Lord Teverson
Main Page: Lord Teverson (Liberal Democrat - Life peer)Enterprise and Regulatory Reform Bill
Lord Teverson Excerpts(11 years, 5 months ago)
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Lord Teverson
My Lords, before I speak to Amendment 4, I should say that it is a great pleasure to deal with a Minister who understands the area of energy and climate change, which part of this Bill deals with. He knows the area well, so I am sure that our debates this afternoon will be extremely productive. I also welcome the fact that the Green Investment Bank comes at the beginning of the Bill, because it is an important part of making growth really happen in this country.
I also commend the list of green purposes; individually, they are excellent in terms of greenhouse gas emission reductions, natural resources and natural environment, biodiversity and environmental stability. I could not write a better list myself. However, what we are trying to do here is to get absolute clarity over whether this is a list that includes them all or whether you can pick one off for investment, and ignore the rest. I very much interpret this—and I presume that this is how the Bill was drafted by the Government—as a way of ensuring that at least one is met, but not necessarily all the others. To have the whole list as obligatory would be unrealistic.
What I and the other co-sponsors of the amendment are trying to do is to tie it into the climate change elements—the carbon and other greenhouse gas reductions—as being a necessary part of the investment programme. I refer not to individual investments, but to the investment strategy and programme of the bank as a whole. That is why the amendment places a legal duty on the board to assess the impact of the bank’s investment strategy on the Climate Change Act, which is an absolute anchor point for all this work, and a mission of this Government and the previous Government in terms of that global challenge. It is also to ensure that there is a duty on the board to have regard to the advice and reports of the Committee on Climate Change. My noble friend Lord Deben is not here today, but I am sure that he would like the fact that we wish to pay particular attention to this independent body that was set up specifically to advise government in this key area. Furthermore, it is to prevent the board from adopting or amending an investment strategy unless it is satisfied that the implementation of the proposed investment portfolio will increase the likelihood of UK carbon budgets and targets being met.
I apologise to the Minister for the fact that the proposed new clause has so many subsections and is so long, but it anchors the bank and legislation not just to the advice of the Committee on Climate Change and its work but to the real area of greenhouse gas emissions and the Climate Change Act, which has broad consensus of all parties—as it did in the last Parliament and does in this one. I hope that in that way we can ensure that this legislation is absolutely fit for purpose.
My noble friend the Minister mentioned the remarks made by the noble Lord, Lord Smith of Kelvin, at Second Reading. I have huge respect for the noble Lord, Lord Smith, and I commend and congratulate the Government on his appointment; he is exactly the right person to do this. I would just suggest that perhaps post-appointment he might be rather keener to make sure that his board is not inhibited in any way in the decisions that it would like to make. I think that one looks at this in a slightly different way post-appointment, as chair of an organisation, from pre-appointment and as a member of the legislature. It is beholden on us to look independently, from a bird’s-eye view, to make sure that we have our purpose right. I am sure that the noble Lord, Lord Smith of Kelvin, is right in the vast majority of his remarks, but I think that here there is a need for a little more future-proofing of how operations might work, as I am sure that at some point in the long and glorious career of this bank there will be chairmen other than the noble Lord.
Lord Marland
My Lords, I have a sense of deja vu, thinking that I am still in the Department for Energy and Climate Change—where, of course, the Green Investment Bank was largely initiated, so I am extremely keen that it gets off on the right footing for that reason alone. I believe that my noble friend Lord Teverson, who always speaks so eloquently on the subject, actually answered the question that he posed himself. We could not have written a better list if we had tried. My concern is that we would get into definition overkill as we take this Bill through the House.
