EU Financial Instruments 2014-20
The Committee consisted of the following Members:
† Cryer, John (Leyton and Wanstead) (Lab)
† Ellison, Jane (Battersea) (Con)
† Hands, Greg (Chelsea and Fulham) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Hoban, Mr Mark (Financial Secretary to the Treasury)
† Leslie, Chris (Nottingham East) (Lab/Co-op)
† McFadden, Mr Pat (Wolverhampton South East) (Lab)
† Mordaunt, Penny (Portsmouth North) (Con)
† Munn, Meg (Sheffield, Heeley) (Lab/Co-op)
† Ruffley, Mr David (Bury St Edmunds) (Con)
† Sharma, Alok (Reading West) (Con)
† Simpson, David (Upper Bann) (DUP)
Sarah Thatcher, Committee Clerk
† attended the Committee
European Committee B
Monday 27 February 2012
[Miss Anne McIntosh in the Chair]
EU Financial Instruments 2014-20
4.30 pm
The Chair: Does a member of the European Scrutiny Committee wish to make a brief explanatory statement about the decision to refer the relevant documents to the Committee?
Penny Mordaunt (Portsmouth North) (Con): It might help the Committee if I take a few minutes to explain the background to the document and the reason why the European Scrutiny Committee recommended it for debate.
The term “innovative financial instrument” describes EU interventions other than pure grant funding. In that sense, it covers a broad range of classes, where financial support from the EU budget is provided in forms other than grants, including cases where EU grants are blended with loans from financial institutions. Innovative financial instruments in the current 2007-2013 financial framework are comprised of two EU-level risk capital and equity instruments, three EU-level debt instruments, two instruments combining equity and debt support, two instruments financed by structural funds and two external policy instruments in pre-accession countries.
The Commission believes that innovative financial instruments should play an increasingly important role in EU budget spending under the 2014-20 multi-annual financial framework. It has proposed eight instruments for that next framework. The communication, which the European Scrutiny Committee has recommended for debate, presents the Commission’s view on the future design and management of innovative financial instruments. It envisages a new framework for streamlining and rationalising the design and management of the new generation of innovative financial instruments, to be called EU equity and debt platforms.
The Commission suggests that, first, the platforms will be a set of common rules and guidance for equity and debt instruments, including guarantees and risk sharing, for internal policies. That will ensure a consistent approach to such instruments where they are supported by the EU budget. Secondly, the platforms will cover distinct financial and technical parameters, such as maximum ceilings for risk sharing arrangements or minimum levels of equity participations and other key parameters for the design and implementation of innovative financial instruments, with a view to their streamlining and rationalisation.
The Commission says that it will be discussing the proposed framework in the coming months. That discussion will feed into the general framework to be created by the next financial regulation, which governs raising and managing the EU budget, and the Commission’s subordinate delegated Act, which will replace the present implementing rules. That discussion will also feed into the specific legislative proposals for policy programmes for the next MFF period, which are presently being adopted by the Commission.
The European Scrutiny Committee says that the proper use of innovative financial instruments might lead to some EU budgetary advantage for the UK. It recommended the document for debate so that Members could explore with the Minister what form such instruments should take and how many there should be.
4.33 pm
The Financial Secretary to the Treasury (Mr Mark Hoban): It is a pleasure to serve under your chairmanship again in one of these great Committees, Miss McIntosh.
We live in truly unprecedented times. Growth has stalled across the EU, unemployment is rising, and European citizens and businesses are facing their toughest economic conditions for many years. All over Europe, the need for fiscal constraint is forcing Governments to make tough choices to ensure that they can put their economies on a sustainable growth path for the future.
Against that background, the Commission has submitted its proposal for the next financial perspective—a proposal that is, in every sense of the word, unacceptable. Just as national Governments are having to introduce austerity measures and fiscal constraint, so must the Commission. As I have said before, the EU budget must be part of the drive towards consolidation, not immune from it.
