UK Infrastructure Bank Bill [HL]

Lord Teverson Excerpts

2nd reading
Tuesday 24th May 2022 Lords Chamber

[Lord Teverson (LD)]

My Lords, I declare my interest as a trustee of the Green Purposes Company, which has custodianship of the green share in the Green Investment Bank. I suppose that takes me on to my first questions: what is the purpose of the Bill, and do we on these Benches welcome it? I suppose we sort of do. It is the right thing to do but what an irony, in a way, that it comes after the Green Investment Bank, from 10 years ago, was privatised a few years later and we somehow have to replace it with another bank that has as its major objective the green purposes that were in the Green Investment Bank, which was then in the public sector to deliver net zero by 2050. I correct myself —I think it was 80% at that time.

I am also interested that the Minister was able to say, without any hint of irony, that one of the reasons for the Bill was that the bank was enduring, as if there was a temptation there of Governments—particularly Conservative Governments—to privatise these institutions and they had to save themselves from doing so again and repeating the activity by making sure it was fully embedded in the Bill.

One of the reasons I think there is an opportunity missed here is that as Liberal Democrats we look across the channel at the KfW, the bank in Germany, which has a much broader remit and is so much more successful in that economy, from the Mittelstand of German companies right the way through to a global objective. This is a very small step. One of the things that came back from the Government in the past, when we were a member of the EU, was that we were not able to extend to that degree because of Commission and EU rules and regulations. Now that we are free of that, here we have a very constrained bank that looks at very specific areas. We welcome those areas, and I will take the argument on from there as it is, with its own restricted remit.

One of the things that comes out, and I am sure will be dominant in our conversations and debates in Committee and on Report, is the fact that the Bill rightly identifies climate change and net zero as objective 1. Clearly, we all welcome that. I accept that the Minister has tried to talk around this, but there is another equal emergency: biodiversity and the decline of nature in this country and globally. Although, as she correctly says, the climate change remit can cover certain things, such as nature-based solutions, it seems strange that in this world now we somehow deny the equal importance of the biodiversity emergency and the objective of improving that. That is one of the key things that must happen in the Bill. We need to have that biodiversity crisis of an equal stature. They are interrelated in all sorts of ways. We know and have seen in previous debates, particularly during the passage of the Environment Act here last year, that those two crises are interconnected. You cannot solve one without the other, and we need both to be present in the Bill.

From a much more economic point of view, which I know the Bill is about as well because it is about private as well as public investment, we should not forget the circular economy. I would be very upset and find it strange if the bank did not see as one of its objectives to move the UK from a linear economy to a circular one. It seems clear to me that this ought to be an objective that we have nationally and that the infrastructure bank is able to help to deliver, whether it be local authorities or private companies.

One of the biggest challenges in net zero is energy efficiency—making our economy, from households through to commercial properties and infrastructure, much more energy efficient as time goes on, so that we do not need to build more and more energy generation and can manage demand. I would be interested to understand from the Minister how the bank can be involved in that process in particular. It seems to me to exclude building efficiency, which is one of the malaises of the British economy and our built infrastructure. How can we meet that as well?

Although the Minister mentioned the institution, the National Infrastructure Commission is not mentioned in the four pages of the Bill—it is one of the exclusions. I readily accept that the UK Infrastructure Bank comes out of recommendations from that commission, but it seems very strange to me that the Government have this commission, which I think reports to the Treasury, yet somehow this bank’s direction is driven purely by the Treasury and there seems to be no connection at all with the National Infrastructure Commission. Surely there needs to be some pathway that is obvious and transparent from the recommendations of those reports, which are high quality and well put together, and should be a long-term way of improving our infrastructure investment in this country. There should be a connection somewhere there as well.

The other major issue is risk appetite. One of the things we learned from the Green Investment Bank—which was not perfect—was that, because there was such pressure from the Treasury that it should, if you like, turn a profit and build up its own reserves in the early years, its actual investment was quite conservative. In fact, you could question how much, in its very early days, it substituted the private sector or found the capacity where the private sector would not come in—providing additionality. I am not sure that it did.

Here too, I am far from convinced that the UK Infrastructure Bank will have a motivation to fill the areas that the private sector is not willing to or, indeed—perhaps more importantly—drive forward slightly more risky innovation in infrastructure, zero carbon and nature-based solutions. I think it will be risk-averse, and I would like the Minister to assure me that there will be a reasonable risk appetite. None of us expects the UK Infrastructure Bank to throw money away and be in debt, but we surely want it to be a leader in stimulating innovation moving forward, not just replacing private capital. I would be very interested to hear that. All the Treasury controls will mean that this bank is cautious.

Lastly, I will talk about supervisory boards. I was quite shocked that there was going to be a 10-year review; I cannot imagine that there will not be amendments tabled on that. Reviewing an institution after 10 years is ridiculous; it is two Parliaments and is probably beyond the life of half the Members here in the Chamber —I do not know. I am sorry, I should not have said that—but it is not satisfactory.