My noble friend mentioned that the reduction of carbon is not relevant on the individual investments, but it is at the top line. I would respectfully—I emphasise that word for the noble Lord—point out that it is the fundamental investments that will reduce carbon emissions. It is only at the top level—I see the noble Lord, Lord Oxburgh, sagely nodding his head—that you will achieve the carbon reduction. The Government are very heavily committed to this. It is no accident that the noble Lord, Lord Stern, was on the advisory board that set up the bank and that was advising at all levels. As a result of that, the noble Lord, Lord Smith, has made it clear that the bank will have a very high regard—as it should—for the Energy and Climate Change Committee because it is fundamental for the Government and for the future of the business. However, I exercise a word of caution, because there are important activities that are clearly green but do not necessarily reduce greenhouse gas emissions—for example, recycling and improvements in water quality. We would want this bank to invest in such activities, I am sure, but that would not necessarily reduce carbon emissions.
I have not mentioned a judicial review in my line of inquiry because I think it is far more important that this Committee gets this into the right shape rather than for it to be directed by a judicial review. However, the bank’s board has agreed—across the board—that the bank will voluntarily report on greenhouse gas impacts on its investments. This is in addition to the requirement for the bank to report on the greenhouse gas emissions associated with its own activities. So it comes as no surprise to all of us, after discussions with the noble Lords, Lord Adonis and Lord Smith of Kelvin, that it is absolutely at the heart of what the bank is doing. I hope that that gives confidence to noble Lords and I therefore respectfully ask them to withdraw their amendment.
Lord Teverson
“(f) a proportion of proceeds due to the UK Government as a result of the auctioning of emission permits under the European Union Emissions Trading Scheme.”
Lord Teverson
My Lords, I shall speak also to Amendment 11. Here, I am trying to be as helpful as I can be to the Minister in trying to find ways in which we can make this investment bank even more effective in finding ways of providing finance. We will come later to the arguments about lending.
There are two obvious areas where we could assist the Government and the board of the Green Investment Bank, when appropriate. I absolutely agree that the worst thing that we could do is try to shovel out through this bank too much money too quickly and allow it to lose its reputation in terms of investment appraisal and doing the right thing. It should build up that reputation over a sensible period. However, given the need in the United Kingdom for investment in green matters and energy, we know that £3 billion, although it is a lot of money to all of us, will not last indefinitely. We therefore need to start thinking ahead now. Two areas should be considered.
My first amendment refers to the European Emissions Trading Scheme. I remind the Grand Committee that there is a list in subsection (3), which states:
“It may in particular be given by way of …”.
We are not therefore talking about hypothecation of the ETS revenues. We are saying that this is one of the areas where the bank and the Government may look to facilitate funding of this bank. It is an extra piece of the armoury for the bank and the Government that could be, but not necessarily has to be, used—although I think it would be a very good idea. I remind noble Lords that the EU-ETS is coming to the end of its second phase. In fact, at the end of this month that phase will end and we will move into phase three. In phase two, the Government have already raised some £1.3 billion-worth in sales of so-called EUAs, or units of European Union—forgive me, I have forgotten what the A stands for.
Lord Teverson
Thank you very much indeed. In fact, last month the Government already had their first auction of phase three allowances. They made £34 million and sold 6.5 million EUAs at €6.62 per unit—a terrible price in terms of carbon pricing but not a bad price, given some of the other prices that have been found. Unfortunately and regrettably, since then the price has fallen below €6. The German Government have sold some as well more recently and that price fell. There is an intention to auction in excess of 50% of these allowances in phase three and once auctioning starts, it seems that will be one of the ways in which the price will go up because the free issue has ended.
I would also hope that the Government’s intention to raise the bar on 2020 carbon reductions to 30% will be successful. That would also mean that the number of these allowances would decrease in the market. This seems to be an obvious revenue stream, some of which could be used towards reinvestment— I am not saying that it must be—of those carbon reduction revenues into green growth and into making sure that that whole process is reinforced.
