UK Infrastructure Bank Bill [HL] - Report – in the House of Lords at 4:30 pm on 4th July 2022.
Moved by Lord Holmes of Richmond
6: Clause 2, page 1, line 22, at end insert—“(4A) Before making any investment decision, the Bank must ensure that the principle of additionality is met.(4B) The principle of additionality is that—(a) all activities make a contribution which is beyond what is available or is otherwise absent from the market,(b) all activities do not crowd out the private sector, and(c) all activities have effects that encourage private sector funding to a multiple specified by regulations made by the Treasury.”
My Lords, it is a pleasure to open this group of amendments and to move my Amendment 6. This amendment boils down to just one word, which predates the investment principles of the bank, the objectives of the bank, the strategy of the bank, the framework document of the bank and everything else associated with the bank: additionality. That is the bank’s raison d'être—no additionality, no bank.
As mentioned in the first group of amendments, we have “roads” in the Bill but nothing about additionality. My Amendment 6 would seek to set out exactly what additionality means, how it covers crowding out as well as crowding in, and what multiple Treasury should set on that crowding in.
Government Amendment 23 is purely an amendment to review what the bank has done on crowding in after seven years. It says nothing on crowding out, hence why I support Amendment 24 in the name of my noble friend Lady Noakes, which I will say no more about.
My Amendment 6 covers both the end-point—the review—and the beginning, the mission the bank needs to be on. It is all well and good to have a review at the end of 10 years, or now seven, but without Amendment 6 the review is just the spectre of an individual walking backwards into the future, wringing hands about what the bank has done, either positively in achieving additionality or negatively. Although a review is significant and important, it always arrives a little too late to influence what has just happened.
It is critical that additionality is in the Bill for the benefit of the bank and for the private sector, which would have the confidence to know that the bank would operate to the threshold of additionality, which would have to be achieved or that specific investment would not be entered into. If the Minister cannot accept my amendment, would she commit to meeting with me between Report and Third Reading to look at what we can do to get additionality in the Bill to strengthen the position of the bank, to make projects far more likely to crowd in and not crowd out funding and, ultimately, to benefit everything we are trying to do in this infrastructure space? I beg to move.
My Lords, I have Amendment 24 in this group, which is an amendment to the Minister’s Amendment 23. It is always rather strange speaking to an amendment to an amendment when the amendment itself has not been spoken to—but I will do my best.
First, I congratulate my noble friend Lord Holmes of Richmond on his Amendment 6. It is well drafted and encompasses what we understand by additionality in the context of the operations of the UKIB. In Committee, it was widely agreed that additionality was so important that it should be in the Bill. I think it was also agreed that the boundary between what is in this Bill and is in other documents outside the Bill, including the framework document which is not even referred to in the Bill, has been set in the wrong place. When I say that the Committee agreed these things, I do not suggest that the Government agreed, but the vast majority of the Committee was aligned on these matters.
The Minister has been generous with her time with noble Lords, and I thank her for the meetings she arranged and for her letter of last week. She gets a gold star for effort, but I am afraid that that is not matched for content. On additionality, my noble friend claimed that the absence of an agreed definition in the Bill could stop it developing over time. That is nonsense. Additionality, as a basic concept, has barely shifted in the many years that I have been involved in public sector matters. The essence of it is about, and always has been about, something that should occur that would not otherwise have occurred but for the particular intervention or action. It is a universal principle that can be adapted to a number of circumstances.
I then suggested to my noble friend the Minister that, rather than try to produce a specific definition, she could put a high-level definition in the Bill and take a Treasury power to issue guidance to UKIB. That too was brushed aside. The Treasury likes to keep stuff in documents, such as the framework document, which it alone controls. I remind noble Lords that, as my noble friend the Minister informed us in Committee, the framework document is not even legally binding.
Nevertheless, I recognised that the Treasury is something of an immovable object on this issue, so I decided that it would be better to pursue the Minister’s offer of a way forward and include additionality issues in the periodic reports which are required by Clause 9. I thought that half a loaf would be better than no loaf, but I have to say that Amendment 23, which my noble friend has tabled, is a serious disappointment. It represents no more than a quarter of a loaf.