One of the things I have since learned through my work with the Green Investment Group, which I congratulate on everything it has achieved recently, is that you need some sort of supervisory board or independent body to check, post investment—I am not talking about investment at committee level—that the bank has met its objectives and remit. It is important that there is scrutiny beyond the Treasury and, of course, very loose scrutiny from Parliament, which does not really work. We will certainly bring that forward as one of our amendments, to make sure that the bank meets its objectives.

In 2012, the Green Investment Bank was legislated for, and 10 years later we are starting again. We on these Benches wish the bank good luck. I would like to understand, as my noble friend Lord Bruce asks, how it ties up with things such as the Scottish investment equivalent. We would be interested to hear that, but we wish it well. It is limited—we hope that it can broaden its remit—but we start again for success, we hope, in infrastructure and for net zero.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have contributed to such an interesting and wide-ranging debate. It showed the breadth and depth of the knowledge of this House, but also showed me that I have no chance of addressing all the points raised. I will write a detailed letter to noble Lords who I do not manage to reach.

The only other thing I would say at the outset is that I think there was a broad welcome for the bank and the Bill in the debate, although of course the devil will be in the detail. I am pleased that we were able to have an initial engagement session with my honourable friend the Economic Secretary to the Treasury and the chief executive of the bank, John Flint, yesterday. It is in that spirit of engagement and listening that we want to continue the Bill’s progress through the House.

I turn directly to trying to address as many of the points raised by noble Lords in the debate as possible. I start with the size and remit of the bank. The noble Lords, Lord Teverson, Lord Tunnicliffe and Lord Sikka, the noble Baroness, Lady Kramer, and others noted that the bank is small compared with other institutions and cited the KfW development bank in Germany. This might be the case, but I do not think that UKIB and the KfW are quite the right comparison. The KfW is an institution that has existed since 1948. It might be more appropriate to compare UKIB to similar institutions in Canada and Australia: the Canada Infrastructure Bank, which had an initial capitalisation of around £20 billion, and the Australian CEFC, which was capitalised with 10 billion Australian dollars.

However, as I mentioned in opening, we will undertake a review of the initial capitalisation of the bank ahead of spring 2024, as set out in the policy design document last year. The Government took a conscious decision to have a narrower remit for the bank in line with recommendations from the NIC, to address the point raised by my noble friend Lady Noakes, to avoid the high risk of crowding out funding from the private sector that would otherwise be there. There is a higher risk of that with institutions such as the KfW. It is also unclear how successful those kinds of institutions are at co-investing with the private sector. This is a different beast and has been designed to be so.

Many noble Lords, including the noble Lords, Lord Teverson, Lord Tunnicliffe, Lord Vaux and Lord Davies of Brixton, and my noble friends Lord Holmes and Lady Noakes, expanded this into asking about the risk appetite for the bank, what the market failures are that it seeks to address, the role the bank will have in ensuring additionality and the risk of crowding out, as I have touched on. The noble Lord, Lord Vaux, probably put the role of an infrastructure bank better than I am about to, but the Government see their role as maximising the bank’s impact to focus on intervening where its additionality to the market is greatest, and will limit its exposure to investments that could already be fulfilled by the private sector. The bank will have a higher risk appetite than the market where it sees that policy outcomes that the private sector has not considered can be achieved. However, it will also have to bear in mind the usual value-for-money considerations in doing this.

To try to answer directly the question about market failure from the noble Lord, Lord Davies of Brixton, infrastructure investment is prone to market failure as it is often complex, large, novel and long term, with risks around construction and technological or government policy changes. Based on historical trends, the most significant market failure is that there is a financing gap around new technologies, where there are high levels of risk for the private sector and unproven financial cases. For example, an analysis by Vivid Economics suggested that early-stage support provided for offshore wind through the European Investment Bank and the Green Investment Bank helped to make the sector more attractive to investors and more viable at scale. Looking forward, the UK Infrastructure Bank has the potential to deliver these benefits to scale up other new technologies.

On additionality, based on figures for similar institutions we estimate that the bank will crowd in an additional £18 billion of private finance from £8 billion of UKIB lending. Based on our internal modelling and analysis of comparable institutions—the Green Investment Bank, the European Investment Bank, the Australian Clean Energy Finance Corporation and the Canada Infrastructure Bank—we think that between two and two and a half times is a reasonable estimate. We have not included any additionality for local authority lending and the guarantee function, although we think there is likely to be some. The risk of crowding out, which I have touched on already, will also be considered as part of the review of the bank’s progress and financial performance taking place in 2024.