I must apologise to the Grand Committee in that Amendment 11, on a second area, has a mistake in it. In subsection (3), at the very end, it should say Clause 1 instead of “section 1” and I apologise to noble Lords for that. I have been looking for a way in which, when the time is right, we could lever extra money into the Green Investment Bank without having all the effects of increased public debt, which is why the current £3 billion comes from asset sales. It means that there have to be other ways of finding that money, with all the borrowings, but the debt is not changed. As I understand it, it would be absolutely the same as for the Nuclear Liabilities Fund, which is currently worth some £8.6 billion. Again, this is a way in which the firepower of this bank could be increased quite substantially without the effect on public debt that other forms of fundraising might have. It would not require outside borrowing by the bank and would take over the trustees’ functions.
I do not know how many of your Lordships have read the excellent report by Professor Gordon MacKerron, Evaluation of Nuclear Decommissioning and Waste Management, which came out earlier in the year. I am sure that my noble friend the Minister was closely associated with it, given his responsibilities in that area. Very importantly, it makes the point that at the moment the vast majority of that £8.6 billion has to be invested in the National Loans Fund for a very low return. I would be interested to learn from the Minister whether he or his officials know what that current rate of interest is. Professor MacKerron was clearly particularly concerned at the low rate of return. On understanding the net present value of the fund’s existing liabilities, he said,
“though its current rate of accumulation is significantly less than the discount rate applied”,
which was 3% . He went on:
“Whether the fund will be able to meet all the … liabilities will depend on a range of factors (in addition to whether the current approach to its investment regime are maintained)”.
He questioned whether putting that cash into the National Loans Fund would maintain a sufficient value for the decommissioning costs of the existing nuclear fleet. There is a simple solution to that as well: the purpose of the Green Investment Bank is not only to invest in green infrastructure but to create a proper commercial return from its investments, so we have a double-win situation here. We increase the firepower of the Green Investment Bank quite substantially and also make it far more certain that the NLF will be able to meet its liabilities and not put the liability back on taxpayers, as would happen otherwise in future. So we have a double success. I beg to move.
Lord Jenkin of Roding
My Lords, I have some doubt about the proposed new clause of which my noble friend has just spoken. The Nuclear Liabilities Fund very properly seeks to avoid the situation that the country got into over many years when large numbers of nuclear installations of one sort of another were left to be decommissioned and their radioactive materials dealt with, and there were no funds available. One is always astonished at the huge amounts of money that have to be set aside to satisfy the obligations that are now being discharged to decommission these nuclear plants safely and effectively. My noble friend Lord Teverson may contradict me on this, but I believe that it is intended entirely to be confined to that purpose; it is intended to be there when it is needed and nuclear establishments come to be decommissioned. When my noble friend says that this increases the firepower of the Green Investment Bank, what does he mean? Is it intended that the fund should be invested in other green projects, which may or may not achieve the return expected when the fund was invested? I would have thought that that would risk defeating the purpose of the Nuclear Liabilities Fund.
The question of the rate of interest that should be earned on that fund is something that the Minister may wish to look at. I had not refreshed my memory of Professor MacKerron’s report, and I was grateful to my noble friend for reminding me what was in it. Of course, it is a very low rate of interest, as he has rightly said. But the fact of the matter is that this is a hypothecated fund; it is there for a particular purpose, and the idea that it could be used by the Green Investment Bank to invest in something else that might produce a higher return risks prejudicing the absolute and essential purpose for which it has been set up—namely, to meet the costs of decommissioning nuclear plants when they are available. I hope that the Minister will give some indication that he will look at this proposal in the proposed new clause with some suspicion, because I believe that it might be misconceived. I apologise to my noble friend Lord Teverson for putting it in that form, but I feel very strongly about this.
One of the best things that the previous Government and this Government have done is to make sure that future nuclear liabilities will not fall on the taxpayer but are regarded as a proper cost of those who invest in nuclear installations, power plants and so on. That is what it is intended to do. It is a very wise thing to do, and I hope that it will not be prejudiced by diverting it to some of the other purposes of the Green Investment Bank that noble Lords have talked about this afternoon.
