Oral Answers to Questions

Debate between George Freeman and Kevin Brennan

Tuesday 10th November 2015 Commons Chamber

[George Freeman]

My hon. Friend makes an important point. Lord Maude is overseeing an important review of the way in which UKTI works, to make sure that we are developing a sector focus and a strategic market focus around the world. We are maintaining momentum—and we will improve on it in the years ahead—in order to hit that ambitious target.

[Kevin Brennan (Cardiff West) (Lab)]

The deficit for which this Department is responsible is the trade deficit. The current account measures our ability to pay our way in the world and its deficit recently reached its highest point since the second world war. It is still at 3.6% of GDP. How on earth will refusing to have an industrial strategy help British exporters overcome the failure of this Government’s trade policy?

[George Freeman]

The hon. Gentleman has picked the wrong Minister to talk about industrial strategy, seeing as I lead one of our most successful ones on life sciences. The Secretary of State’s speech yesterday made very clear our commitment to innovation, and this Department, though our investment in science and innovation, is leading in building a long-term economic plan for the science, industries and innovation of tomorrow. The hon. Gentleman can cite trade balance figures all he likes, but the truth is that we are in a global economy and we cannot control the rate at which other economies grow around the world.

Green Investment Bank

Debate between George Freeman and Kevin Brennan

Thursday 29th October 2015 Westminster Hall

[George Freeman]

Our view is that we want to give the Green Investment Bank the best possible chance of having a stable and secure future and being able to raise the sort of money that it needs out of the market. Having been an investor myself in much smaller companies, I would say that anyone involved—my hon. Friend is aware of this—will know that there is no perfect shareholder structure. Often having a very small number, particularly if it is one, can create risks of its own. Having far too many small investors can mean that it is a struggle to raise the capital needed. A happy balance will need to be struck, but the judgment will have to give the Green Investment Bank the best chance of fulfilling its remit. I will say something about its green remit in just a moment. My hon. Friend made an important point.

Crucially, the plans are not being imposed by the Government on a reluctant bank. They have the full support of the company and its independent board and chair, Lord Smith of Kelvin, and others. Lord Smith of Kelvin said:

“I welcome this. You can’t keep going back to the Government for more and more money. If we want to build something that is sustainable and durable, we need private capital. This was always going to happen.”

He also said:

“The UK Government led the world in their vision and commitment in setting up the world’s first dedicated green investment bank, so we are delighted to have their support as we enter a new phase and seek additional investors in our business.”

Shaun Kingsbury, the chief executive officer, said:

“That is why I believe the decision announced by the Business Secretary is the right one. It is the option that gives us the best chance of creating the greatest green impact.”

Other important commentators have concurred. Richard Howard, head of environment and policy at the think-tank Policy Exchange, said at the evidence session of the Environmental Audit Committee yesterday that the legislation may not be needed to maintain the green focus, and that if we remove that legislation and allow someone to invest, that investor would come along and invest because they are interested in supporting what the Green Investment Bank is doing. He said that private capital funds have got involved precisely because the bank has a track record in these areas and that they are buying into a pool of expertise in investing in green projects.

The Environmental Audit Committee’s report on green finance in March 2014 said that the Green Investment Bank

“needs to be able to raise significant further private sector capital for investment alongside the Bank’s programmes, and to borrow itself to enlarge the scale of its work…The Government must make an early and clear statement about the Green Investment Bank’s long-term future beyond the 2015–16 horizon of its Spending Review funding settlement”,

which answers one of the points made earlier.

[Kevin Brennan]

I am grateful to the Minister for giving way. That is all very well but the problem is that is all just opinion. Today, we are seeking more of an assurance that the Minister can guarantee that when the bank is privatised, it will not lose its green focus. Nothing that we have heard so far gives that guarantee. Is he coming to that?

[George Freeman]

I am coming to that. I have been very generous in giving way. Perhaps I should crack on and then I could answer the points that I keep being asked.

In consultations on the Green Investment Bank in May 2012, Greenpeace said:

“If it’s going to be more than an empty gesture, the bank’s got to have the borrowing powers necessary to support the green shoots of the UK’s renewables industry.”

It recognised that the sector is moving fast.

On the freedom to borrow and to raise capital, by giving the bank access to private funding, we will enable it to grow in accordance with its ambitious green business plan, giving it access to a much greater volume of capital than if it remained in public ownership. I commend that plan to any Members who have not looked at it, as it is a legal document that investors are investing in and will be the subject of all the legal constraints of a company sale. Crucially, it will give the bank much greater freedom to operate, removing a number of constraints that apply to it because it is a Government-owned enterprise, and enabling it to borrow freely on the capital markets without impacting on public sector debt. Hon. Members who take a view that public sector debt is not a national priority or issue will not find that argument compelling. Those of us who believe that that debt is an issue will find it compelling. That is firmly the view of the Conservative party.