Also on the bank’s remit, the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Kramer, noted their disappointment that housing is not included. Homes England is the first port of call for housing projects, and the bank will work closely with Homes England to ensure that projects can access the appropriate support, and with similar bodies in the devolved Administrations—for example, where there may be a mixed-infrastructure project that involves housing. The noble Baroness, Lady Kramer, also mentioned schools. I assure her that the Government are investing more than £19 billion in education up to 2024-25.

On the specific question from the noble Lord, Lord Tunnicliffe, on the community infrastructure levy, I can confirm that the bank is not a replacement for CIL, which continues to ensure that our communities are served with appropriate social and economic infrastructure through necessary developer contributions.

I turn to a point where it is probably easier to mention the noble Lords who did not raise it than those who did, so I may not try to mention everyone by name: the question of a third objective and natural capital. I assure noble Lords that the Government absolutely agree with the Dasgupta review’s assessment that tackling climate change and nature loss are two sides of the same coin. As I said in my opening remarks, the Government conducted a review specifically to consider the potential of broadening the bank’s objectives to include other areas, such as improving the UK’s natural capital. The review recognised the significant potential for increased use of nature-based and hybrid infrastructure solutions, including for the water sector and greenhouse gas removals, and the opportunities for growth of the ecosystem services market. These opportunities will be important to meet our objective to leverage at least £500 million per annum in private finance for nature’s recovery by 2027 and more than £1 billion per annum by 2030.

Noble Lords will know that, aside from the bank itself, the Government are supporting the growth of these markets in a number of ways. This includes developing high integrity standards and frameworks for ecosystems services markets, allowing investors to participate with confidence; backing the maturation of the woodland carbon code and peatland code through the nature for climate fund and woodland carbon guarantee; designing our new environmental land management schemes for farmers and landowners to support the crowding in of private finance and ensure farmers are better off when they participate in private finance opportunities; and demand-side regulation to grow these markets—for example, mandating biodiversity net gain for development. The projects undertaken through UKIB financing will be subject to those net gain requirements. The nature recovery Green Paper sets out many of the Government’s specific plans in this area. All I can say to noble Lords at this stage is that the Government have considered this very carefully and concluded that the bank is able to invest in natural capital under its existing objectives. However, I am sure that I will hear much more from noble Lords in Committee on this subject.

The noble Lord, Lord Teverson, the noble Baroness, Lady Kramer, my noble friend Lord Bourne and others asked whether energy is excluded or included in the definition of infrastructure. Although the construction of new homes is generally out of scope, projects or technologies that support energy efficiency, including the retrofit of homes and buildings and the decarbonisation of heating in line with the Government’s heat and buildings strategy, are very much in scope. I hope that provides some reassurance.

A number of noble Lords asked about the “do no harm” requirement, which we have set out in the bank’s framework document. The Government are confident that this requirement will deliver the objectives that noble Lords have talked about in terms of having a clear policy not to invest in fossil fuel projects, as set out in the framework document, with some specific exceptions to the policy—for example, carbon capture usage and storage. Those “do no harm” objectives are set out in the framework document and strategic plans, which can be updated without the need for further primary legislation.

The noble and learned Lord, Lord Thomas, made a point about Clause 8 and the Environment Agency. The Treasury is clear that the purpose of the bank is to invest in a way that tackles climate change. That is set out in the Bill, the framework document and further in the strategic steer issued in March. If ever a scenario happened where the bank was carrying out activities not tackling climate change, the Treasury would use its Clause 8 powers or its powers as a shareholder. If the Treasury failed to do so, Parliament could make its voice heard and it would be subject to challenge in the courts, as the noble and learned Lord, Lord Thomas, recognised. I do not agree that the aims of this clause are only aspirational. The bank is also subject to judicial review on anything it does, including compliance with its climate obligations.

The noble Lord, Lord Tunnicliffe, asked about the expertise of external bodies such as the Climate Change Committee. The UK Infrastructure Bank has already worked with a wide range of stakeholders since its launch, including external bodies and market participants. It is keen to use expertise in its decision-making, including appointing its first lead climate adviser, Professor Andy Gouldson, an internationally recognised expert on place-based climate action, as part of its ongoing work to partner with regional and national experts to shape the work of the bank and ensure its long-lasting impact.

The noble Lord, Lord Teverson, asked about the relationship between UKIB and the NIC. The bank is intended to complement the work of the NIC. The NIC will continue to provide an expert assessment of infrastructure needs. Central government will identify the levers that they can use to meet the needs, and UKIB will provide financing to support projects that meet the needs set out by the NIC.

My noble friend Lady Noakes asked about the regulation of the bank. The bank is not regulated by the FCA or the PRA because it will not perform the functions of a bank ordinarily regulated by those institutions. It does not take deposits, it is only investing—for now—in capital provided by the Government, and it does not engage with retail customers. We are committed to reviewing this decision after three years, at which point we will decide whether the bank should seek authorisation or to continue to remain exempt. However, we have set out our expectation that the bank should abide by the highest standards of good practice, governance and conduct, even though it is not authorised under FSMA, and that it should comply with the spirit of the financial services and markets regulation. The bank has recruited with this obligation in mind. It will submit to the Treasury, for approval, how it has interpreted the principles of the senior managers and certification regime and relevant elements of the FCA principles for business.