Lord Teverson
My Lords, as we are in Committee, perhaps I could come back on my noble friend Lord Jenkin’s important areas. I can reassure him on both those items that we would be better off if this amendment was passed. First, the MacKerron report is quite clear that the current rate of investment going into the National Loans Fund almost certainly will mean that its liabilities cannot be met, so we have to find another way to do this. The Green Investment Bank is not a fund to give away money; it is there to commercially invest, alongside other commercial investors. It could be perceived as being a greater risk perhaps—I will come on to why it is also a lesser risk—but also as providing a sensible return with a very sound government-backed institution to do the investment, and I think that is good. Furthermore, this fund has to invest its money in the National Loans Fund. That is a euphemism; what it actually means is that it has to give it all to the Treasury. So the Nuclear Liabilities Fund at the moment is similar to unfunded state pensions. It goes in there, but to take the money out will have the same impact as paying pensions into the future. While it is a discrete amount that is accounted for, it just reduces the national debt. That is all that it does on the current terms.
In fact, how secure is that? Yes, there is an accounting mechanism, and my noble friend is absolutely right that the sins of the past are huge in terms of those funds having been lost during the process of changes in the nuclear industry and its ownership over the past couple of decades. First, this amendment would make it far more certain that this fund will be able to meet its liabilities in the future. Secondly, we, as taxpayers and as citizens, would know that that money is in a place where we can actually see it, see its value, see that it is different and separate out of the Treasury from the national debt and, as the noble Baroness, Lady Worthington, said, we can predict decommissioning of nuclear plants far enough in advance to craft the investment and our exit strategies around those financial needs.
Lord Jenkin of Roding
As we are in Committee, I hope that I can say a couple of words about this. The nuclear industry is, of course, building up this fund as part of the Government’s policy to make sure that the liability for decommissioning does not again fall on the taxpayer. It has recognised this, and it follows the same pattern as one has seen increasingly in the offshore oil and gas industry, where funds now have to be put aside so that when the oil rigs are decommissioned, again that does not fall on the taxpayer but is part of the cost that has to be built into the supply of the oil or gas and therefore met by the investor. I think that my noble friend Lord Teverson may be confusing two matters. I use the phrase again: this is a hypothecated fund. It is not like the pension fund. There never was a separate fund for that. It is simply that the pension contributions from, for instance, the teachers’ pension fund have been paid to the Government, and the obligations are met, of course, by the taxpayer out of the fund. There has never been any question of trying to balance the one against the other. This is quite different. This is a fund that is being set up and funded by the industry. It has to be built up while plants are operating—not just when they are commissioned—so that, at the end, when they come to be decommissioned, which may be 50 or 60 years ahead, the fund is there. They have invested in it so the cost will not fall on the taxpayers. It is a separate, hypothecated fund. It may make the green bank look bigger because it will have more money but it cannot do anything with it other than get a rate of interest. My noble friend shakes his head, but if they are going to start investing in green industrial ventures and so on, it seems to me that that would be a breach of trust to those who have built up the fund. It may be that they can hold it and, as it were, guarantee the payment, but the minute that they start investing it themselves, it seems to me that that is risking the whole purpose for which the fund has been set up.
A separate issue is whether there is an alternative method of investing in the Nuclear Liabilities Fund that might get a slightly more realistic rate of interest. That is a separate matter, but it seems to me that to make it part of the loan capital of the UK Green Investment Bank would be a breach of trust, as I suggested, against the firms that are building this up perfectly properly. They agree, they recognise it, and they know that they do not want to go back to the previous position, but they want the fund to be available to finance the decommissioning of the plants when the time comes.
Lord Marland
My Lords, perhaps I can deal with this quite swiftly. Both the ETS and the NLF, the Nuclear Liabilities Fund, reported to me in my previous department so I have a rough idea of what is going on. Let us deal with the EUAs and the ETSs first. I also sit on the government assets committee and we looked at selling some of our EUAs. We drew the conclusion that the price was not right, the market was not big enough and we would not be able to get a substantial figure into the market. However, as the noble Lord, Lord Teverson, rightly says, an opportunity may come along later.
Clause 4 permits financial assistance to be provided in any form,
“as the Secretary of State, with the consent of the Treasury, considers appropriate”.
