Draft Enterprise and Regulatory Reform (Designation of the UK Green Investment Bank) Order 2013
The Committee consisted of the following Members:
Margaret McKinnon, Committee Clerk
† attended the Committee
Draft Enterprise and Regulatory Reform (Designation of the UK Green Investment Bank) Order 2013
The draft order’s purpose is to designate the UK Green Investment Bank for the purposes of sections 3 to 6 of the Enterprise and Regulatory Reform Act 2013, to which the House gave approval in the spring. Designation means that certain statutory requirements provided for in the 2013 Act will apply to the bank. First, section 3 of the Act will prevent the bank from altering its objects unless that is either required by law or approved by the Secretary of State. That will ensure that the articles of association always remain consistent with the green purposes provided for in the Act. Secondly, section 4 provides the Government with a bespoke power to fund the bank. Thirdly, sections 5 and 6 impose on the bank certain enhanced reporting and publication requirements, including one to report to Parliament if the operational independence undertaking is revoked or materially altered.
The Act specifies that certain conditions must be met before the bank may be designated. I am satisfied that each of those conditions has now been met as follows. First, the UK Green Investment Bank’s objects, as provided for in article 3 of its articles of association, provide assurance that the bank will engage only in investment-related activity that it considers likely to contribute to the achievement of one or more of the statutory green purposes. Secondly, the bank’s objects should ensure that its investment-related activity, taken as a whole, is likely to contribute to a reduction in global greenhouse gas emissions. Thirdly, the bank’s operational independence undertaking was laid before Parliament in July at the same time as the draft order. Finally, I can also confirm that the bank is wholly owned by the Crown.
The UK Green Investment Bank became fully operational at the end of October 2012. Over the past 12 months, it has been establishing itself as an expert in financing green infrastructure, working alongside other market participants to mobilise additional investment. In the recent spending review, the Government announced that it was allocating the bank a further £800 million, meaning that it will have a total of £3.8 billion of funding for the period to March 2016. That additional
The UK Green Investment Bank’s purpose is to mobilise the additional private investment needed to help us to achieve our environmental objectives and our climate change targets. Its investment criteria ensure that it only supports projects that deliver real green benefits while also generating strong commercial returns on the bank’s capital. Its activity is helping to encourage other market players to recognise that investing in green infrastructure is a profitable business to be in.
In June, the Secretary of State placed in the Libraries of both Houses a copy of the Green Investment Bank’s first annual report, containing detailed information about the bank’s strategy and activities to date, including its green impact. The bank has so far made commitments totalling £714 million into green projects, including projects in each of its four principal priority areas, which are offshore wind, energy efficiency, waste recycling and waste to energy. That has mobilised in turn more than £1.8 billion of additional private sector finance. On green impact, the Government believe that the bank has made a good start, which we expect to continue as more projects supported by the bank become operational.
UK Green Investment Bank has an important role to play in helping to increase the scale and pace of investment in green infrastructure. Through tonight’s order, we are designating the bank and bringing into effect the statutory requirements and safeguards that will ensure it continues to perform its role in the way that Parliament agreed it should. I commend the order to the Committee.
Mr Iain Wright (Hartlepool) (Lab): May I begin by saying what a pleasure it is to serve under your chairmanship, Mr Robertson? I welcome you and the Committee today, especially given the difficult weather conditions and subsequent travel disruption that many hon. Members will have had to encounter to get here. I welcome particularly the hon. Member for East Surrey and my hon. Friend the Member for Cardiff South and Penarth, who were both rightly promoted in the recent reshuffles of their respective parties. I say well done to them. The promotions were thoroughly well deserved.
I thank the Minister for his explanation of the order. I do not wish to detain the Committee for too long as I know other hon. Members wish to speak, nor do I wish to recycle the arguments—[ Laughter. ] I am pleased that someone got my gag. I do not wish to rehash the arguments we had in the Committee on the Enterprise and Regulatory Reform Bill, but I have questions for the Minister.
As the Minister said, the purpose of the order is to ensure that the UK Green Investment Bank engages in green activities only, contributes to a reduction in global greenhouse gas emissions and can operate independently, at arm’s length from Government. Section 2 (1) of the 2013 Act states that
“conducive to, making, facilitating or encouraging investments that it considers likely to contribute to the achievement of one or more of the green purposes (whether in the United Kingdom or elsewhere).”
The legislation therefore allows the UK Green Investment Bank to make investments elsewhere in the world, as long as it can be demonstrated that one or more of the green purposes are being achieved. I am sure that you will agree, Mr Robertson, that that will not aid British industrial capability in the low-carbon sector. Can the Minister confirm that it is not the intention of the Government for investments to be made in companies that place their industrial activity, chief base and employment possibilities outside the UK?
“is that the Secretary of State is satisfied that the Bank’s objects in its articles of association are such that, acting consistently with them, its activities in making, facilitating or encouraging investments in each relevant period would (taken as a whole) be such as the Bank considers likely to contribute to a reduction of global greenhouse gas emissions.”
The Minister referred to that in his opening remarks. That seems to be a very big, if laudable, objective. How can progress on it be measured? UK emissions in the first year of the bank’s operation rose by 3.5%—I know there is no specific correlation—so does that mean that under the terms of the Act, the bank has failed in its objects and the order cannot go ahead? What are the measurement criteria?
