the Minister just said that the bank is not required to publish its letter of reservations. Is it not correct to say that what the document says is that the shareholder may effectively prohibit the bank from publishing its letter of reservations—so it is a gagging clause? That is what it says in the framework.

[Baroness Penn (Con)]

In picking up the noble Baroness’s other point, I shall ensure that my response covers that specific point.

[Baroness Noakes (Con)]

My Lords, before I move on to what I will be doing with my amendment, could I ask one factual question? During my noble friend’s response, she said that the UK Infrastructure Bank had a borrowing limit of £7.5 billion. I understand that the source of that borrowing limit is this framework document. Could she confirm that? If that is the case, I think it is going to make the status of the framework document and its interaction with the statute a very important issue for the conduct of this Committee. The question posed to her by the noble Lord, Lord Vaux, becomes particularly important for us to have a proper understanding. Will she respond on that specific point?

[Baroness Penn (Con)]

I think that the framework document sets out those limits and they are put in place, as it were, by the Treasury. That is my understanding of that interaction.

[Baroness Noakes (Con)]

I thank my noble friend for that, I think what we take from that is that the framework document needs to be well-understood in its scope and effect for many aspects of the debates in this Committee.

In relation to my own amendments, I thank all noble Lords who have taken part in this debate. It has raised some important issues, in particular those related to whistleblowing by the noble Baroness, Lady Kramer. I hope that she gets answers to the questions she has raised because they are important.

I had not appreciated that Parliament approved an exemption for the UK Infrastructure Bank last week. My noble friend did not tell me that at Second Reading, but these things pass one by when dealing with financial services regulation. We were asleep on the job when that came up, but now we have this Bill so we have the opportunity to revisit that question.

I say to my noble friend the Minister that I am not entirely convinced by the argument that, because there is no issue of protecting depositors, there is no systemic risk from the UK Infrastructure Bank, and it should therefore be exempt from the panoply of oversight and supervision banks are ordinarily subject to, whether or not they are small banks. We should not dismiss lightly the areas that have been raised: whistleblowing; the senior manager and certification regime; and financial crime. There are some very important issues which would get attention at the moment, if this were not a state-owned bank, from the FCA/PRA. Without that, nobody is looking at them. I do not think that is a very safe way to set up this bank. I hear what my noble friend says about reviewing it in 2024, but there is a question of whether it is sensible to run the risks until 2024. For today, I beg leave to withdraw my amendment.

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[Lord Teverson (LD)]

My Lords, I omitted to declare my interests as chair of the Cornwall and Isles of Scilly Local Nature Partnership and as a director of Aldustria Ltd, which is into battery storage.

[Baroness Penn (Con)]

My Lords, the Committee’s debate on this group has helped to ensure that we have properly considered the purpose of the bank, particularly around its levelling-up and climate change objectives. I will first address Amendments 3, 4, 5, 15 and 20, which seek, in various forms, to provide additional scope for the bank to pursue natural capital improvement, biodiversity or to deliver environmental improvement plans, by either splitting the climate change objective or adding a third environmental objective.

The bank has a broad mandate, which includes the flexibility to support a wide range of projects to help tackle climate change and support regional and local economic growth—two of the defining missions of this Government. As noble Lords will know, the Government conducted a review, which reported in March following wide engagement with environmental stakeholders and market participants, to consider a potential broadening of the bank’s objectives to include other areas such as improving the UK’s natural capital. Most stakeholders observed that there is already significant scope for intervention in nature-based solutions within UKIB’s existing mandate, particularly through its climate mitigation and adaptation objective, and scope to invest in flood defences, water and wastewater infrastructure.

Therefore, following this review, the Chancellor confirmed in his first non-statutory strategic steer to the bank that natural capital opportunities are in scope of its existing remit and that it should explore early opportunities to support the development of markets for ecosystem services and nature-based solutions within its existing climate and levelling-up objectives. The bank will reflect the contents of this strategic steer in its first strategic plan, which will be published later this month.

