Infrastructure (Financial Assistance) Bill

Lord Peston Excerpts

Tuesday 23rd October 2012 Lords Chamber

[Lord Newby]

I hope that my speech will answer the noble Lord’s question adequately.

Firms will have access to the communications and transport networks that they need, wherever in the UK they happen to be, enabling Britain to compete on the world stage.

Our national infrastructure plan published last November sets out an ambitious but credible roadmap to deliver on that vision—a pipeline of upcoming investment worth £257 billion in crucial large-scale projects, of which more than two-thirds will typically be financed and delivered by the private sector.

A number of key infrastructure projects close to starting construction are being delayed because of the difficulties they face in securing the finance and investment required, and the housing market continues to suffer from an undersupply of homes to meet the UK’s demographic needs. Even under favourable credit conditions, raising the amount of private finance required to deliver these projects and to meet our overall infrastructure investment goals would be a challenge. However, the disruption caused by the instability of international financial markets and the adverse effect that this is having on long-term debt provision have not abated. Proactive, decisive action by the Government is therefore needed now. The Bill will allow us to take that action and will bring forward the investment needed.

The principal aim of the Bill is to make investment in major infrastructure and housing schemes possible. The Government have agreed in principle, subject to strict approvals criteria, to make financial support available to infrastructure projects using the strength and credibility of our balance sheet to support the investment that we need.

Through this Bill, guarantees provided by the Government will help to ensure that where projects are struggling to access private finance due to adverse credit conditions, these projects can now go ahead. It authorises the Treasury and, where appropriate, other Secretaries of State to incur expenditure necessary for providing financial assistance.

The Bill will allow the Government to support crucial investment in key areas of economic and public service infrastructure: utilities, such as energy and telecommunications; transport, such as railways and roads; infrastructure to provide public services, such as hospitals and schools; and housing development to deliver much-needed homes.

The Treasury estimates that up to £40 billion of investment in infrastructure and an additional £10 billion in housing investment could be accelerated under the guarantee schemes using the powers in the Bill. Importantly, we will put in place strict guidelines and eligibility criteria for the schemes to protect the taxpayer and ensure that the Exchequer does not take on unacceptable fiscal risks.

Any proposal that receives a guarantee from Infrastructure UK will as a minimum have satisfied the following requirements. It must be nationally and/or economically significant; financially credible; good value for money for the taxpayer; not solely dependent on a guarantee to proceed; and ready to start construction within 12 months. Any proposal that receives a housing guarantee from the Department for Communities and Local Government will, as a minimum, need to deliver an agreed number of new homes; undergo an investment appraisal and full due diligence and be subject to ongoing monitoring requirements; meet a risk capital contribution at the outset; and provide recourse to the secured housing assets.

Since the projects that we expect to back will be structured to minimise the potential losses to the Exchequer, there will be minimal impact on public sector net borrowing as a result. The exception is under the extreme circumstances that a guarantee is called upon or other forms of financial assistance are provided, but we expect such circumstances to be rare. Furthermore, the Government will levy a commercial charge. This will cover the services received by infrastructure providers and beneficiaries of the private rented sector housing guarantee. It will ensure that companies pay a fair price for the benefits that they receive, and that taxpayers receive a fair price for any risk being taken. It will also ensure that schemes do not fall foul of EU state aid rules.

The Bill raises a number of questions. The first and most fundamental is: will it work? Is there any evidence that the guarantee being offered will really facilitate the speeding up of infrastructure projects? There is already substantial evidence that it will. Infrastructure UK has received some 60 enquiries from projects that might qualify, and more are expected. There is also strong interest across the housing sector. Negotiations on these projects are ongoing so it would be inappropriate at this point to run down a list but, as an example of the kind of thing that is likely to benefit, we have indicated that the Crossrail rolling stock and depot services procurement meets the eligibility criteria.

A number of people have asked why the Bill is necessary at all. Can the Government not already do this kind of thing without explicit legislative cover? The Treasury and Secretaries of State already have common-law powers to make guarantees, make loans and give other financial assistance. In addition, some Secretaries of State have express statutory powers to support infrastructure. However, the Treasury does not have the authority to incur expenditure in relation to guarantees on the scale that I have outlined. Moreover, there is a longstanding convention—

[Lord Peston]

The noble Lord was kind enough when I asked him why we needed a Bill to point me to an answer given in the other place, which I have to tell him I found completely incomprehensible. I am still stuck. Will he say in terms that we need a Bill because of the scale of the operations? Is he willing to place on record that that is the point and it is the size of the operations which requires legislation? I find that very odd but at least I would like to hear him say it.

[Lord Newby]

It is partly the scale of the operations and the length of the guarantees, and also because the current rules have gaps in them, as I understand them, or there are certain parts of the whole infrastructure world, as it were, that are not covered by the existing rules. To finish my sentence, there is a longstanding convention known as “Baldwin cover”, dating back to 1932, that Governments should not rest significant and regular expenditure under common-law powers on the sole authority of general supply legislation. That is the noble Lord’s point. It is significant and regular guarantees, not expenditure, that could have a very long period of operation.