If we were able to do it and if—that is a big “if”—the Treasury agrees, the Secretary of State could divert funds into it. Amendment 6 permits the Government to use a proportion of revenues from auctioning emission permits to fund the bank. There is already provision within that.
This is creative thinking and I am very grateful to my noble friend for that because he is a great creative thinker. I turn to the Nuclear Liabilities Fund. Clearly, as the noble Lord, Lord Jenkin, quite rightly said, two things are going on here. One is that this is a fund that is committed to nuclear liabilities; it is committed to the nuclear industry and, therefore, it has a range of opportunities in the nuclear industry in which it could invest. The noble Lord, Lord Wigley, referred to Wylfa and other investments in new nuclear. I had discussions with the chairman of the NLF about developing the fund into nuclear investments, including, for example, a MOX plant, which is something that we were committed to when I was in the department and, indeed, new nuclear. That is entirely for the NLF to decide for itself.
The problem I have with the NLF diverting funds here is that this is an investment bank and it is what it says. There is no such thing as a guaranteed investment. Some investments go up and some investments go down and if the NLF lost money, co-venturing with the Green Investment Bank on things that it did not understand, of course the liabilities would not be met. Despite the fact that we may consider it a very boring return on the investment at the moment, it is planned to match some of the liabilities. But I do not want the noble Lord, Lord Teverson, to go away thinking that actually the NLF is enhancing its investments, but think that it has enough on its plate with the nuclear industry.
Therefore, given the commitments that I have made on Clauses 4 and 6, I hope that, despite the fact that two very important points have been raised—and I am grateful to my noble friend Lord Jenkin of Roding, who has expertise in this field—the noble Lord will withdraw the amendment.
Lord Teverson
I thank my noble friend the Minister for his response. I fully accept that the EU ETS money route is not precluded by the Bill as it is, and I suppose that it would be nice to have it on the list as a nudge or a reminder to the Treasury that it was a possible flow. That was all that the amendment did, but it would tie in well with the philosophy of the carbon market and trying to recycle money into helping the greening of the European economy and the UK even more.
Baroness Worthington
It struck me that the revenues from the EU ETS auctions would be considerable, even at this depressed carbon price. How much money will the auctions raise in the next few years, and how does that compare to the £3 billion that has been put up as a stake for the bank?
Lord Teverson
I read an estimate somewhere of about £1.3 billion a year. But it all depends on the carbon price. That is the key thing, and we do not know that.
Lord Marland
Perhaps I can help. It depends on the market, which is not there at the moment to buy it. We investigated and got a lot lower offer than £6.62 for the price. That is six months ago, and I cannot remember what figures were involved. I am sure that we could invite the Department of Energy and Climate Change to provide some information in the normal course. It depends on a willing buyer and the price at which they are sold.
Baroness Worthington
I have done some back of the envelope calculations, and at about 100 million tonnes it will be in the region of £1 billion or £1.5 billion. That is not an insubstantial amount of money, and it will rise in time, which would mean that the bank’s initial deposit was paid back by those auctions in less than three years. That is an important context for the discussion.
Lord Teverson
I thank the noble Baroness for her comments. It is certainly an area that I would like to come back to. I agree with my noble friend that putting all the Nuclear Liabilities Fund into the Green Investment Bank might not be the best way in which to spread the portfolio, although it would be even worse to put it back into the nuclear industry itself. That would be a bit like the Mirror Group reinvesting the pensions funds in itself, or whatever it did. The area needs looking at, and a broader investment strategy for the NLF that included a sensible investment in a bank like this would be a good way forward.
I will continue to look for opportunities to help the Government and hope that we can have further conversations about this—but I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Baroness Pitkeathley)
Amendment proposed:
“Page 3, line 10, at end insert”,
the words as printed—but not quite as printed, because there is a typo in the fourth line. After:
“The Secretary of State shall consult the Bank of England”,
we need to insert the word “on” before,
“granting the Bank access to the Quantitative Easing programme”.