Adding a third objective for the bank could dilute its focus. Although projects to deliver nature-based solutions and enhance the UK’s natural capital are within scope for the bank, these projects must link back to its core purpose, which is to deliver economic infrastructure projects. It is an infrastructure bank, and that is why the environmental review landed sensibly on nature-based solutions as a means of delivering the ends of economic infrastructure through natural technology.

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. 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.

However, other steps must be taken to ensure that a successful market is created to finance nature. The review found that the market for nature-based solutions is constrained by multiple barriers, including insufficient scale of projects, lack of proven revenue streams and a lack of data. The bank can help to overcome some of these barriers, but work is also under way by Defra to improve standards and accreditation and to improve early grant funding through the £10 million natural environment investment readiness fund launched in February 2021 and the big nature impact fund, a blended finance vehicle that will help to create a commercial portfolio of projects.

I turn now to the bank’s “do no significant harm” commitment. Amendment 2 from the noble Lord, Lord Tunnicliffe, seeks to raise and firm up the environmental floor for UKIB projects, and Amendment 16 from the noble Baroness, Lady Bennett, seeks to remove fossil fuels from the scope of the bank, as she explained.

With respect to Amendment 2, while there is naturally some risk of the bank’s growth objective coming into conflict with its climate change objective, we believe that this has already been robustly and appropriately covered in the bank’s framework document, which states:

“Where an investment is primarily to support economic growth, the Company will ensure that it does not do significant harm against its climate objective.”


It will be for the bank to decide exactly how to administer this “do no significant harm” clause and how to interpret it when considering individual transactions, and it is already doing this.

On Amendment 16, I say that the “do no significant harm” clause is accompanied by a sensible exclusions list, prohibiting the bank from entering into fossil fuel investments, with a small number of exemptions—for example, for carbon capture, usage and storage, which will significantly reduce emissions over its lifetime. I hope the noble Baroness, Lady Bennett, can see why we need these exemptions and why it would not be appropriate to exclude fossil fuels entirely from the bank’s scope. As a package, it is sensible to keep all these conditions together in the framework document so that they may be kept under review and ensure that the environmental baseline for the organisation is sufficiently high.

Amendments 6, 8 and 9 all seek in some way to add more specificity to the existing objectives. For reasons that I will set out, the Government believe that the current drafting of the Bill is a more appropriate way to deliver against these, although they recognise the policy aims that the amendments seek to deliver. At statutory level, the correct approach is to set out the overarching policy goal and, in this context, phrasing the bank’s objective as one of supporting regional and local growth provides a clear direction for the bank without being overly prescriptive.

We would not want to use language or terms in statute that could result in unintended consequences. For instance, if we adopted the drafting of the noble Lord, Lord Ravensdale, in Amendment 6, terms such as “geographical inequality” and “areas of economic disadvantage” would require detailed and complicated definitions that could change over time or be context dependent. We would not necessarily want to preclude the bank from providing funding in disadvantaged areas of the south-east but, if we adopted the proposed amendment, the bank might be put in difficulty as the south-east as a whole might not qualify as an area of economic disadvantage.

However, all three amendments are addressed in the Chancellor’s first strategic steer to the bank, which states:

“Addressing the deep spatial disparities across and within UK regions is a central ambition of this government. Economic infrastructure connects people, both physically and digitally, to opportunities and the Bank has a key role to play in providing infrastructure finance across the UK and targeting investment to support faster growth in regions with lower levels of productivity … The government’s recently published Levelling Up White Paper (LUWP) outlines the need to end the geographical inequality which is such a striking feature of the UK”,


as noble Lords have noted,

“and it is important that UKIB supports this ambition. Therefore, I would encourage the Bank to target its portfolio of investments towards projects across the UK that deliver against the missions set out in the LUWP”.

Further, the steer is also clear that the economic growth objective should provide “opportunities for new jobs”. I will happily confirm to the noble Lord, Lord Tunnicliffe, that it is the Government’s ambition across the economy to have more high-skilled, better paid and securer jobs. The bank’s investments to date, consistent with its strategic steer, already meet the aims of these amendments. Investments in the Midlands, Northern Ireland and Wales are already helping to boost productivity across the UK and support the creation of good new jobs.