Questions have also been raised about what kinds of project can potentially be covered by this legislation. In particular, the Institution of Civil Engineers has asked about what constitutes a nationally significant project—a phrase that does not appear in the Bill but did appear in last year’s national infrastructure plan. I should make it clear that projects that could potentially benefit from this Bill are not limited to the nationally significant projects identified in the national infrastructure plan. In addition to the areas covered by the plan, we will be prepared, for example, to look at waste management and university projects that are economically viable and simply want for finance. As to the scale of project that can potentially benefit, again there is considerable flexibility. A project does not necessarily have to be valued at several hundred millions of pounds to be considered.

The Bill is one part of the Government’s overall approach to ensuring that the United Kingdom invests in the infrastructure that it needs for the future. I look forward to our debate today and I commend the Bill to the House. I beg to move.

--- Later in debate ---

[Lord Skidelsky]

My Lords, as someone who has never been averse to having a go at the Chancellor of the Exchequer, I start by saying how idiotic and puerile it is for newspapers to make a lead story of which ticket he used for his journey from Chester to London. It is George Osborne’s stewardship of the economy, not his travel arrangements, which deserves censure. However, we have an infantile press.

Three big mistakes stick out over the past two and a half years. The first was the belief that cutting down government spending would automatically produce recovery. I know the Government now claim that they never believed anything so simple or idiotic, but they did, and there is plenty of evidence to prove it. Austerity is not a recovery policy.

The second has been the Chancellor’s failure to distinguish between current and capital spending. This has made the deficit seem more dangerous than it was. The prime example of this blind spot was the £50 billion cut in capital spending. The noble Lord, Lord Adonis, has drawn attention to the devastating consequences of this for the construction industry and for house, transport, education and hospital building.

The third was the Chancellor’s belief that without a severe fiscal contraction Britain would go the way of Greece: that is, interest rates would go through the roof. This was doubly wrong. First, with an independent central bank able to buy government debt in whatever quantities were needed there was never any chance of gilt yields rising to the levels experienced by Greece, Portugal, Ireland and Spain. Secondly, and perhaps even more importantly, a reduction in the cost of government borrowing is no guarantee of a reduction in the cost of commercial loans sufficient to offset the collapse of the private demand for loans. That is the explanation of a point mentioned by the noble Lord, Lord Desai, regarding cash mountains sitting in corporations.

All three mistakes were interrelated parts of the wrong theory of the economy. Anyone who is interested in economics must start the analysis there. I am not going to go into it, but it is well known to those who are economically literate. The results have been zero growth since George Osborne took office. That was entirely predictable and was predicted by some of us. I have been saying for two and a half years—and I am not alone—that austerity would not produce growth and it has not produced growth. Now the international agencies are saying the same thing. Slowly but surely, the Government are being driven to plan B, though the Prime Minister prefers to call it plan A-plus.

It is against that background that I give a cautious welcome to the proposals in this Bill. Better late than never, better too little than nothing at all. As I understand it, the Bill aims to do three things. First, it provides for the Government to guarantee up to £40 billion or £50 billion of “nationally significant” private infrastructure investments which have to be ready to start within 12 months of the guarantee. As the Treasury explains it, the aim is,

“to kick start critical infrastructure projects that may have stalled because of adverse credit conditions”.

That is Treasury language. The guarantees might cover key project risks such as construction, performance or revenue.

Secondly, the Government will lend money directly to private investors to enable 30 public/private partnership projects worth £6 billion to go ahead in the next 12 months; I do not think that has been mentioned yet in the debate. Finally, a £5 billion export financing facility will be available later this year to overseas buyers of British capital goods; in other words, an export credit guarantee scheme of the type we are all familiar with. I would like to reinforce what the noble Lord, Lord Adonis, said. Having cancelled about £50 billion of certain public capital spending, the Government are hoping to replace it with an equivalent amount of private capital spending, much of which will never happen. That is completely illogical.

The main difference between this Bill and the British investment bank, which I have been urging, is that my bank—I call it “my bank” because I feel a certain sense of paternity in the idea, having been floating it for the last three years—would actively raise money in the private markets for its own investment projects whereas UK Guarantees, the government scheme, merely provides some finance for projects initiated by the private sector. In other words, the government scheme is still governed by the ideology that the private sector is more likely to pick winners than a state investment bank and that that is sufficient justification for waiting for the private sector to produce its projects.

[Lord Peston]

My Lords, the logic of what is being said is not that it is more likely to pick winners but that it already has all those winners. The only things holding them back are the risks of the projects which the taxpayer is taking over. It is a new theory to replace classical economics which—as the noble Lord well knows—says savings cause investment. Now we have loan guarantees causing investment and it is just as nonsensical as a serious piece of economics.

[Lord Skidelsky]

The noble Lord is quite right. The argument can be developed, but my point about picking winners and losers is that there is no empirical evidence for it being true, as a general proposition, that the state is more likely to pick losers than the private sector. We have had many examples of that not being true. The economic collapse of 2008 is a very good one.