Examination of Witnesses (Question Numbers
50-59)
MRS LOWRI
KHAN, MR
CHRIS MARTIN
AND MR
DAVID LUNN
9 MARCH 2010
Q50 Chair: Good morning and thank you
for coming in to talk about this. You will have heard the previous
exchanges when quite a lot of questions seem to have been referred
to you to answer and we look forward to that very much. UKFI has
been operating for a year and a half. How well do you think it
is doing in supporting all areas of government policy?
Mrs Khan: It is worth stepping
back a bit and thinking about why we have UKFI. The decision to
provide support to the banking sector and to create UKFI was in
response to a crisis situation; the imperative then was to maintain
financial stability and economic stability more widely. The shares
held by UKFI are basically held for those primary purposes and
UKFI has been essentially established in pursuit of those objectives.
Its policy rationale is grounded in a specific set of circumstances
and our assessment of its performance is essentially against the
framework we have set up to govern the organisation which colleagues
from UKFI set out earlier. We believe it has performed well but
within the terms of the task that it was set up to achieve which
has been governed by the particular circumstances and indeed a
decision in principle that shares in banks in a crisis situation
are best managed at arm's length and on a commercial basis.
Q51 Chair: Accepting that that is
the context in which UKFI has been established, nevertheless we
are in a situation now where the Government, on behalf of the
public, control two very large banks and the Government also have
certain policy aims which extend beyond just making money out
of shareholdings which they happen to have acquired because of
a crisis. We are constantly assured that there is a degree of
coordination between different aspects of government policy and
different departments. Given that is the case, do you think that
UKFI is doing everything it can to influence those banks' environmental
performance?
Mrs Khan: UKFI, as they set out,
have acted properly within the framework that they have been given
by the Treasury. There is a question of balance in interpretation
there and ultimately that is a question of judgment. However,
they very clearly have obligations as a public body to do as we
would expect any public body to do. Do they have any specific
remit in relation to environmental matters? The answer to that
is no.
Q52 Chair: I do not think any of
us probably disputes that they are acting properly and acting
within their remit. The question really is: does that remit allow
them to do any more than any other bank would do environmentally?
If it does not allow that, should that remit be amended?
Mrs Khan: The policy position
in relation to environmental matters is in effect that UKFI makes
sure that the banks are operated in a sustainable way and that
they have a sustainability policy to that end. As UKFI set out,
there is ultimately a policy tension around whether a body such
as that seeks to pursue its core objectives or whether it also
seeks to bring into play a broad array of government objectives.
There are ways in which that can undermine its primary objective.
Ultimately, were UKFI perceived to be placing influence over the
banks in which we have a majority shareholding in a way that other
investors perceived to be detrimental to their value that would
clearly undermine the objective of obtaining value for the taxpayer,
so there is a balance to be struck there.
Q53 Chair: From the evidence we have
heard so far, the balance looks to me to be tilted pretty sharply
in one direction, that the overriding consideration in relation
to every possible decision is to maximise the financial return
on these shareholdings. Even if those banks were pursuing lending
policies which were actively counter to other government objectives,
including environmental objectives, you would not see it as appropriate
for UKFI to intervene in that because that might in some way inhibit
the maximisation of the value of those investments?
Mrs Khan: It is probably unfair
to characterise the objective as being maximisation at all cost.
There is a sustainability objective within that; it is about creating
sustainable value. I would also highlight the fact that in many
ways there are other constraints acting on banks, acting on banks
generally. Our general stance would be that environmental policy
is pursued through a variety of means, not just through the narrow
lens of our public ownership of certain shares.
Q54 Chair: What you appear to be
saying, and of course it is pursued in a number of ways, is that
it will not be pursued at all in relation to the ownership of
these banks.
Mrs Khan: It is pursued to a degree
and it is pursued to a degree that is consistent with the core
objectives of UKFI.
Q55 Chair: Has any consideration
been given in the past or now to setting conditions on the type
of lending or investment that these banks might undertake in order
to make that a greener form of lending or investment?
Mrs Khan: Certain commitments
have been made by the banks on lending and the volume of lending
but there is no detail within that as to the specific nature of
the loans they should make.
Q56 Colin Challen: Do you, or indeed
does anybody in the Treasury, know whether or not British taxpayer
money is supporting developments of Chinese unmitigated coal plant
or, shall we say, Albertan tar sands?
Mrs Khan: We do not take a detailed
oversight role in relation to the detailed operations of RBS or
Lloyds. Our relationships with those banks are governed by an
arm's-length relationship. We do have UKFI to oversee the investments
and those matters and the detail of the banks' operations are
properly a matter for the boards of the banks in question.
Q57 Colin Challen: At every recent
United Nations climate change conference since the financial crisis
began ministers from all around the world, but not least British
ministers, have come to the podium to say that the financial crisis
is an opportunity to kick start a green industrial revolution.
Would you say that in any way UKFI is contributing to that policy
statement?
Mrs Khan: I think it is in the
way that colleagues from UKFI set out earlier, which is that it
is instilling proper governance in the banks; it is ensuring that
they have the risk management and the policy frameworks in place
to run those banks in an effective, sustainable manner.
Mr Martin: The test for that is
whether we have the policy framework right overall, so we see
banks in general, including the banks in which we happen at the
moment to have a public stake in, responding to that. If we have
the policy framework wrong, in terms of not seeing the investment
flows into cleaner energy, low-carbon energy efficiency, then
we need to change the policy framework rather than trying to correct
it by steering or trying to make these two institutions which
we happen to have a stake in behave differently. That is the view
ministers have very much taken on how we should approach tackling
the issue. If we are discussing the narrow issue of UKFI, ministers
have taken a particular view about how we should operate that.
We are certainly not complacent at all about how we tackle the
low-carbon challenge. You have had many hearings on this and I
could discuss it at length. I will not try your patience now unless
you want me to. There is a wide policy framework which is evolving,
in which the Treasury are very deeply involved, whether it is
through the establishment of Infrastructure UK or a consideration
that it is currently making at the moment about whether there
is a case for some kind of green investment institution, our involvement
with the European Investment Bank or the energy market assessment
which we are jointly conducting at the moment between DECC and
the Treasury to look at the overall framework for energy markets
going forward. All those are very explicitly about ensuring that
we have a framework in the UK that will incentivise investment
as undoubtedly necessary to see the transformation we are talking
about. A very important part of that is the availability of capital,
both at the venture capital end and all the way through to project
finance and long-term debt. Absolutely it is a really important
agenda. It is just that we see from our perspective that the role
is to get the policy framework right rather than interfere in
the individual decisions.
Q58 Colin Challen: What I am hearing
is that it is absolutely an important agenda except it does not
apply here.
Mr Martin: No, it absolutely does.
Q59 Joan Walley: How does it apply
here?
Mr Martin: Do these institutions,
operating commercially but consistently with good sustainability
practice within the sector, see investment opportunities in low
carbon in energy efficiency in the UK?
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