In Government ownership, the bank must compete for funding along with all other Government expenditure needs, in a necessarily tight public spending round. We do not want to constrain it because of that. For all those reasons it makes sense for the Green Investment Bank’s investment activity to be funded by private capital where possible and to minimise the need for public funding, which fits with our original strategic policy aim of getting the market to work in tackling green policy challenges. Part of the coalition’s strategic intention was to try to generate, support and de-risk that early green investment market here and globally. As a number of Members have mentioned, the bank has been very successful in that first phase.

I want to touch on the need for repeal of the legislation, which a number of hon. Members have talked about. The reason that we need to repeal the legislation on the bank contained in the Enterprise and Regulatory Reform Act 2013 is so that the company can be reclassified to the private sector rather than remain as a public sector body. That is essential to achieving the benefits of private ownership, including the aim that the bank should be free to borrow and raise capital without affecting public sector debt. It has become apparent that, unless we repeal that legislation, there is a major and uncarryable risk that the bank would remain classified to the public sector, even after a sale, because the legislation will be likely to constitute a continued public sector control over the company’s business. The hon. Member for Cardiff West asked whether this was wise in terms of the drafting of the original legislation that set up the bank. I cannot comment on that because I was not involved in it. Our advice now is very clear. If we want the bank to be able to operate in the way that we do, that piece of legislation needs to be repealed. While the decision was not arrived at lightly in any way, we are clear that it is a necessary step if we are to achieve our aims.

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[George Freeman]

Let me answer the question. We will not put a binding contract in regulation or legislation, but we will ensure—here is the point—that when the Green Investment Bank goes to raise funds in a subscription round, the subscription agreement and all the legal documentation will be based on the bank’s current mission to be a green investment bank. The bank’s green business plan will be a material document in the context of that funding round, and investors will be investing in that mission, that plan and those values. As I have said, we will build in a series of protections to ensure that the vehicle in which they are investing is clearly committed to that green mission.

I want Members to understand that we have taken legal advice, and in order to comply with state aid and Treasury rules on public sector financing, and in order to give the bank the freedom that we want to give it, it is essential that we do not bind it with statutory, legislative and regulatory instruction but ensure that, in its offering to the market, the intention of the bank is clear. That is the right mechanism for us to ensure the bank’s green mission.

[Kevin Brennan]

Some might observe that assurances were sought ahead of the Royal Mail privatisation and that those assurances lasted about five minutes after the privatisation happened. Leaving that aside, the initial investors may well come in on the prospectus that the Minister is putting before the House today, but there is nothing to say that that will last for any period of time. Within a pretty short period of time, we could be looking at a very different kind of institution. Can he give us any guarantees about that?

[George Freeman]

I think I have made it clear that I will not commit the Government to giving statutory and legislative guarantees that would constrain the operation of the bank, not because we do not want to see the bank continue doing what it is doing, but because we have been clearly advised that once such guarantees are given, we will not be able to allow the bank to have the freedom that we want it to have or to be able to raise money that does not count towards public sector debt. We have made it clear that we want the bank to continue doing more of what it has been doing, such as investing in green energy and catalysing that market. I do not know whether the hon. Gentleman has seen the bank’s green business plan, which is a clear document. When investors invest in any entity, particularly a bank, the entity has to set out a prospectus and a business plan into which the investors are investing. That document will clearly set out the bank’s green activities. It will be very clear that people will not be investing in a company that can do something outside of that.

[Kevin Brennan]

Fracking?

[George Freeman]

It will be up to the investors and the bank to determine where the green energy market goes in the longer term. None of us in this room is able to predict where the bank should be investing, given the pace of investment. I have seen a number of interesting technologies—hydrogen cells and some of the battery technology are extraordinary stuff—and we want the bank to be free to invest in different sectors.

[Kevin Brennan]

rose—

[Graham Stuart]

rose—

[George Freeman]

I will take these two interventions, and perhaps I can then crack through the questions.

[Kevin Brennan]

I want to ensure that this is on the record. I said “fracking” from a sedentary position, and I think the Minister accepted that it is possible, under the current privatisation plans, that the Green Investment Bank might be involved in investing in fracking projects.

[George Freeman]

I want to take specific advice, but I will write to the hon. Gentleman on whether any constraints are envisaged on what may or may not constitute green investment. My understanding is that we want to give the bank the freedom to invest in a range of different technologies. Indeed, part of the bank’s mission is to be able to catalyse investment in a much wider range of technologies that will be key to building a 21st-century green economy.

