Lord Mendelsohn
Main Page: Lord Mendelsohn (Labour - Life peer)Enterprise Bill [HL]
Lord Mendelsohn Excerpts
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills and Department for Culture, Media and Sport (Baroness Neville-Rolfe) (Con)
My Lords, the Government have brought forward this amendment because we want to ensure that UK Government Investments Ltd—UKGI—can carry out its important work, which is managing most taxpayer stakes in businesses, running most corporate and financial asset sales, and providing corporate finance advice across government to ensure value to the taxpayer from publicly owned assets.
The Chancellor announced the creation of UKGI in May this year and it will open for business from next April. UKGI will bring together, into a single company, the Shareholder Executive from BIS and UK Financial Investments Ltd from the Treasury. The move will provide UKGI with additional independence and a corporate governance structure, allowing it to provide impartial expert advice to its customer departments.
The Chancellor of the Exchequer will be the Minister responsible for the company. It will remain focused on its core activities. It is not a company that we intend to privatise in whole or in part; it will bring together expertise from the private sector with that of civil servants.
The work to facilitate the transfer of functions and operations from the Shareholder Executive into UKGI is well under way. The issue of funding powers has been identified in recent weeks, hence its late introduction into the Bill. The 1932 concordat between Parliament and the Government, now reflected in the Treasury’s manual, Managing Public Money, requires there to be specific statutory authority for significant items of ongoing government expenditure. The Government intend that UKGI will be directly funded by its parent department, HM Treasury. This is necessary to cover UKGI’s running costs in providing a service across government. The amendment is an administrative measure to enable the Shareholder Executive’s ongoing work to continue after its functions transition to UKGI and ensures that a specific funding power is in place in line with the 1932 concordat. I beg to move.
Lord Mendelsohn (Lab)
My Lords, I thank the Minister for sending a very useful letter on this amendment. It was a late addition to the Bill and we were not entirely clear about its full purpose, so I am very grateful that she wrote to us as she did.
It is fairly standard for machinery of government changes to be announced in this way, but it gives us our first opportunity to ask a series of questions about how the change is likely to work. First, we understand that the amendment establishes powers to enable the Treasury to pay the bills of the new body and underwrite its liabilities. It can provide loans or grants to these entities as it wishes. We would be grateful if the Minister could give us some idea about the combined costs of UKGI and whether there are cost savings as a result of merging the two entities. What is the anticipated run rate over the next few years of UKGI?
Naturally, the argument for removing the Shareholder Executive from the Department for Business, Innovation and Skills and establishing it as a separate company with UKFI is, in essence, that the Shareholder Executive proved useful beyond the Department for Business, Innovation and Skills and now works across government. It should therefore go to the Treasury to ensure that it can work better with all departments and be much better utilised in government. Accordingly, it needs a degree of independence, which will be enshrined in its governance arrangements and its board duties. So, across the areas, perhaps I may ask the following questions.
On the suggestion that this structure allows it to attract top talent from the private sector and the Civil Service, was there an assessment of the existing Shareholder Executive and where it had failed to recruit staff of a sufficient quality, or where there were gaps in its current operation that this structure will support? Who will be responsible for recruitment for each of the operating divisions? Could UKGI exist without civil servants? Could it recruit only from the private sector? If civil servants are recruited, are they on secondment or will they sign new employment terms with the agency directly? Will all the employees of every part of UKGI be subject to the proposed public sector exit payment restrictions that are in the Bill? Will guaranteed bonuses be offered to the staff, which, for the higher earners in government, is a traditional method of incentive and currently outside the public sector exit payment provisions?
On whether it strengthens governance arrangements and the commercial disciplines and will be useful going forward, what is the case for a Permanent Secretary sitting on the board? Do the Government not think it would be better for governance arrangements to separate shareholders from company directors and their duties? How will the Permanent Secretary square their role as an accounting officer and their duties to the company under company law? Who will select the board? Who will appoint the leading executives? What will the relationship to Ministers be? Will the new body provide better governance to the management of external advisers? Will there be an internal market whereby individual departments can consider which provides the best cost option, be it the new agency UKGI or external advisers? Who will set the objectives and strategy? Will it be the board or will it still be the Treasury?