If used prudently and responsibly, innovative financial instruments can contribute towards a smaller EU budget. They have the potential increasingly to replace grant funding with debt financing, and thus deliver considerable reductions in elements of EU budget spending. However, the Government’s willingness to explore the greater use of innovative financial instruments is conditional on their being used to deliver a smaller EU budget.
If utilised correctly, IFIs can deliver two key economic benefits. The first is greater efficiency of EU funding. Grant funding is by its nature non-repayable. Debt and bond financing, however, is repayable, and once repaid, the same money can be spent again. The second key economic benefit is greater effectiveness of EU funding. Grant funding is delivered euro for euro, but by combining EU budget money with co-financing from the European Investment Bank or private sector institutions, a multiplier effect is created so that the same financial benefit can be delivered for a much lower contribution from the EU budget.
The Government’s approach to the development of IFIs is guided by a number of principles. First, their use should be confined to areas of EU value added; they should minimise deadweight cost and avoid overlaps. Secondly, they should be financially sound and in particular should not result in any obligation for the budget above the budgetary contribution. They should be transparent, simple and limited in number and there should be adequate reporting of their use and financial performance.
I am pleased that a number of those principles are reflected in the Commission’s communication, and I welcome the Commission’s approach to develop a more coherent framework for innovative financial instruments. We support the Commission’s attempts to streamline and rationalise the overall framework for IFIs, and the establishment of a common set of rules for equity and debt platforms. Those might include more integrated monitoring and governance arrangements, or the greater use of ex-ante impact assessments and ex-post evaluations. However, our willingness to explore the greater use of
IFIs is dependent on their being used to reduce, rather than supplement, EU budget expenditure. It is therefore most regrettable that in its framework—Mr David Ruffley (Bury St Edmunds) (Con): Will the Minister give way?
The Chair: Order. There will be opportunities to ask questions and deliver speeches later, but there can be no interventions on the Minister at this stage.
Mr Hoban: It is most regrettable that in its framework communication the Commission sees IFIs as being largely additional or complementary. For that reason, the Government are unable to support the innovative financial instrument framework proposed by the Commission. The Government will, however, continue to argue that the instruments should be used to reduce an element of the EU budget, and I assure the Committee that I pressed that point strongly in my discussions with the Commissioner and will continue to do so. Our position on IFIs reflects our overall stance on negotiating the EU budget: to ensure value for money and to ensure that, where money is spent, it drives forward economic growth.
The Chair: We now have until 5.30 pm for questions to the Minister, and I remind hon. Members that those should be brief. Subject to my discretion, it is open to a Member to ask related supplementary questions together as a group.
Chris Leslie (Nottingham East) (Lab/Co-op): This is indeed an excellent Committee; the Minister and I both attended a Committee on the previous parliamentary sitting day, and it is good to do so again. I have a number of questions about innovative financial instruments. First, what is the Government’s assessment of the 1% of the EU budget used in the 2007-13 multi-annual financial framework round for IFI-based schemes? Does the Minister feel that that was a positive or negative use of the budget? With respect to IFIs, what is his analysis of the current round?
Mr Hoban: In a way, that question answers itself. The 1% is a start but it is not a hugely significant contribution. I wonder whether more can be done with the instruments, in the right way, to channel more funds and make them more effective. That is one of the themes underlying our approach to the instruments in the next financial framework.
Chris Leslie: We are talking about innovative financial instruments being used in a European budgetary context, which is relevant to how they reflect on similar usage in a UK domestic context. What discussions has the Treasury had with the Bank of England on the use of quantitative easing funds as an innovative financial way of aiding British business, perhaps in respect of corporate debt support?