Lord Teverson
I had not noted that. Perhaps I should change my whole speech because of it.
The whole area of bonds issuance is important. In fact, it was looked at in some depth by the Environmental Audit Committee in the other place, together with green ISAs. It is a method, which I know the Government and the Treasury are very keen on, to use money from pension schemes in particular to invest in the UK and in areas of quick growth. Although I am sure that my noble friend the Minister will go through the whole question of whether these would be government-guaranteed bonds and the effect that would have on the public accounts, I believe that this is an important area of fundraising. It is one that could, with the length of investment in these sorts of projects, appeal very much to the pension industry and pension funds, which have large amounts of money, as we know, to invest successfully. This would be a good way of moving forward and I am sure that the Government have considered it a great deal.
I would like to ask the Minister whether the Government have thought further about the area of green ISAs and about involving not just fund managers and corporates, as one would do with bonds, but ordinary people to support the purposes of this bank. I note that some 18 million people have ISAs at the moment. That is one in three adults. Some £220 billion is invested by individuals in ISAs, which clearly have all sorts of tax breaks that are attractive to individual savers. Both these financial instruments could really make a difference in terms of the Green Investment Bank and green ISAs. You could get a public and personal commitment to this cause and create extra employment and growth in the UK.
Lord Brooke of Sutton Mandeville
My Lords, I have a small technical question. The Official Opposition indicated, in the noble Baroness, Lady Worthington, a clear understanding that it was the Bank of England that was consulted on quantitative easing, but I have a question for my noble friend. If he were so minded as to grant this amendment, would we need a consequential amendment in the context of the reference to the consent of the Treasury in subsection (4)?
Lord Teverson
“(7) It is the duty of the Secretary of State to provide the European Commission with State aid notification concerning the intention to allow the Bank to borrow, including borrowing from the capital markets.
(8) The duty in subsection (7) must be fulfilled no later than 31 December 2013.
(9) In the event the European Commission approves the State aid notification concerning borrowing, it is the duty of the Treasury and of the Secretary of State to permit the Green Investment Bank to begin borrowing from the capital markets no later than 30 June 2015, or, if State aid approval has not been received by that date, no later than one month from the date of approval.”
Lord Teverson
My Lords, now we get on to one of the core issues around the Green Investment Bank, which is its ability not just to lend its own capital or funds but to be able to multiply them up, perhaps in different ways, and to use that as leverage to enable it to be a bigger investor than it would be from its own resources. Of course, this rather comes back to that cliché of whether the Green Investment Bank is actually a bank or a fund. We know that any corporate plc can borrow money—that is its function—but what it cannot do without going through a further procedure is to borrow it and then lend it out as well, because that gets it into the area of financial services and the Financial Services Authority’s authorisation there.
This amendment seeks to recognise that there is a period during which this bank has £3 billion and has to earn respect through having a track record and credibility in its functions. My noble friend the Minister was absolutely correct on this. That is enough for it to get on with in the first couple of years. Yet we know, through the amount of time that it has taken to get to where we are on the Green Investment Bank, that decisions take a long time. To get state aid takes a long time. To get authorisation under the Financial Services Authority and its successors as they will then be—that may be the Prudential Regulation Authority for a bank—takes a number of years, so we have to prepare by thinking about those issues now. We cannot do that once we get to 2015. In this amendment, we are saying that by 2015 we need to start going through those procedures, many of which will not be in the Bill. Lots of other preparations will need doing as well, apart from state aid, to make sure that by 2015 the bank can take on extra firepower—I apologise to my noble friend Lord Jenkin if he does not like my using that word.
This is about the bank’s ability to invest and to change the economy; to get this green growth that we want and know to be available; and to deliver jobs, growth and carbon reductions. It will be able to do this only by being able to leverage extra investment, apart from the investment it will have from its co-investors of £3 billion in the first three years. I do not see how it will be able to fulfil its mission and proper function without being able to increase its ability to lend beyond the likely Treasury resources.