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[George Freeman]

I want to crack through. Time is galloping on.

[Kevin Brennan]

You have 43 minutes.

[George Freeman]

Well, the shadow Minister should see the list of questions I have been asked, not least by the shadow Minister himself. I will try to answer those questions and, if I fail, the hon. Member for Hartlepool (Mr Wright) can intervene at the end.

I was asked whether the management of the Green Investment Bank would prefer a statutory lock. The chief executive officer allegedly said that he is “agnostic” about privatisation, but he did say that he prefers a statutory lock. He also said that he wants the ability to raise funds from the private sector, and he understands the need to remove the statute and the statutory constraints.

My hon. Friend the Member for Beverley and Holderness asked how the shareholder framework document will change. Clearly, the framework document will need to change as the shareholding changes. When the bank was set up in 2012, the document’s primary purpose was to set out that the bank should operate independently so that the Government could not interfere in its investment decisions and to ensure the bank’s green ethos. Privatisation will further increase that operational independence, but the bank’s green ethos is now entrenched. The Green Investment Bank is what it is, and it is what is in its business plan, which will be a material document in the shareholder subscription round.

My hon. Friend also asked whether the market failures that the bank was set up to address have now improved to such an extent that we no longer feel the bank needs to operate in the same way. He is right that the bank was set up shortly after the banking crisis in the depths of the dark period of 2010, 2011 and 2012, when the economy was moving very slowly, to rectify a lack of long-term liquidity in the market. It is true that long-term funding for infrastructure projects has recovered strongly, as illustrated by the data I gave earlier. There was a lack of specialist green infrastructure investors, particularly at scale, which is what the bank has now become. The bank has helped to support such infrastructure projects, and we intend that the bank will remain a specialist green investor after privatisation. That is what the bank does, and it is what an acquirer will be buying. We want to let the bank off the leash to do more of that.

The hon. Member for Brighton, Pavilion (Caroline Lucas), who is no longer in her place—she gave her apologies—asked whether a profit-maximising bank would be in danger of crowding out investment because it would be just like any other bank. In fact, the Green Investment Bank is already profit maximising; it has turned its first profit. It exists to prove that it is possible to be green and profitable. That is in the bank’s very DNA; we want to show that the green economy is a real economy. That is how we will attract the private sector capital that we need. The GIB’s expertise can do so regardless of whether it is in the private or the public sector, of course, but we want to give it the freedom to raise that money.

The hon. Lady also asked whether other countries are copying us. It is true that we were in the vanguard when the Conservative-led coalition set up the Green Investment Bank, and we have been copied. It is our ambition to be in the vanguard as we take the market forward. We need to raise not just hundreds of millions or billions, but tens of billions—actually, over the next decade or so, we need to raise hundreds of billions—of money for green infrastructure. There is no way that any Government could fund all of it, even if they wanted to. We need to go to the next stage by leading private sector capital into the market.

Several hon. Members, including my hon. Friend the Member for Beverley and Holderness, asked whether the bank cannot raise debt anyway, and whether we had explored all the options. The truth is that equity raising by the bank will effectively score like debt to the public sector once that equity is invested, so this is not just about debt, but about ensuring that the bank has the right financial mix to operate. My hon. Friend also asked about the European fund for strategic investments, a £300 billion pot for capital raising, and whether the bank will still be encouraged and able to access that money.

The Government are aware of the European funding for infrastructure investment, and are examining how best to make use of that facility—my hon. Friend makes a good point. In our view, that does not alter the case for moving the bank into private ownership. We absolutely need to ensure that it can access funding. The Government and devolved Administrations are actively considering, along with other UK institutions, how they can work alongside the bank to maximise the impact for the bank and others of accessing that European funding. The EFSI guarantee can be used by the bank to co-invest in and co-finance with both public and private institutions, so privatising the bank does not in itself preclude benefiting from the European fund.

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[George Freeman]

For any investor entering into a subscription agreement, the parties will be the current owners, the operating company, the bank and the other investors, so the shareholder agreement will be crucial. It is binding in law and if anyone has ever seen a subscription agreement pack, they will know that it is lever-arch files-worth of papers. However, the central point is that all the parties in that agreement come together to agree what they are investing in, and what the objectives and aims of the company are, and that is set out in the articles of association and in the subscription agreement.