Mr Hoban: Despite the hon. Gentleman’s views about the nature of the Bank of England, it is beyond even its remit to encroach on European territory in such a way. The Bank of England is independent. It is responsible for the way in which it uses quantitative easing to support the economy. Its aim through quantitative easing is to tackle the issue of yields and to make investment in
areas outside sovereign debt more attractive. Therefore, it would not be appropriate to use quantitative easing in the same way that such instruments are proposed to be used.Chris Leslie: It is interesting to draw parallels. There is quite a lot of Eurospeak on the concept of innovative financial instrument, and I am trying to get a handle on it. In the British context, was credit easing an equivalent of an innovative financial instrument—underwriting and risk-sharing with banks and so forth? What would the UK Government’s opinion be of credit easing at a European level?
Mr Hoban: There is a parallel in that funds that flow through the European Investment Bank achieve a similar outcome: reducing the cost of funding. We are not on entirely new territory when the Government talk about a national loan guarantee scheme. Some of the areas that we are also looking at through business finance partnerships, such as finding alternative funding sources for small and medium-sized enterprises, have a parallel, in a way, with some of the instruments that are planned for the price of equity or a loan facility to SMEs. There are parallels between some of the instruments and aspects of credit easing.
Chris Leslie: The European Commission communication, on page 18 of the document pack, describes some sector-specific proposals for innovative financial instruments in the next multi-annual financial framework. There is reference to a student loan guarantee facility, and a reference to video game developers, publishers and distributors,
“whose assets are mostly intangible (such as intellectual property rights), often resulting in financial intermediaries perceiving the CCS”—
The Government withdrew the previous Administration’s plans for tax relief for the video games industry in 2010. Has the Minister developed plans to provide alternative support for the video games industry, or is he relying on the European IFI route as the only way in which the UK Government are likely to support the video games sector?
Mr Hoban: Clearly, as the document states, the EU seeks to find ways to support the cultural and creative sector, which includes video games developers, publishers and distributors. Part of the challenge those people face is access to finance, which is why we have supported a number of schemes to improve the access of small businesses to finance, including the business growth fund, which is a bank-led initiative. We have also provided tax incentives to encourage more people to put equity into such businesses.
Another area in which we are working closely with our European partners—this was the subject of a letter sent by the Prime Minister and 11 other Heads of State and Government last week—is the completion of the digital single market. It will have a huge impact on the cultural and creative sectors that we are looking to foster.
Chris Leslie: I have a final question. The IFIs are one piece of the jigsaw. The Minister will be aware that we are concerned that the Government are not emphasising the growth agenda sufficiently in European discussions. Another piece of the jigsaw that is impossible to segregate from the issue is about where we are going with the European stability mechanism and the treaty that I understand the UK must sign up to imminently. Will the Minister clarify when we are likely to debate the ESM treaty on the Floor of the House?
Mr Hoban: That was a remarkably ingenious question in suggesting that the ESM might be an innovative financial instrument as defined by the document pack; it is not, as the hon. Gentleman knows.
Chris Leslie: When will we debate the treaty?
Mr Hoban: That is a discussion for the usual channels.
Mr Ruffley: May I ask the Financial Secretary to clarify one point? As I understand it, the support of Her Majesty’s Government for the greater use of these instruments is conditional on their reducing, not adding to, the overall EU budget to which we contribute. Given that his officials will be making projections for the next framework, can he give us some indication of the order of magnitude of the reduction he is talking about?
Mr Hoban: We are at a relatively early stage of the discussion on the multi-annual financial framework. The Prime Minister, together with leaders of a number of member states, including the French and the Germans, has put forward a proposal that there should be a real-terms freeze in the EU budget. Clearly, any money to be voted to these instruments from within the budget must be within that freeze. One of the discussions going on at the moment is about how we find money within that budgetary ceiling to deliver on objectives such as growth. We will wait to see just how things shape up, but we have been clear with the Commission on a whole range of issues—this is just one of many. We have had debates on the Floor of the House—about staff regulations last week and about connecting Europe a few weeks ago—and we have been clear with the Commission, as have other member states, that its ambitions must be tempered by the size of the budget and that the size of the budget must be not be driven by its ambitions.
Mr Ruffley: I am grateful to my hon. Friend, but does he have any figure or percentage to offer us in connection with what reduction these instruments are likely to deliver in the EU budget?