I realise and understand entirely the Government’s concern about the public balance sheet and public debt. The Chancellor has said that this borrowing cannot take place until the proportion of debt to GDP has started to decline. It is a fundamental mission of the coalition to do that. However, getting to the fundamental question, I would ask this particularly. When the Green Investment Bank was launched on 28 November, which was last week, I received a statement saying that it will make £3 billion available for green technology and become a valued and integral part of the UK’s financial infrastructure—absolutely. It goes on to say that it is similar to Germany’s own development KfW Bank. We hope so, although the KfW Bank has a €400 billion asset value. The big difference between the two is that the borrowing of the KfW does not appear on the public balance sheets, whereas it is envisaged that the borrowing of the Green Investment Bank, as it is currently structured, will.
Baroness Ford
This is a really interesting amendment, which also touches on the previous amendment. I am not sure that I support the amendment of the noble Lord, Lord Teverson, but not because I do not support its intent. I think it is hugely important that the Green Investment Bank, if it is to have any attraction, is better capitalised than the Government are proposing. However, allowing the bank to borrow is one thing, but you have to ask, who would lend to it?
Before I came into your Lordships’ House, I spent many years in the capital markets. The capital markets will not lend to this bank unless one of two things happens: either it is guaranteed by government—plainly, that is behind the Government saying that they have to wait for a certain period—or it has a strong balance sheet of its own. No one will lend to it just on the basis of thinking that it is a great idea in the same way that no one will buy a bond unless it is backed by a cash flow. That is what the bond market buys; it buys cash flows. It does not invest in speculative infrastructure, however worthy. Therefore, it is really important that we do not get carried away by just wishing that things were different, and that we push the Government to come forward with practical propositions about increasing the funding available to this bank. Until there is a track record there and until there are infrastructure projects that are capable of securing a rating from the rating agencies, there will be no bond issuance, and until it has a very strong balance sheet or the Government give a guarantee to underpin that balance sheet, there will be no lending from the capital markets either. I hate to pour cold water on this but we have to connect with reality here.
Lord Teverson
I thank the noble Baroness very much for that contribution. I should point out that the borrowings of KfW, which is owned by the German länder and the federal Government, are guaranteed by that Government and still manage to escape public sector classification. I thank the noble Baroness very much for bringing up that point, which I forgot to mention.
Baroness Ford
KfW is covered by the covered bond regime, which we do not have in the United Kingdom.
Lord Marland
My Lords, I say to the noble Lord, Lord Mitchell, that handwritten notes such as those that we old fogies use would be useful instead of modern technology. I am grateful to noble Lords for exploring this area. Clearly, those who have been in government and those who have read the papers know that we are in very deep financial straits. This Government have decided to start a bank against all odds, investing £3 billion in it in the next period, which is a tremendous achievement. We have been told to get on with it. We have done so and it is here before you now, with a chairman and chief executive in place who are getting on with it. On that point, I would like to quote what the noble Lord, Lord Smith of Kelvin, has said about the state of affairs. I am very grateful to the noble Baroness, Lady Ford, for her very constructive and practical comments. The noble Lord said:
“We need to show government and private capital markets that we are a well run organisation with a good track record worthy of the injection of more capital or, indeed, borrowing money in capital markets”.—[Official Report, 14/11/12; col. 1529.].
That is absolutely fundamental. No one is going to lend to this bank or provide borrowing unless it can show a track record of prosperity. I can promise noble Lords that if we feel the need to borrow, we will approach the stakeholder well before 2015.
On that point, the Government have given a commitment that we will seek state aid approval from the European Commission in respect of borrowing before the end of this Parliament. The noble Lord, Lord Skidelsky, very appropriately raised this. We have only just got this thing going but already we are starting to move forward. As the noble Lord, Lord Oxburgh, rightly says, it takes a long time to achieve these things in Europe but we are playing that game; indeed, we are ahead of it.