Finally, I turn to Amendments 7 and 10, in the name of the noble Baroness, Lady Bennett, which focus on improving the life outcomes of people in disadvantaged areas, reducing the use of natural resources and emissions and securing the interests of future generations. I would argue that these are consistent with the existing objectives for the bank. In the long run, productivity gains and economic growth are the fundamental source of improvements in prosperity. Productivity is closely linked to incomes and living standards and supports employment. Improvements in productivity also free up money to invest in jobs and support the Government’s ability to spend on public services. The climate change objective will help to secure the interests of future generations by reducing emissions and, as discussed, investing in nature-based solutions.

The Government recognise that protecting and enhancing the natural environment and the biodiversity that underpins it is crucial to supporting sustainable, resilient economies, livelihoods and well-being. We are therefore determined to support the development of private markets that drive investment in projects that restore or enhance our natural environment.

I thought it might be worth touching again on the question from the noble Lord, Lord Vaux, about the framework document, in order to aid our discussion. The framework document is a non-legally binding agreement between the Treasury and UKIB that sets out details of how the bank works that it would not be appropriate to have in statute. Notwithstanding that, it does create some legal force, as UKIB is expected to abide by it and can be judged against it in normal public law ways. It is a public document and there are reputational reasons for UKIB to follow it, and the Treasury can enforce it both as a shareholder in the bank and through the issuing of a direction. Of course, there will be parliamentary scrutiny, given that it is a published document. It can be changed and updated by agreement of both parties, the Treasury and the bank. UKIB’s articles of association are binding in company law and have been filed with Companies House.

[Lord Vaux of Harrowden (CB)]

The Minister mentioned that it will be subject to parliamentary scrutiny. What will be the mechanism for that?

[Baroness Penn (Con)]

There are many mechanisms of parliamentary scrutiny that we are subject to every day. There are committee hearings, Questions in the House and many other different routes of parliamentary scrutiny.

To pick up on one final question, from my noble friend Lord Holmes of Richmond, about the bank’s ability to invest in overseas territories, the intention is for UKIB to invest in UK projects; it is not expected that it would invest in UK overseas territories.

I therefore hope, given those explanations, that the noble Lord, Lord Tunnicliffe, will withdraw his amendment and that other noble Lords will not move theirs when they are reached.

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[Lord Tunnicliffe (Lab)]

My Lords, there is very little in this group that I can object to in principle. We debated the definition of infrastructure at Second Reading, with concerns expressed on all sides that items such as buildings or energy efficiency are not in the Bill. As we are doing this, I took to my own conscience and realised that we have not done the loft—the problem is all the stuff in it. Anyway, by subcontracting that a bit, we got it out.

The noble Baroness, Lady Bennett, raises an interesting point about mass transport in her Amendment 18, while the noble Lord, Lord Holmes, raised a variety of issues including air quality, social infrastructure, data and skills training. I said at Second Reading that it is vital we get the bank’s objectives and definitions of infrastructure correct from the start. That remains my view. The bank will not be effective if its mission statement is ambiguous. However, for that very reason, it is also important that the Bill does not simply become a long shopping list.

I hope the Minister can confirm that the current definitions include—even if not explicitly—many of the initiatives raised by noble Lords. It is inevitable that there will be a composite amendment on Report which once again seeks to embrace many of the important ideas we have discussed in this group. I also hope she will take a number of these suggestions away. It may be suitable for the Government to amend the Bill, but there may be other ways forward.

[Baroness Penn (Con)]

My Lords, as discussed, the amendments in this group seek to clarify or extend the scope of the bank and are focused predominantly on the Bill’s definition of infrastructure. I apologise to the Committee and the noble Baroness, Lady Bennett, that I did indeed get ahead of myself on the previous group.

First, I will address Amendments 10, 11, 17, 19 and 21, which seek to make explicit reference to technologies and facilities relating to energy efficiency, energy security and clean air. I reassure noble Lords that these technologies are already in scope of the definition of infrastructure in Clause 2. The definition captures all energy efficiency measures, including those related to buildings and homes, and energy security measures that fall in scope of “electricity” and the “provision of heat”. We expect clean air to be captured under “climate change”. The definition, which is non-exhaustive by design to give the bank an appropriate degree of flexibility over the subsectors in which it can invest, would be too long and specific if we were to list every subsection.