Mr Hoban: It is too early to say. We need to work out the budget envelope, the allocation of resources between the various headings and the extent to which other member states and the Commission will think creatively and see these instruments as a substitute, rather than an addition, to the budget. This is the opening skirmish, as it were, in these battles.
Mr Pat McFadden (Wolverhampton South East) (Lab): The document talks about smart, sustainable, inclusive growth. It includes items about instruments on individual sectors, including creative industry. It also talks about structural funds, trans-European networks, infrastructure
and so on. All that is about jobs and growth, and the Minister rightly said at the beginning that those are a shared concern across Europe. We had a lot of discussion around Christmas about the Prime Minister’s stance on the treaty to stabilise the eurozone in terms of how it might affect Britain and the financial markets, but we had less discussion of the Government’s position on the content of that treaty as it affected the eurozone itself. The draft treaty proposes future deficits of no more than 0.5% of GDP across the eurozone. Do the Government support that position or not?Mr Hoban: One of the inevitable consequences of monetary union, if we want it to be successful, is that those who are part of it should undergo closer fiscal integration, and we support that. It is a matter for the eurozone Governments and the contracting parties to the treaty to determine its terms; it is not a matter for this Government.
Mr McFadden: Given that the eurozone is our main trading power, and given, as the Chancellor rightly reminds us all the time, that a stable, strong eurozone is in the interests not only of eurozone members, but the UK, even though we are not part of it, is the Minister really saying that we have no view about a eurozone treaty that locks in austerity for the eurozone for many years to come, with the impact that that could have on jobs and growth in the UK?
The Chair: Order. Minister, it might be helpful if you confine your remarks to the scope of the document.
Mr Hoban: On that basis, I have nothing to add in response to that question.
John Hemming (Birmingham, Yardley) (LD): For the avoidance of doubt, I refer hon. Members to my declaration of interests regarding my involvement with John Hemming and Company, which provides software for the equity and debt industries. I do not think that this issue relates directly, but it is sufficiently close for me to declare an interest.
I was pleased to see the Minister’s comments on page 5 of the report:
“innovative financial instruments should be financially sound—in particular, they should not result in any obligation for the Budget above the budgetary contribution”.
Given the fiction that is the EU budget when we look at the outcomes, what comfort can we have that there are no risks beyond what is already being accounted for in the budget?
Mr Hoban: The commitment needs to be very clear in the design of the instruments; for example, if a guarantee was issued to back debt, whether that guarantee should not be open-ended, either in duration or amount. Where equity is invested, that again should be defined and capped. There are, therefore, ways in which the instrument can be designed to provide the degree of comfort we need to give certainty about the budget and the fact that there will not be any further cost. That does not mean to say that the Commission might not want to decide to go on to, say, follow-on funding if there is a start-up, but at each stage we need to be very clear what the actual investment is likely to be.
John Hemming: I thank the Minister for that answer, which has given me some comfort. Given the nature of how things happen in the EU, my concern is that contingent liabilities can rack up very easily without having been accounted for in the budget. Will the Minister write to me on what comfort can be given to ensure that a massive contingent liability will not be developed under these new instruments?
Mr Hoban: I am happy to do so.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 16301/11, relating to a Commission Communication: A framework for the next generation of innovative financial instruments—the EU equity and debt platforms; notes that the Commission’s proposals increase resources available to the EU; agrees that the maximum acceptable expenditure increase through the next Financial Perspective is a real-terms freeze in payments; and supports the view that Innovative Financial Instruments in the next Financial Perspective, 2014-2020, should only be used to deliver a smaller EU Budget and not to supplement existing funding.—(Mr Hoban.)
4.52 pm
Chris Leslie: First, I congratulate the hon. Member for Birmingham, Yardley on extracting so readily a commitment from the Minister to write to him. The Minister does not often give such concessions so easily, so it is a red letter day.