In identifying that there is a role to build a unique identity and culture, will the Minister explain what this means, or flesh out what the notions of identity and culture are for such an agency? What is the target culture of a government asset manager and what is the target culture of a government corporate finance vehicle?
Finally, on improving service to customer departments, what are the current identified weaknesses that this arrangement will help to improve? What is the Government’s current plan to evaluate this? Who evaluated the current working arrangements and found the gaps? What independent body will be charged to evaluate whether it has provided a better service to customer departments?
Lord O’Neill of Clackmannan (Lab)
I am always suspicious when Governments introduce amendments rather late in the proceedings because it tends to suggest that the initial thought processes have not been that rigorous. However, having said that, I am sure we have to be grateful to the Minister for some of the points to which she alluded in her introduction of this amendment.
One of the problems that we have encountered in recent years has been the issue of state aid and the European dimension. Can the Minister tell us how this arrangement will stack up with the requirements of Brussels? Obviously, if we are to be able to use some public money—money that has been earned through the success of earlier amendments—this will be a welcome step. However, we need to know what is going to happen because we would be concerned if the money ended up back in the Treasury via one massive loop, when we would want it to be reinvested in a whole range of worthwhile projects.
What, if any, will be the role of DECC in the new company? It is the department with responsibility for environmental improvements. It is also, in a number of respects, the most important department in terms of government input. One thinks of the Treasury largely in the context of making sure not that the money is necessarily well spent, but that it might not be spent at all if it does not like the look of this new creature. When the Minister responds to what I imagine will be a relatively short debate, perhaps she could take up the following issues: Europe, the role of DECC and, ultimately, the degree of independence that this body will have, particularly independence from the Treasury, whose dead hand many of us would be very suspicious of in pretty much any government involvement apart from the collection of taxes. But, of course, it has other responsibilities. Can the Minister give us some assurance on these points? I think the House will then consider this proposal an improvement on the original recommendations set out in the earlier version of the Bill.
Lord Mendelsohn
My Lords, I thank the Minister for coming forward with these amendments. I was very grateful that she withdrew the very brief initial amendment in Grand Committee after a very useful debate and has come back with a much more considered position. We support the amendments that she has proposed. However, we on this side have added our name to the amendment from the noble Lord, Lord Teverson, which carries on some of the discussions that we have had ever since this issue was mooted about the right way forward. We had a very useful and wide-ranging debate in Committee on issues relating to the conduct of the sale, along with other matters.
It is very important to note that we are where we are. There is no additional money coming in from the Government with the sort of force needed to keep this moving. The decision has been made to privatise the bank, so the question is what the best way is in which we can go forward with all the Government’s issues regarding value for money and other sorts of things while, crucially, keeping to the mission that we had. It was that desire to ensure that we had something that kept the mission going and allowed for the greatest flexibility that was the progenitor of this amendment from the noble Lord, Lord Teverson, with which we strongly agree.
One has to be realistic about the Green Investment Bank. It is indeed an outstanding success and is ably chaired by the noble Lord, Lord Smith of Kelvin, but it is an unusual asset to sell. The noble Lord, Lord Leigh, is one of London’s great corporate financiers; I declare an interest as a relative twig compared to the tree that is the noble Lord. This is not a business that makes money. It made £100,000 last time and has a run rate of about £30 million, which is paid for by the department. Now that it has a fund, its run rate is probably about £20 million. It is a portfolio sale so one has to be realistic about what assets are being sold and who the likely purchaser is, as opposed to just investors investing in the funds.
We have to ensure a smooth transition to the private sector, which will allow the Green Investment Bank to continue its task. In this, the most crucial element is how we maintain its mission and free it into the private sector, released from some of the state aid constraints and the ONS restrictions. Those two things should not get confused. They are entirely separate; you can lose one and keep the other, and vice versa. The structure that the noble Lord, Lord Teverson, has come up with is outstanding and he has put a lot of work into it. My team thinks that it is immaculate, and those people they have spoken to who have done jobs like this in a private sector context think that it works immaculately, so it has our absolute support.