Amendment 23 adds an additional reporting requirement to Clause 9 but it is a lop-sided approach to additionality. Its focus is on the extent to which UKIB’s investments in projects have encouraged additional investments in those projects. It therefore will cover the extent to which projects have enabled crowding in, but it does not explicitly cover crowding out, which has always been my biggest concern, because a bank with a high capital ratio and a low cost of capital can easily outcompete private sector financing. I do not believe that if UKIB were to finance the whole of a transaction to the complete exclusion of the private sector in circumstances where 100% private finance could have been obtained, it would be captured by my noble friend’s amendment—it would not come close to being captured by my noble friend’s amendment. Such a transaction would not have encouraged or discouraged private sector finance; it would have bypassed it completely. That is why my Amendment 24 refers to investments having been made by UKIB
“despite an adequate supply of private sector financing”.
My noble friend the Minister will doubtless say that it is not in UKIB’s strategic plan to do transactions without private sector financing. It was never in the strategic plans of the European Investment Bank to crowd out private sector financing, but it did it anyway, in collusion with private sector borrowers, who were quite happy to take soft loans from public sector lenders who were much easier to deal with than hard-nosed real bankers in real banks.
My noble friend the Minister has also referred in correspondence to the impact of the Subsidy Control Act, which became law earlier this year. I have to say that the Act, which refers to subsidy decisions, sits rather uneasily with the practice of doing investment deals in the context of a bank. I accept that at a high level it would apply to UKIB. I just think that the language is very difficult to interpret in the context of what UKIB would do. My main concern is that there would never be an enforcement action against UKIB because the crowded-out private sector financiers are exactly the same people who want to be invited to any crowding-in party. It simply will not be in their interest to try to get the Act enforced against UKIB.
For all these reasons, I am very disappointed that this Bill, which I have never regarded as a shining example of Conservative economic values in any event, is going to ignore the concept of crowding out, which ought to be something dear to any Conservative Government’s heart. I shall not move my amendment when we reach it in the Marshalled List, but I live in hope that there are still some Conservatives in the Treasury who might have a change of heart before this Bill reaches the other place.
My Lords, I rise to speak to Amendment 24 in the name of the noble Baroness, Lady Noakes, to which I have added my name. The noble Baroness has already eloquently explained the rationale for this amendment, so I will try to keep my speech reasonably short.
Like the noble Baroness, I was strongly drawn to Amendment 6 in the name of the noble Lord, Lord Holmes, which would insert the critical additionality principle into the principles of the Bill. That would be the preferable approach, but, like the noble Baroness, Lady Noakes, I have been persuaded, reluctantly, to go along with the Government’s approach of making this something the bank reports on.
That leads me to amendments in the final group about the timing of those reports, which are, at the moment, seven years apart. If this is to be the way we deal with additionality, the report timings need to be shorter.
I thank the Minister for her engagement during this process. It has been exemplary. I thank her for listening and I am pleased that she has introduced the principle of additionality, albeit into the review process, by amending Clause 9 with Amendment 23. However, I share the disappointment of the noble Baroness, Lady Noakes, with that amendment and, in particular, the way in which it fails to deal with crowding out. It deals with the additionality element, but it does not deal with the crowding-out element.
If noble Lords will forgive me, I will touch on why crowding out is important, because I am not sure it is widely understood. It sounds like a technical economic term, but it is not; it is a very practical and important issue. Crowding out happens when the Government, in this case through the bank, invest in direct competition with the private sector by offering lower interest rates or better terms generally. This is something, as the noble Baroness, Lady Noakes, has said, that the Government have rightly criticised the EIB for doing in some circumstance. I think the EIB got some things right and was quite good in certain circumstances, but there are also plenty of examples where it crowded out.
First, crowding out is a waste of taxpayers’ money—why should the taxpayer, in effect, subsidise a project that could perfectly well be financed by the private sector? More damaging still is the effect that crowding out has in actively discouraging the development of a thriving private sector financing market for the sorts of investments in infrastructure and the environment that the bank is meant to encourage. Why would a private sector financier bother to create an infrastructure financing business if it will simply be undercut by the Government’s investment arm? So the impact of crowding out is to reduce the longer-term availability of private sector finance, and it may end up actually reducing the level of infrastructure and environmental investment over the longer term, which is precisely the opposite of what we are trying to achieve with the infrastructure bank. That is why it is so important that the bank does not crowd out private finance.