However, I mention a word of caution, as, indeed, did the noble Lord, Lord Smith. I think that the original budget of investing the first £775 million over the next five months will be difficult to achieve. However, I am confident that we can do it. It is not as if there is a whole load of stuff piling up to be invested in at the moment. Of course, we know there are investments out there, but the budget will be difficult to achieve in the first period. That shows that these things take time; it takes time to build up a track record; it takes time to build up confidence in the markets; and it takes time to build up co-investors, which will be the initial endeavour of the bank.
The noble Lord, Lord Teverson, asked about KfW. Rules are rules and the noble Baroness, Lady Ford, mentioned that we cannot do it in this country. I thank her for that. The UK’s boundary for public finance covers the whole of the public sector, including central and local government and public corporations. That reflects the approach of this Government and that of previous Governments. It is not something that we can suddenly do and in this piece of legislation we are not going to change the rules of engagement.
Lord Teverson
This is covered in European accounting standard 95. I do not see why we should put ourselves at a disadvantage in that interpretation compared with other nations within the European Union who are competing for the same capital. That seems to me to be tying our hands behind our back. We could use the example of changing the rules in terms of Lloyds and RBS as regards public balance sheets and how, with those banks, we made exceptions. I accept that this is rather different, but we have a track record that says that we can change things. I do not understand why it is possible for our competitors to be unchallenged by the European Court of Justice or the Commission in terms of state aid where we risk being seen as being subservient rather than proactive. I would not accuse the Minister of this—quite the opposite—but we do ourselves down by appearing to be supine in this area.
Lord Marland
We have made it very clear that it will not come to pass before the end of this Parliament. That is what prudent people do. They say, “I am going to buy something and I am going to spend this amount of money”. We have said that we will spend only that amount of money, but we have said that we will spend $3 billion on this project, which three years ago did not exist.
Lord Teverson
My Lords, I thank my noble friend for going through this. Can I just say what I am not saying? I am not for a minute saying that we should immediately rush into this. I said in my opening address that the bank needed to have a track record and credibility. It needed to prove that it was good at what it does. However, one thing that we all know, whether you have been in business or, as the noble Lord, Lord Oxburgh, said, you are involved in the EU, you have to plan well ahead and start making provisions for the longer term. There is no better time to do that than when you lay down legislation.
I was being very understanding in terms of the debt problem. I am not talking about changing policy: I am talking about testing rules. All Governments try to get around rules, whether you call it PFI, PPP or whatever to get round public sector borrowing ceilings. I accept that. That is one of the reasons that we went into the coalition and I am delighted to have done so. However, that does not mean that we then accept everything that we are told to accept, although I know that that is not in my noble friend’s nature either.
This is fundamental to making this bank work. My noble friend mentioned matched funding. Yes it is true that there is already a considerable leverage, but that is a fund; the Regional Growth Fund does exactly that. That is why this would then be a green growth fund. However, it is not that: it is a Green Investment Bank. That is why, to get to our goal, we all need to find a way around this. This will be a really important area to explore constructively between now and Report. In the mean time, I beg leave to withdraw the amendment.
Lord Stevenson of Balmacara
I thank the Minister for his comments and I share the support shown for the success of the bank. However, I remain puzzled as to how it will make the transformation from the little duckling that is alone to the wonderful swan that I am sure the Minister has in his mind as sailing calmly across the seas of international finance, sucking up investment from wherever it goes, flying off into the sunset with a raft of projects carefully tucked under its wings, and therefore being successful. I do not see that, and we will return to this matter.
Lord Teverson
Perhaps I may ask the noble Baroness about one matter. One of the things that I understand investment banks often do is raise bonds against projects. It is not a question of the recourse of liabilities to them; they raise bonds on the asset value of the project. There are ways of doing it in that way.
Baroness Ford
There are ways of doing it. I do not wish to detain the Committee and perhaps I should have a cup of coffee with the noble Lord to explain; I mean that in a helpful way. Bonds are raised against the cash flows from projects. They are raised against an infrastructure project only if the Government underpin it—hence, PFI.