Infrastructure Bill [HL]

Debate between Lord Forsyth of Drumlean and Lord Hodgson of Astley Abbotts

Monday 10th November 2014 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, the purpose of the amendment is simple, although the policy implications are perhaps more complex. It is to insert a new clause that will provide a statutory framework for the establishment of a UK sovereign wealth fund to receive a proportion of the Government’s revenues from fracking and shale gas.

I tabled a similar amendment in Committee on 14 October and I hope that my noble friend will forgive me if I say that I did not find her response entirely convincing. I have therefore retabled the amendment. It is primarily a Treasury matter, of course, and I am therefore pleased and grateful to see that my noble friend Lord Deighton has taken up the cudgels and will reply to this debate. I am grateful also to my noble friends Lord Jenkin and Lord Teverson, and the noble Lord, Lord Whitty, for adding their names in support.

The background to and reasons for my amendment are as follows. This country has been blessed with a wide range of natural assets. These can be divided into two parts, the finite and the infinite. The infinite includes the sun, rain and wind—all of which we can harness in various ways. However, there are finite resources. For example, our huge reserves of coal that powered the industrial revolution for a time made this country the workshop of the world. In the 1970s, we discovered another great gift from nature—North Sea oil. At the time of the original discovery, it was expected that by now it would all have run out. In the event, because of improved technology and higher oil prices, despite our having extracted some 40 billion barrels of oil, it is estimated that at least some 16 billion barrels remain recoverable. But—and this is the important but—one day the oil will inevitably run out and this gift from nature will have been entirely consumed.

Successive Governments and the country have benefited hugely from this oil. Estimates of the overall revenue run as high as £400 billion, but every penny of that revenue has been spent. A debate on whether it has been wisely or foolishly spent would occupy your Lordships’ House for many a long day. That is not the point this evening. The point this evening is that the revenue has all been spent and nothing has been put aside for the future.

On the other side of the North Sea, Norway, which has also benefited from North Sea oil, had an extremely fierce political debate about how to use its proceeds. In the end, it was decided that it should establish a sovereign wealth fund. Norway has a much smaller population than we do—about 10% of that of the United Kingdom—and its oil and gas reserves are commensurately larger. Therefore, I do not wish to push the metrics too far. The fact is that in the 20 short years since revenue started to flow to the Norwegian sovereign wealth fund, it has grown to $800 billion—£500 billion. At this point, I should apologise to Members of your Lordships’ House because when trying to send a letter to you from Chicago I mixed up my “millions” and “billions”. The figure is, in fact, £500 billion, not £500 million, as in my original letter. That is not the end of it. It is confidently expected that the $800 billion will reach $1 trillion in the next few years. The fund generates between £20 billion and £25 billion every year. That is a lot of money. It is roughly two-thirds of our annual defence expenditure or what we expect to spend on our nuclear deterrent over its life. It is roughly 10 times what the Leader of the Opposition thought was necessary to save the National Health Service. He referred to £2.4 billion in his speech at his party conference.

In this country, we took a different approach, and the decision is irrevocable. Every penny that we receive in future will be spent until the oil finally runs out. But we now appear to have received another potential gift from nature: natural gas extracted as a result of the development of the new fracking process. I argue that we should learn from the decisions of the past, as well as from the example set by Norway, and provide for the establishment of a sovereign wealth fund to receive at least part of the proceeds from shale gas exploration and development. I do so on three principal grounds. First, the costs of infrastructure projects, which are so essential to this country’s long-term prosperity, are notoriously difficult to forecast. The returns from a sovereign wealth fund would help to plug some of these overs and unders.

Secondly, a sovereign wealth fund would provide some insurance against future uncertainties. Governments are constantly urging us as private citizens to save more to guard against the rising costs of our increasingly long lives. We are told that we must forgo current consumption individually for our long-term benefit. It would surely be no bad thing if the Government occasionally practised what they so assiduously preach.

Thirdly, and most importantly, it is about intergenerational fairness and equity. These gas reserves have built up over millions of years. Are they properly ours to plunder and spend in a couple of generations? Should we not ensure that some parts of the proceeds are left for those who come after us?

[Lord Forsyth of Drumlean (Con)]

In his amendment, my noble friend says that no less than 50% of any revenue received should go into the fund. Can he indicate what he expects that revenue to be and why he chose 50%?

[Lord Hodgson of Astley Abbotts]

If my noble friend waits for one minute, I shall explain the detail of the amendment. That will take care of the 50% point. Since I think there is possibly an indication that other uses should be made for this revenue, I will come to that immediately after that point. If I have not answered those questions in a couple of minutes I invite him to intervene again.