In this instance, the Government can achieve the Green Investment Bank’s original policy objectives without having to put any further money into it, although it was welcome to hear that the Government will put in some additional money on the basis that it will be privatised. It is also true that the Government have not yet decided what level of shareholding they want or how long they want to hold it. They have sent bankers into the market to see what potential purchasers and acquirers want and will design the transaction structure accordingly. This is what the Government mean when they say that they cannot prejudice the bank’s status and why they cannot establish any meaningful commitments or undertakings. In our view and in most people’s view, whether the Government keep a minority stake is irrelevant as regards whether they have any powers. Minority stakes have very little powers; indeed, the stake the Government will hold is no more than the protections that the UK in general affords, which I happen to think are the best minority protections in the world. But it has no special duties.
Lord Barker of Battle
On that point of whether the Government should retain a stake, it is important, for example, in management buyouts, where the management may only have a small stake but nevertheless is shown to have a financial interest in the ongoing success of the institution. A lot of people—particularly foreign investors coming into the UK—would see that point; a small, although not controlling, stake in the GIB going forward would be a clear signal that the financial interests of the Government were aligned with those of other investors.
Lord Mendelsohn
I thank the noble Lord for that unusual intervention. He is absolutely right—it is important that management is retained and incentivised, and that will happen. The bank may or may not make an appeal for anyone to come in as an investor, and as the bank goes forward it will be fairly irrelevant. There will have to be some provision as to how you will acquire the full amount and what price you pay for it. Given that it is a portfolio, it has to be established how much the Government want back from the money they have supplied, and that will be calculated. The merits of whether you have such a stake seem fairly minimal, if not irrelevant.
Apart from all that, I feel strongly, in keeping with the interventions we have had, that we should try to cherish this fantastic instrument we have created and find a way to maintain its mission. The noble Lord, Lord Teverson, has done that and has the support of a number of people who have examined his amendment in detail, and here we have a win-win. It gives greenness a degree of certainty; it does not affect the sale or the price; there is no risk that the bank will fall on the Government’s balance sheet; and the Government have complete flexibility as to what they sell, be it 51%, 76% or even 100%—they can cash in on the rest if they so choose at another time, or can do other things.
The mission is worth protecting and the organisation is worth backing. In this amendment, both have been achieved. It broadens the mission of the Green Investment Bank to areas currently excluded by state aid rules and avoids some of the problems of trying to be, in a sense, half pregnant. Therefore, rather than a recipe for conflict, controversy and confrontation, it provides clarity and greater flexibility to deliver a sale. The amendment is a perfect example of something which achieves all the objectives everyone is looking for, and we strongly support it.
Baroness Neville-Rolfe
I am very grateful to the noble Lord, Lord Smith, for being here this evening and, on behalf of us all, for the work he has done in getting the GIB off the ground so successfully. It has reached a break-even position from a standing start in two and a half years, which is an amazing track record, and his speech demonstrated the opportunities and the green intent of the GIB very well.
I am also delighted to welcome my noble friend Lord Barker of Battle to the debate and to our discussions. He brings such huge knowledge of environmental matters to our Benches. I was glad that he mentioned the climate change conference in Paris, because it underlines the importance of capital for green business, and I am in complete agreement with him about the potential for new areas of investment once the GIB is privatised. It was also very good to hear from my noble friend Lord Framlingham. I agree that if the GIB is not green, it is nothing. It is a brand and can blossom.
I am very grateful to the noble Lord, Lord Teverson, for his courtesy, for the discussions we have had and for the support he expressed today for GIB privatisation; and to the noble Lord, Lord Mendelsohn. With other noble Lords, they have tabled Amendment 70ZA, which would place a special share in the control of a third party—a newly established charitable company—which would have the power to block changes to the GIB’s articles of association. I fully understand and appreciate the intent behind this amendment, which is to ensure that the GIB can have a successful future in the private sector while seeking to enshrine its green purpose.
I place on record my thanks to noble Lords opposite for the very helpful discussions which they have already referenced. We are all working to the same purpose: to ensure that the GIB has a successful future. I commend the noble Lords for the way they have probed and tested the Government. I do not believe that anyone wants to remove the “Green” from the GIB. I certainly do not, nor do the noble Lords opposite and, most importantly, nor does the GIB itself. As I said in my opening remarks, the Government would not repeal this legislation unless it were necessary, but necessary it is. The challenge we face—this is where, unfortunately, the Government and noble Lords opposite are not aligned—is whether it is possible to lock down that green mission in a way that does not constitute public sector control.