I commend the question from my right hon. Friend the Member for Wolverhampton South East. He pointed out the relevance of this particular aspect of EU activity to the wider discussions following the phantom veto in the bigger treaty discussions that we are not part of. What is being discussed by the other 26 members will have an important impact on our economic prospects, and the Minister’s words will be ringing through the corridors of power—“Nothing further to add”, I think they were.
As I said earlier, there is an incredible amount of Eurospeak in this documentation. I am not sure that the innovative financial instruments are really that innovative; they basically talk about non-grant funding, taking equity stakes or debt financing and those kinds of support. We welcome that sort of activity where it works, but important safeguards have to be put in place. We are not a million miles away from the Government’s attitude on that.
We agree that we need to guard against budget creep, which tends to happen at EU level. It is important that we are firm and keep a close check on what happens. There has already been some debate about whether there is sufficient attention to the independent processes of selecting the projects that might be candidates for innovative financial instruments. Are they based on a rigorous risk assessment, or are we into terrain where a bit of political carving up is going on? I am not necessarily implying pork barrel projects across the EU, but we have to ensure that innovative financial instruments are awarded to projects in a very transparent and accountable way. A watchful eye needs to be kept on the scale of returns to the intermediaries who are brokering and facilitating these innovative financial instruments. There is a prospect of some firms or individuals making
considerable amounts of money on the back of IFI deals. Again, it is an important and necessary check in the system.As I said, we and the Government are not a million miles apart. What disappoints us about the motion as drafted is the Government’s lack of engagement in trying to shape what happens in respect of the innovative financial instruments strategy as part of the multi-annual financial framework. They are sending out the signal that they are not exactly steering that agenda; this is merely a commentary on it. That sums up the Government’s current role in the European Union: making comments from the sidelines rather than getting stuck in and trying to shape the agenda.
We will not oppose the motion, but we had hoped for better from the Government. They should have said in the motion what they are doing to shape the agenda, what the dynamic process is and what course they are taking, although things are taking place in a more constrained budgetary environment, to maximise the potential impact of such schemes on jobs and growth in Europe and across the UK.
4.56 pm
Mr Hoban: The debate has been suitably brief. I will save the cost of postage by telling my hon. Friend the Member for Birmingham, Yardley that typically, the EU budget makes cash contributions to such projects. Usually exposure is limited to that. That does not mean that there are no guarantees, but the typical form of input is cash. He and the hon. Member for Nottingham East are right to say that there should be tough controls on the disbursement of those funds. That is why last week, at ECOFIN, my right hon. Friend the Chancellor voted against the discharge of the 2010 accounts due to a rise in the number of irregularities in the disbursement of EU funds.
We must ensure that that flow of money is spent wisely. That is a theme running through our approach in the financial framework; it is meant to ensure not only a real-terms budget freeze but that individual programmes are designed so as to ensure that money is spent wisely and that we get value for money. That is why we are working closely on some initiatives with the EIB to shape the instruments. We play an active role on the EIB board. I know that those of my officials who sit on the board are focused on putting good schemes in place as well as ensuring that we get value for money.
It was asked where the instrument fits into the growth agenda. It is worth pointing out that last week, the Prime Minister and the Heads of State and Government of 11 other member states wrote in advance of the March council, setting out clear issues involving economic growth, including the digital economy, trade, the cost of regulation and financial services regulation. That letter was signed not just by our Prime Minister but by Mario Monti, Prime Minister Rajoy of Spain and the Polish Prime Minister, Donald Tusk. It represents a wide range of member states and a good cross-section of euro and non-euro and large and small ones.
That collective action demonstrates a commitment to pursuing the growth agenda and the UK’s engagement in pushing that agenda forward. I had hoped that Labour Members would welcome that. The hon. Member for Nottingham East did not do so in his speech, but I am
sure that it is an omission that he is bound to correct at another opportunity. The instrument can be important, but it must be got right. It is meant not to add to the EU budget burden but to control it. I hope that the Committee will endorse the motion.