I turn to the details of my amendment. As I have said, it is an enabling amendment. It does not require the Government to do anything now, but it does indicate a direction of travel. The enabling provision is subject to five provisos. The first, as my noble friend Lord Forsyth has just pointed out, is that the Government should get 50% of the revenue from shale gas. That is part of the fairness argument: 50% for us, knowing that at least some of it will be spent on projects that will benefit future generations, and 50% put aside for those generations directly.

Secondly, the fund should support long-term public policy objectives. That underpins the philosophy and approach behind it.

Thirdly, the fund may invest overseas, as well as in the United Kingdom. That is necessary to ensure that the fund obtains the best returns. In that context, it is worth noting that the Norwegian sovereign wealth fund now owns more than 1% of the entire world’s quoted equities.

Fourthly, no more than 4% of the fund may be paid out in any one year. The need for a limit is obvious. Without one the fund would almost certainly be drained very quickly indeed. My proposed maximum level of withdrawal, 4%, is calculated based on a 2% long-term rate of real return and a 2% allowance for inflation. That level should mean that a well managed fund should be able to operate long into the future.

Finally and most importantly, proposed subsection 2(e) provides that the operation and activities of the fund must be transparent and open to public scrutiny. If noble Lords read the literature, it is clear that transparency has been a vital part of creating trust and confidence among the Norwegian public in the operation of their fund.

So much for the reasons for the fund and the detail of my amendment. Before I conclude, let me briefly address the reasons given for not having a fund, which I think underlie the intervention from my noble friend Lord Forsyth. There are essentially three of them: first, this is not the right time to do it because we do not yet know how large and profitable the shale gas development will be. That is absolutely true. My answer is that the amendment is permissive—it requires only an indication of the direction of travel. I hope the House will not think me unduly cynical if I say that, in the absence of any specific prior commitment, I believe the chances of establishing a sovereign wealth fund once the revenues are beginning to flow are even closer to zero than the chances of the Government accepting my amendment tonight.

The second reason is that any revenue from shale gas should be used to reduce the deficit. Again, that is a perfectly understandable argument, but one that undermines the concept of intergenerational fairness. In any case, under my amendment, half the proceeds are available to reduce the deficit. However, to suggest that all should be used for that purpose is akin to me saying to my children, “I was going to leave you a decent sum of money, but I’m afraid I’ve been living beyond my means and I’ve run up debts. I don’t wish to take difficult decisions to reduce my standard of living, so I’m afraid that if you want your inheritance, you’ll have to take all my debts with it—or, of course, I could use your inheritance to pay off my debts”. We need to face the consequences of our own actions and not slide them on to a future generation.

The third and last reason revolves around the most feared word in Treasury-speak—hypothecation, the sin that dare not speak its name. If one consults the Oxford English Dictionary, hypothecate is defined as:

“Pledge … by law to a specific purpose”.

I argue that the establishment of a sovereign wealth fund which has no specific purpose would require an unusually broad interpretation of the concept of hypothecation. Of course, in reality, this is all a smokescreen. The real reason for Treasury opposition is that it always opposes policies that in any way diminish its direct day-to-day control over every aspect of our national life.

To conclude, this enabling amendment is designed to balance the long-term national interest against short-term political expediencies, to enable future generations to share in this potential windfall and to encourage Governments to follow the saving practices they so urgently suggest we individually adopt.

[Lord Forsyth of Drumlean]

My noble friend has not answered my question on what he anticipates the revenue to be.

[Lord Hodgson of Astley Abbotts]

I think I answered it by saying that the reason given for opposing a fund at this stage is that nobody knows quite how much money is going to flow. No one can know. I pointed out that if you do not get something in principle in place now, once the revenue starts to flow, the chances of having a sovereign wealth fund are very low. If we do not get a peg in the board now, when revenue starts to flow there will be a million reasons as to why it should not be put in place at that stage.

I was most encouraged by the remarks of the Chancellor of the Exchequer over the weekend about the advantages that a sovereign wealth fund would bring. I hope that my noble friend will put some flesh on these bones when he winds up. The very last word must rest with Jens Stoltenberg, the then Prime Minister of Norway. In September 2013, at the John F Kennedy School of Government, he said:

“The problem in Europe with the deficits and the debt crisis is that many European countries have spent money they don’t have. The problem in Norway is that we don’t spend money we do have”.

He went on to say that to achieve this happy state of affairs needs actions to be taken that require “political courage”. It is that political courage that I am looking for from the Minister tonight. I beg to move.