I would like to propose a way forward, because I understand and share the frustrations on this issue. However, it remains the case that, if the Government exercise significant control over the corporate policy of an organisation—for example, by holding a lock over its objects—it would be deemed to be part of the public sector. It is not the form of control that is important, but the effect. Legislation, regulation, contractual agreements: all can have the same effect. The noble Lord, Lord Teverson, understands this very well and I am grateful to him for the hours he has put into trying to find a solution to this problem, although I do not entirely share his confidence that his proposals would work. We need to provide investors with certainty on the important issue of classification. In reply to my noble friend Lord Barker, we have made it clear that we intend to sell a majority stake. Decisions on the size will depend on the outcome of discussions with potential investors, some of whom might value the Government’s continued involvement. However, it is important to be clear that, under corporate law, retaining a minority stake would not afford the Government a special right to exercise control over the company.
The noble Lord, Lord O’Neill, asked about Britishness. I completely understand his concern. The GIB, which is based in Scotland, contains top-class UK experts on green and climate change issues. As my noble friend Lord Leigh of Hurley said, foreign investors could take a stake, but it is the UK’s Green Investment Bank and has invested in every region in the UK, although it has already had some overseas investors in particular projects.
As I said, I would like to propose a way forward. The amendment is well reasoned and merits close scrutiny; I commend the amount of work that has gone into developing it. I know that the noble Lord, Lord Teverson, brings experience of a similar structure through his role as a trustee of Regen SW. I invite him and his colleagues to work with the Government in testing further his proposal for a charitable company structure, and exploring with our advisers in the coming weeks whether it might be a feasible structure for the GIB. In considering this, we will have to look at whether such a structure would not only allow the GIB to be classified to the private sector, but to attract private investment and, most importantly, private investors with the capacity to fund its future business plan, which is what we all want.
As I said, we want to work with noble Lords. The fly in the ointment is that Parliament’s mandating this structure in statute might be deemed control—Parliament and the Government are equivalent in the eyes of the statisticians. Therefore, we are keen to keep talking and looking for a workable option, but I am afraid that I cannot support the noble Lords’ amendment.
On the basis of the shared purpose that has been so well articulated today, and of the commitments I have made to the House, I hope that noble Lords feel able not to press their amendment and will agree to work with the Government over the coming weeks and look at the proposal in more detail.
Lord Mendelsohn
“Market rent only: conditions and triggers
(1) The Pubs Code shall require pub-owning businesses to offer a market rent only option to tied pub tenants which fall within the definition in section 70(1)(a) of the Small Business, Enterprise and Employment Act 2015 in the following circumstances—
(a) in connection with the renewal of any of the pub arrangements;(b) in connection with a rent assessment or assessment of money payable by the tenant in lieu of rent;(c) in connection with a significant increase in the price at which any product or service which is subject to a product or service tie is supplied to the tied pub tenant where the increase was not reasonably foreseeable—(i) when the tenancy or licence was granted, or(ii) if there has been an assessment of the kind specified in paragraph (b), when the last assessment was concluded;(d) after a trigger event has occured.(2) A “trigger event”, in relation to a tied pub tenant, means an event which—
(a) is beyond the control of the tied pub tenant,(b) was not reasonably foreseeable,(c) has a significant impact on the level of trade that could reasonably be expected to be achieved at the tied pub, and(d) is of a description specified in the Pubs Code.”
Lord Mendelsohn
My Lords, these amendments are concerned with matters related to pubs. It is regrettable that we had to table them because we had a very productive discussion and came to quite an effective conclusion during the passage of the Small Business, Enterprise and Employment Act 2015. Given the consultations, we had not anticipated that we would have to return to this issue, but unfortunately we have. First, I pay tribute to the Minister, who has always been constructive and has helped us to try to address some of the problems that have arisen. In many ways, the amendments are the result of problems which became apparent during the consultation. Some feared that there was a conspiracy. I will not refer to the other option explicitly—but it is more the other option than a conspiracy. I hope that during today’s proceedings we will be able to resolve the problems.