We hope that there will be a substantial range of serious investors who are committed to this space and to subscribing investment moneys into the bank’s green investment plan. They are not investing in a casino or any of the things that conspiracy theorists might imagine this thing could go on to be, including a “zombie” handing out money. They are investing in a specific commercial venture, and the directors of the company will have to put a prospectus out to the market, and they will have to warrant it legally themselves, personally as well as in the usual way. So, the subscription process, in and of itself, affords significant protections to us all, as shareholders and parliamentarians.

The issue of the Government’s ambition of retaining a stake in the bank was raised; I am trying, Mr Percy, to deal with all the points that were raised this afternoon. We will consider all options for a sale and we will be guided by the ultimate test of what achieves best value for the UK taxpayer, and what best fits with the strategic intention of allowing the bank to continue to be a leader in the green investment market and to pull in private finance. I am not in a position to commit this afternoon to a particular level or stake; I do not suppose that anyone would expect me to do so. We need the flexibility to do what best achieves that value for money and the best outcome for the bank.

It is important to note that, in any event, the Government’s retaining a stake while also securing declassification would not give Her Majesty’s Government the power to exercise control over the company; it would merely provide a stake in the company. Before anyone asks, the advice we have had has been very clear that retaining special shareholder rights that would enable the Government to veto corporate policy decisions would effectively amount to state control, and would bring us back to the problem that we are trying to get around. The Government could only have the same rights as any other shareholder in the company.

Here come the tickertape answers to some of the questions that have been put. The hon. Member for Cardiff West asked if I could comment on whether the off-balance sheet treatment is the only reason for the repeal of the legislation. It is the central reason why we need to do it; it is a necessary technical step to liberate the company from the constraints that would otherwise apply. The reason for wanting the bank to be able to operate in the private market is broader than that; we want it to access private capital and to be freer to develop in that growing market.

The hon. Gentleman also asked how much we would expect to raise from a sale. He will not be surprised to learn that I am not in a position to tell him today what that figure would be.

[Kevin Brennan]

Ballpark.

[George Freeman]

Proceeds will depend on how big a stake is sold, on the outcome of negotiations with investors about the value of the company and on how the company’s business plan is judged. We will need to be satisfied that any transaction represents value for money for the taxpayer, and fits with the Government’s wider policy interests and with the best interests of the bank. The hon. Gentleman would obviously not expect me to speculate this afternoon on what figure we would expect and thus undermine the process.

Importantly, the hon. Gentleman also asked me about the £1.8 billion of funding that is left. As he has highlighted, the bank can carry on for at least another year, given that it has £1.8 billion—roughly—in reserves; he suggested that after that period it could start recycling capital. The truth is that to grow its business and invest in accordance with its green business plan, the bank will need access to a much greater volume of capital from a wide range of sources.

The hon. Gentleman asked why there was urgency about this process. What we do not want is to get to a point where the bank has no reserves and badly needs capital. Anyone who has raised money knows that the time to raise it is not when there is no choice but to raise it, because money is desperately needed, but when a company is in a strong position, and has a pipeline, assets and a good track record. We think the bank is in that situation now. We are confident that we can attract private capital into the bank because of its track record and because it is operating successfully.

[George Freeman]

My hon. Friend makes an important point. A key part of the rationale for proceeding with this move now is that the bank’s momentum—its existing status—is a strength; it is an asset rather than a liability in the context of the bank’s fundraising. So we are actively looking at everything we can do to ensure that clarity about the bank’s status, position and momentum is provided to potential investors. It is not in our interests that there is confusion, and we are addressing that issue.

[Kevin Brennan]

I am still not entirely clear what the Minister meant in his answer about the £1.8 billion, in particular whether that money will remain available for use by the Green Investment Bank or is likely to be returned to the Treasury at some point. Could he just make that clear?

[George Freeman]

Yes, I will happily respond to the hon. Gentleman. There is a slight circularity to this process, because we want to ensure that the bank is in the strongest possible position to raise the maximum possible amount. We are currently in discussions with Her Majesty’s Treasury as part of the spending review and as part of preparing what we want to be a highly successful fundraising exercise. So the bank, the Treasury and the Department for Business, Innovation and Skills are in a conversation right now about how best to structure things, so that we maximise the chances of the bank being able to raise money successfully and to continue the momentum with existing projects, because that is a key part of the asset and of the strength of the offering that we want to put to the market.

The hon. Member for Falkirk (John Mc Nally) made an important point about Scotland. We are of course talking to the devolved Administrations; in fact, I understand that my right hon. Friend the Secretary of State is speaking to Scotland’s Deputy First Minister later today. Obviously, I will not pre-empt that conversation, but such conversations are ongoing.

I will wrap up by saying that we have had a really excellent debate this afternoon. Again, I thank my hon. Friend the Member for Beverley and Holderness—