Amendment 24 is designed to ensure that those situations where crowding out occurs are explicitly reported on, rather than just ignored. The Minister said in her letter of
“given that review will cover crowding-in, that necessarily includes the question of whether crowding-in did not happen with the attendant risk of crowding-out. This is because additionality is designed to measure genuine additional private finance, in other words investment that would not otherwise have happened ... I would fully expect the independent review to address the question of crowding-out under the terms of this drafting.”
However, let us look at the drafting of Amendment 23: it simply does not do that. It requires the review to report only on
“the extent to which its investments in particular projects or types of project have encouraged additional investment”.
It does not refer to situations where the bank has replaced private finance, in whole or in part. Indeed, in the slightly odd situation where it replaced private sector finance only in part—for example, by taking 50% of an investment—as drafted, the bank would be able to measure the other 50% as additionality, even though it would have happened anyway. A project where 100% is replaced by private finance would simply be treated as not crowding in. There is nothing in Amendment 23 that would mean it would be the actual crowding out would be measured or reported on.
Given the importance of the bank not crowding out the private sector, which, as I have explained, would potentially undermine the bank’s very purpose of encouraging infrastructure and environmental investment, the Government should look very closely at accepting an amendment like Amendment 24. At the very least, could the Minister please be explicit at the Dispatch Box—rather than implicit, as she was in her letter—that her Amendment 23 is intended to ensure that the review is intended to cover, and will actually report on, those situations where the bank invests despite there being private finance available for the investment? That wording is really important, and her letter is not explicit on that point.
My Lords, it was not my intention to speak on this group but, given that all the non-government speakers have been from the other side of the House, I felt I should offer an argument from this side of the House that is perhaps 180 degrees opposite to that presented by the noble Baroness, Lady Noakes, but, none the less, makes an argument for either Amendment 6 or Amendment 24.
The noble Baroness, Lady Noakes, suggested that she preferred private bankers to public bankers. Private bankers have been left to provide the direction for our economy and society over the past few decades and look where that has got us: we are having to talk from all sides of the House about the urgent need to level up and to tackle poverty, inequality, our climate emergency and the nature crisis. Therefore, we need to make sure that the bank is not crowding out private finance. If it is, it is spending money in the wrong places. It needs to be doing things that are innovative and different from what we have been doing up to now. That is why I encourage either the mover of Amendment 6 or those speaking to Amendment 24 to consider testing the opinion of House, and I offer them Green support.
My Lords, my motivation here is somewhat different: I want to see the bank move along the risk spectrum. There is a temptation, due to the structure of the bank, for it to stay within the range of fairly safe investments. It has to produce a return and it has a very small risk capital base, but I would like it to maximise that to move along the risk spectrum. I see no other way to accelerate the innovative technologies that we need, or development in disadvantaged areas where people have typically turned their backs, unless the bank is willing to take on that much higher risk profile. The various additionality amendments seem to create that kind of pressure to move UKIB much further down the risk spectrum than it might otherwise feel comfortable in doing, meaning that it therefore does not maximise the opportunities in front of it.
My Lords, I join my noble friend Lady Noakes in applauding Amendment 6 in the name of my noble friend Lord Holmes as a gallant attempt at defining additionality, although I dare say another Peer might draft it differently.
I want to make a more general point about additionality before coming on to the specifics of each amendment in this group. Additionality is a key principle underpinning the bank, and it is something that the Government take very seriously. That is demonstrated by the fact that additionality is one of the bank’s core investment principles, as set out in its framework document and strategic plan. However, following legal advice, the principle is not included in the Bill as there is no single agreed definition of additionality in a financial context that we could appropriately include in the Bill. Approaches to assessing additionality are developing over time and we would not want to stymie that development by creating a statutory definition of additionality at this stage.