Some technical matters which are material to getting the situation right still need to be sorted out. Certainly the response deadline for the consultation with the pub industry has been difficult, not least because this is the busiest time of year for publicans, given that 25% of their trade is through the Christmas period. This is not an easy thing for them to assimilate at this point. Further, a consultation in two parts for provisions which may interlink is difficult to respond to until such time as the second part is available. That lies behind part of our argument as to why they should be taken together and the deadline extended. As I say, there are also some technical matters to which we should give further consideration, and we hope that the Government will look at them.
One of those is the reference to a wholesale price list. There is not really a national wholesale price list. Many brewers will not produce a wholesale price list at all, citing competition reasons. A price list comes from a trade body and is made up of merely outline prices, but it is artificial in terms of the open and free market. No free trader pays the prices outlined; only tied tenants pay anything near the prices shown, and sometimes but not always with varying degrees of discount. There is no such provision. Part of this is because, as always with government, sometimes the people who prepared the detail of a Bill have been moved on by the time it has gone through. I have one question for the Minister on these matters: would the Government consider in the future having at least one of the civil servants who had been involved in a Bill remain to see through all the consultations on the secondary instruments? That would be useful.
The fundamental foundation for the consultation paper should have been that there would be a form of parallel rent assessment for new and existing tied tenants, and that existing tied tenants would have various opportunities to consider a market rent only option—the bare minimum and simplest event being the periodic rent review, which in most cases is every five years. The announcement that the PRA would be done away with altogether, along with the proposal for additional conditions to be placed on the MRO opportunity at rent review—it would come into play only when a higher rent had been proposed by the pub-owning businesses—looked to many like a suspicious neutering of all the positive steps that the primary legislation had provided. These were merely errors in framing, rather than a desire to reverse the legislation.
The PRA was initially proposed by tenant and consumer groups as simply an informative tool, enabling a tenant to have a meaningful comparison of the tied and free-of-tie terms on offer. Should the tied tenant consider the tied terms demanded by their pub-owning businesses to be leaving them worse off than if they were free of tie, they could remedy the situation by taking a market rent only option, severing their product and service ties, and paying a market rent. For that reason, PRA and MRO are closely co-dependent, one providing necessary information and the other providing remedy if required. The original draft small business Bill proposed no MRO option, leaving a remedy void. Therefore, the PRA proposed by the Government was to be both an informative tool and a remedy, allowing for a third party potentially to determine a tied rent but leaving the tied product and service ties intact.
The combination of the MRO being voted in, following the events in another place on 18 November 2014, and the realisation that conducting a PRA calculation would throw up problems for the adjudicator potentially controlling the market and saddled with the task of valuing what is called SCOFA—special commercial or financial advantages on offer by pub-owning businesses, some of which might be difficult to quantify—led to the conclusion that the MRO could be the remedy. By eliminating the PRA, the consultation proposal failed to recognise that PRA is necessary to consider whether the MRO remedy should be taken.
We have got to a position where the Government, in bringing together these things, tried to ensure that the process was simplified, so they have absorbed the PRA process in the MRO process. Following discussions that we and stakeholders have had, we believe that we have probably reached a satisfactory position and that Amendment 70ZD is catered for, subject to confirmation from the Minister that the Government will consult, in the secondary consultation paper, on a mechanism that ensures that a tenant who requests an MRO offer under the terms of the Act would also have the option of accepting a rent review proposal and initiating a rent assessment at the same time. The latter ensures that the tenant has a meaningful comparison of the tied and free-of-tie terms on offer when considering taking the MRO option.
The wording of Amendment 70ZC may be familiar to noble Lords. This is because it would reinstate the MRO opportunities and triggers in the Small Business, Enterprise and Employment Act 2015, debated earlier this year. I will briefly outline the chain of events that led us to table the amendment. The small business Bill introduced the original MRO package and the conditions under which it would be offered. A tenant would have the right to request MRO: at rent renewal or at lease renewal; in connection with a significant increase in the price at which any product or service subject to a product or service tie was applied to the tied pub tenant, where the increase was not reasonably foreseeable; or after a trigger event occurred that,
“is beyond the control of the tied pub tenant … was not reasonably foreseeable … has a significant impact on the level of trade that could reasonably be expected to be achieved at the tied pub”,
or,
“is of a description specified in the Pubs Code”.