It may be helpful to give a little more detail on the genesis of the definition; it is based on a definition used in the UKIM Act 2020 but changed in a couple of ways. It is wider in that it relates to the technologies and facilities connected to infrastructure, giving the bank the flexibility to provide support to assets, networks or new technology. It does not seek to include social infrastructure, which I will come to, which is not the focus of the institution. It clarifies that climate change technologies, such as nature-based solutions, are in scope. That is what we have aimed to do in writing the definition. The noble Baroness, Lady Hayman, said that the implication is that what has been listed are priorities; we have sought to provide clarity where it is needed, not necessarily to assign priority.

I turn to Amendments 18 and 25 in the name of the noble Baroness, Lady Bennett. Amendment 18 seeks to exclude infrastructure investment in private cars. I ask her to wait until the strategic plan is published later this month for further information on the bank’s focus in this regard. I have been assured that noble Lords will see the strategic plan ahead of Report, which is a useful development. As I have said, the definition of infrastructure is based on the precedent of the United Kingdom Internal Market Act 2020 and the Infrastructure (Financial Assistance) Act 2012, and does not have a specific list of exclusions in it. Amendment 25 would include reduction in demand in relation to economic infrastructure in the definition of infrastructure. The bank will invest in clean infrastructure which will, if successful, move demand away from more harmful infrastructure, thereby helping to deliver on the bank’s climate change objective.

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[Lord Deben (Con)]

Could my noble friend assure the Committee that she will look again at the inclusion of the diminishing of demand and energy efficiency, which the Climate Change Committee and others have specifically asked for? I think we in this Committee feel universally that that inclusion is necessary. I am sure there is a way of getting to it; I think we need this in the Bill.

[Baroness Penn (Con)]

My Lords, I commit to the Committee that I and the Government will listen very carefully to our proceedings today and, of course, to the advice from the noble Lord’s committee and other expert advisers to the Government. On the particular discussion we are having on a number of aspects of this Bill, I think we agree on the aims that we want to achieve. We may disagree on the mechanism of it, but that does not mean that the contributions of this Committee will not be taken into account before we get to Report.

I hope that, with all that in mind, the noble Lord, Lord Teverson—oh, I have skipped ahead. I hope that the noble Baroness, Lady Bennett, will withdraw her amendment and that other noble Lords will not move theirs when they are reached.

[Baroness Bennett of Manor Castle (GP)]

I thank the Minister for her encouraging, in some respects, response to this rich debate on this important group. I am sure that noble Lords who have flooded into the Chamber for another purpose will be pleased to know that I will not run through all 14 amendments in the group individually.

In welcoming what the Minister said, the Government say that they regard energy conservation and demand reduction as an important part of the bank’s remit. We all find that encouraging, but I am sensing that the broad mood of the Committee, right around these Benches, is that there is still a very strong desire to see that in the Bill.

I also pick up on the point which I guess the Minister made in reference to my amendment on roads. The Minister said—I think I am quoting directly—that “clean air is covered under climate change”. I direct the Minister to the point I made: about half of the particulate matter pollution from vehicles comes from tyres and brakes. That is not a climate change issue but it is very much an air pollution issue, and it needs to be considered.

I have no doubt that we will keep coming back to Amendment 17 on energy efficiency. The noble Baroness, Lady Young of Old Scone, made the important point that this is not just an environmental issue; it is also a poverty reduction issue, and there is a dual benefit from that.

I want to pick up one issue that I think the Minister did not cover, on the points I made about resource use, pollution and novel chemicals. I understand that, as a Treasury Minister, she may not encounter novel chemicals, phosphates and nitrogen cycles on a daily basis. However, I ask her to go and talk to Defra about those issues.

I will return to the whole issue of planetary limits on Report. With expressions of interest around the Committee, I think I will definitely return to the issue of roads on Report. In the meantime, I beg leave to withdraw my amendment.