While the term “additionality” has been included in previous legislation—for example, the Dormant Assets Act 2022 and the National Lottery Act 2006—additionality in those contexts had a different meaning: of funding projects or activities that the Government would not have otherwise funded. Assessing private sector additionality is more complex because it involves more actors and varied forms of financing. Each deal will have a particular set of circumstances that will indicate the amount of additionality that the bank is bringing. For the bank, as part of that, additionality means ensuring that it both crowds in private finance through its investments and avoids crowding out the market by providing finance that could have come from the private sector.
The bank has set out its approach to assessing and measuring these concepts of additionality in its strategic plan, which was published at the end of June. Currently the bank will assess additionality on a case-by-case basis, assessing the evidence as part of due diligence and monitoring that through a key performance indicator on the levels of private sector finance that it has crowded in. This is a measure commonly used by other organisations such as the OECD.
Crowding out is best assessed through evaluations and medium-term assessments of whether the portfolio of investments has led to crowding out in a particular sector. The bank is developing its thinking on how it will monitor and evaluate its work at both deal and portfolio level, including setting up an independent evaluation.
Further to this, additionality is implicitly covered in the Subsidy Control Act 2022, which of course applies to any subsidies the bank gives. Schedule 1D states:
“Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.”
Given the protections of the Subsidy Control Act 2022 and the regulatory regime, the difficulty in accurately defining additionality in the Bill, the work the bank is already doing on additionality and, finally, our amendment to the review, I hope my noble friend Lord Holmes will feel able to withdraw his amendment. I must say to my noble friend that the Government do not intend to bring forward any amendments at Third Reading, so I must disappoint him on that front. I should also say that to the noble Lord, Lord Tunnicliffe, in relation to the previous group, if I was not clear on that front.
The amendment in my name to Clause 9, on the statutory review, will ensure that the review of the bank will measure its success in encouraging additional investment. The drafting of the amendment is based on the reference to additionality in the framework document. I should like to provide reassurance that, given that the review will cover crowding in, it necessarily includes the question of whether crowding in did not happen, with the attendant risk of crowding out. This is because additionality is designed to measure genuine additional private finance—in other words, investment that would not have happened otherwise. I would fully expect the independent review to address the question of crowding out under the terms of this drafting.
The bank could act as the sole financer of a private project if it meets the bank’s investment principles and objectives, but it is highly unlikely that the bank, as the sole financer of a private project, would crowd out private investment, as the bank would be the sole investor in very immature or nascent financial markets for a technology only if no other investors were willing to support the project.
The bank’s initial assessment of the technologies, sectors and markets it plans to engage in, as published in its strategic plan, will allow it to focus its investment in areas with a limited risk of crowding out. This will continue to be developed and reviewed. In cases where the bank would act as the sole financer of a private project, it would expect to have a transformational impact on the market and for the market to be able to attract private capital over the medium to long term. This in part speaks to the concern of the noble Baroness, Lady Kramer, about the bank being able to operate along the risk spectrum, as it were, rather than seeking to invest solely in perhaps lower-risk or less innovative projects, given the other demands that it has: making a return on its investments and becoming self-funding.
Given this, I am grateful to my noble friend for her commitment not to move her amendment when it is reached. I hope that, in future, my best efforts produce more than a quarter of a loaf.
My Lords, I thank all noble Lords who have spoken on this group, and particularly my noble friend Lady Noakes for bringing forward Amendment 24. I shall summarise what the Minister said: that additionality is pretty much impossible to define, but the bank will definitely do it—so that is good. It is unfortunate that we cannot have that in the drafting of the Bill given that, as I said in opening the group, this is the raison d’être of the bank: its only ultimate purpose is additionality. As other noble Lords have said, not having this could lead to less rather than more, and taxpayers’ money being put to that purpose.
It is desperately disappointing that we cannot have additionality in the Bill. I will withdraw my amendment but, in doing so, I gently, politely and respectfully request that my noble friend the Minister considers not moving government Amendment 23 and working to meld it with my noble friend’s Amendment 24 to come up with something that actually covers both crowding out and crowding in. Certainly, as drafted, government Amendment 23 does not do this. I beg leave to withdraw Amendment 6.
Amendment 6 withdrawn.