However, the consultation indicated otherwise. It proposed that, to meet the right balance, the tenant will gain the right to request an MRO offer following receipt of a rent review proposal, but only if the rent proposed by the pubco is higher than the existing rent the tenant pays. Rents that rise in line with inflation would not trigger the MRO, so in effect a pubco could sidestep the legislation by maintaining rent—very possibly at an unfair level. The tenant would be worse off as their rent increases year on year, in line with inflation. How does triggering an MRO only at a rent increase provide a balance, as stated in the consultation? Will the Minister confirm that, if rents were to rise as a result of inflation, this would fail to trigger an MRO? What other opportunities does the tenant then have for an MRO and how likely is it to happen? We are keen to gauge a sense of why there has been a significant policy change when it was firmly understood that tenants push for a rent review to trigger an MRO as a bare minimum.
Lord Mendelsohn
My Lords, I thank my noble friend Lord Snape for his excellent intervention, and I thank the noble Lord, Lord Stoneham, who made the key point that we have departed from the original. I also thank the noble Lord, Lord Hodgson, for his intervention. Describing our amendments as unfair, ineffective or superfluous is the greatest compliment he has paid us during the passage of the provisions. The noble Baroness, Lady Wheatcroft, made a point about the condition of the pub industry. It is in a slightly different place from where it was. Consumer pressures about taste, issues about supermarkets and other matters still exist but—having monitored this quite carefully and read a number of companies’ plans and, in the last instance, the September report and presentation of Enterprise Inns—I am very encouraged by the future that some are starting to develop for the industry and the way they are responding, not just to some of the consumer changes but now to the certainty about regulation.
I shall make one observation to the noble Lord, Lord Hodgson, although I have to caveat that under FCA rules I should not give this advice: it may well be worth a flutter to back some pub companies fairly soon.
The noble Baroness, Lady Wheatcroft, helped to make the point we are making, which is that there is no point in changing legislation when consultation is going through. That is a very fair point. This is rather like a deal: we have agreed the heads of terms and now we are negotiating contracts, but if the contracts are substantially different from the heads of terms, you have to go back to the heads of terms. That is the position that we are in. That is part of the design. We are not hoping to change legislation. We specifically drafted these amendments to reinforce what came out of the previous Bill, to make the point in the context of the consultation that these changes should not be made.
I am very grateful, as ever, to the Minister, who has done a terrific job on this. She was presented with quite a difficult task just prior to the Grand Committee sitting on this. The return of a particular official is a very welcome addition to resolve some of these matters.
On Amendment 70ZD, the Minister made the key point that the PRA should simply be the provision of two rent assessments under tied and free-of-tie circumstances, which is exactly the assurance everyone was looking for. I am extremely grateful that she has taken the view that Amendment 70ZE is consistent with the previous provisions and adds some small or minor elements which give some more force.
On Amendment 70ZC, we are very clear that it was not the Government’s intention to cause these difficulties and that they are somewhat caught with the consultation already being out, but we feel that these matters were discussed and agreed. These are a material variation of the terms and provide the basis to stop MRO having any real force. The evidence was not just whether stakeholders were spoken to. The evidence is publicly available and the documentation has been presented. I am now familiar with the company reports and presentations. Given that it is consultation, we feel that this is a central issue. It is key to the MRO option being available. It will restore tenants’ confidence that this process is going in the right direction. It is important that it follows what we agreed in Grand Committee—that we provide a proper option for MRO that cannot be gamed and that intentions that were agreed on are properly reinforced. It is with deep regret that I wish to test the opinion of the House.
Lord Mendelsohn
“Report on pub company avoidance
(1) The Pubs Code Adjudicator shall have a duty to report to the Secretary of State on cases of pub-owning businesses engaging in unfair business practices in order to avoid the provisions in Part 4 of the Small Business, Enterprise and Employment Act 2015, to the detriment of the tenant.
(2) A report under subsection (1) shall make recommendations on—
(a) actions to be taken to prevent pub-owning businesses from engaging in unfair business practices in order to avoid the provision in Part 4 of the 2015 Act; and(b) provisions of redress for any affected pub tenant(3) The Secretary of State shall issue a statement within three months of receiving any report under subsection (1) outlining what action he or she intends to take to protect the tenant, and if none is to be taken, the reasoning for that decision.”