[Lord Teverson (LD)]

Can the Minister clarify whether that means that the senior managers of the bank need not be approved in terms of financial regulation—the actual individuals, let alone the institution?

[Baroness Penn (Con)]

I believe that it means that the bank is not subject to any aspect of the Financial Services and Markets Act and the authorisation under that, but we expect the bank to operate in line with those obligations—for example, on senior management. The decision not to include it in FSMA regulation will be reviewed after a period of time to ensure that this is the right approach for the bank. I have more to say about whether it should have operated under FSMA regulation, and we can get into that in Committee if it is an area of concern.

My noble friend Lord Bourne, the noble and learned Lord, Lord Thomas, and the noble Lord, Lord Vaux, asked about the circumstances in which the power of direction might be used. As I said, it is intended to be used very rarely and only in circumstances where the Government need to take urgent and necessary action—for example, in cases of national security or to help support a business or sector in direct response to an emergency, as the Government did to direct HMRC to establish the furlough scheme during Covid. It is not intended to be used often and is similar to the power the Government have over the Bank of England, which has never been used.

Many noble Lords, including my noble friend Lord Sarfraz, the noble Baronesses, Lady Young of Old Scone and Lady Kramer, and the noble Lords, Lord Teverson and Lord Tunnicliffe, spoke about the review of the bank, required in Clause 9, after 10 years initially and seven years subsequently. This is not the only review or assessment of the effectiveness of the bank to which it will be subject. As I mentioned, ahead of spring 2024, a review of the bank’s capitalisation and effectiveness will take place. We will also undertake a review of the bank as part of the Cabinet Office-led review of ALBs by 2024-25, and the National Audit Office is currently conducting a value-for-money study on the set-up of UKIB which we expect to be published in the coming months. My noble friend Lady Noakes asked about the ongoing role of the Comptroller and Auditor-General and the NAO, and I confirm to her that they will have an ongoing role in scrutinising the bank.

My noble friend Lord Bourne, the noble Lord, Lord Wigley, and others asked about the bank’s relationship with the devolved Administrations. I cannot answer all the points raised by the noble Lord, Lord Wigley, but I can say that we have notified the devolved Administrations of the Bill and have requested legislative consent Motions from the Welsh Parliament, the Scottish Parliament and the Northern Ireland Assembly. We have engaged with the devolved Administrations through the set-up phases of the bank. The bank is already operating across the whole UK and has done its first deal outside England—a digital infrastructure deal in Northern Ireland.

The noble Baronesses, Lady Young of Old Scone and Lady Kramer, and my noble friend Lord Sarfraz asked about the publication of the bank’s strategy. Either before Committee or before we conclude our consideration of the Bill at this end of the Corridor, I will take that question away and see what can be done. I understand that the strategy is due to be published in June; when in June will be quite an important question in terms of the timing.

The noble Lord, Lord Vaux, asked about resources for the bank. UKIB is ensuring that it has the staff and resources to deliver on its objectives, and is recruiting rapidly. The bank will grow to having up to 300 staff.

The noble Lord, Lord Ravensdale, asked how the regional and local economic growth objectives would directly support levelling up. We have chosen not to further define the bank’s objective to support regional and local economic growth in the Bill, but we believe that the policy intent behind the objective is clear. This is given further clarity through the use of the strategic steer, narrowing down regional and local economic growth and encouraging the bank to focus its investments in line with the missions set out in the levelling-up White Paper.

The noble and learned Lord, Lord Thomas, the noble Baroness, Lady Young of Old Scone, and others talked about the need for a wide range of directors on the board, reflecting different skills and the interests of different nations and regions in the United Kingdom. Members of the UKIB board are still being recruited, based on the skills that they can bring to it and based on its mandate and objectives. The recruitment process is extremely thorough and will ensure that the right skills mix is in place for the board.

Before closing, I have a couple of points to make. It is the Government’s hope that this Bill will establish the bank in the market and ensure its longevity. We have already seen at first hand what the bank can do. Its private sector arm has committed to invest around £300 million, which could potentially unlock more than £500 million of private finance across the UK on a broad range of economic infrastructure, including the rollout of broadband to hard-to-reach areas and subsidy-free solar power. Meanwhile, its local authority arm has invested more than £100 million, supporting green bus routes and a green energy hub that will unlock thousands of jobs.

As I said at the outset, the debate we have had today shows the expertise on infrastructure that we have in this House. I look forward to a more forensic look at the Bill in Committee and on Report.