We had an interesting debate in the Bill Committee at the time about whether the Government planned at some point to privatise part or all of the bank. There is nothing in the Act or the order to prevent that happening. Can he confirm that the Government will not sell off all or part of the UK Green Investment Bank? When we discussed the associated clauses in Committee, we had an interesting debate about ownership and the injection of private capital. The Minister at the time said:
“We need to establish the bank to leverage private investment into the green sector—enabling private capital in the shareholding of the company would be the ultimate success in this mission. In the longer term, therefore, the legislation is designed to enable the opportunity for the injection of private capital.”––[Official Report, Enterprise and Regulatory Reform Public Bill Committee, 26 June 2012; c. 216.]
I would like to see the green investment bank compete at scale with rivals such as KfW. However, it is hindered by the Government, who are stopping it from levering in private capital, particular with regard to borrowing. Has the Minister changed his mind on allowing the bank to borrow? Will he update the Committee on the injection of private capital, whether through equity and/or through debt, and how that will link in with ownership, control and independence for the bank? On a similar theme, what discussions have he or his officials had with the Office for National Statistics on the order and the designation, and on the wider point of whether the bank is truly independent for national accounting purposes?
Will the Minister tell us, what precisely are the Government’s green policy objectives this week? The Government’s energy policy, frankly, is in a mess. Last week at Prime Minister’s questions the Prime Minister said:
Will the Minister outline further what that statement actually means and how it will impact on the green investment bank’s activities? The green purposes of the bank are set out in section (1) of the Act, and include
which is explicitly linked to the Climate Change Act 2008. Do the Prime Minister’s comments mean that the bank’s green purposes no longer apply? What impact will the Prime Minister’s statement have on the bank’s investment activities? Will it not make the cost of capital more expensive for the bank, as there is inherently more risk because of the political uncertainty that has been produced?
In his opening remarks, the Minister used an important phrase, which I agree with absolutely. I share with him his objective of making sure that the private sector realises that—and this is a direct quote, I think—“investing in green infrastructure is a profitable business to be in”. However, is there not now increased additional uncertainty that will stop the private sector from coming in with investment? For example, one of the green investment bank’s investments provided £46 million as part of a debt package to refinance a 24.8% stake in Walney Offshore Windfarms. That project is being operated by DONG Energy, which owns a majority stake, with the remaining stake being held by SSE plc. Is that sort of investment, which has been made in the first year of the bank’s life, now at risk as the result of what the Prime Minister has said?
On a similar note, I understand that the green investment bank has supported the Government’s green deal by signing a £120 million debt commitment. I will not dwell on the low take-up of the green deal by customers—I am sure that you would rule me out of order, Mr Robertson. However, I understand that a big part of the way that the green deal is funded is through the energy companies obligation. Is that now at risk as a result of the Prime Minister’s comments and will the bank’s investments now suffer as a result? If the green regulations are to be rolled back, will the bank be asked by the Government to take on some of that responsibility for funding the green deal and will additional funding be needed for the bank as a result?
Those questions get to the heart of the Opposition’s concerns regarding the order. The Government say that the bank has operational independence while tying one of its hands behind its back and not providing sufficient clarity for successful investment decisions to take place.
My final remarks relate to an excellent letter in today’s Financial Times, written by prominent entrepreneurs in the low-carbon sector, on the 2030 decarbonisation targets. I understand that that matter is being considered
“an excellent economic growth opportunity and we have the engineers, designers, investors, entrepreneurs and other innovation skills needed, but failure to support the target now will mean hundreds of millions of pounds worth of investment in renewable technologies will be lost along with the jobs and innovation that green technologies can deliver.”
We can play a leading part in the low-carbon economy throughout the world in the 21st century, and the bank can, rightly, be key in delivering that. However, confusion and uncertainty in the Government’s energy policy are hindering that industrial opportunity and undermining the bank’s potential.
That lack of long-term certainty is making investment more expensive, which will mean that the bank cannot achieve the maximum possible with its available resources or else that investors will be deterred from coming to the UK in the first place. Will the Minister take the opportunity to clarify matters and to provide a clear path for the UK Green Investment Bank to take, making it the success I think all of us in this Committee, in this House and in this country want it to be?
Steve Baker (Wycombe) (Con): I fear that we are, once again, gathered together to make our constituents poorer and to promote special-interest rent seeking. I am rather surprised that we are gathered together in this Committee. My right hon. Friend the Prime Minister has pointed out that Opposition Members wish to use direct intervention in the electricity price system and correctly identified that as socialism—
Mr Iain Wright: The hon. Gentleman talks about direct intervention in the energy markets. Does he think there is any difference between what my right hon. Friend the Leader of the Opposition has said regarding freezing energy bills and the commitment given by the Government regarding the nuclear industry?
The Prime Minister also talked about how green taxes were raising energy prices for those least able to pay them. I had rather hoped, therefore, that this would be the moment when the Government thought again about the UK Green Investment Bank as part of their broader strategy. I have watched these proposals advance with some despair. I felt that there were only so many battles one could fight and that this one was last, but the Prime Minister has inspired me to believe that it is possible for common sense to return.
In designating this nationalised body, we will enable it to spend £3.8 billion of taxpayers’ money to create special interests. Unfortunately, the proposal has had draped around it the language of the market and talk about profitability. However, the hon. Member for Hartlepool prompts me to note that we sometimes forget that the purpose of the market is to allow the price system to indicate where entrepreneurs should direct their efforts and their capital best to serve the interests of the public. However, green entrepreneurs
I am glad that the bank—we call it a bank—will not be able to borrow, because I note from the explanatory memorandum that it will report its accounts under international financial reporting standards. I have said elsewhere at some length how dangerous IFRS can be in terms of up-fronting profits that have not yet been realised and making imprudent provision for losses. I am therefore delighted that the bank will not be borrowing, although I am puzzled as to the extent to which it will be a bank.
Previously, I have reluctantly supported the Government on this proposal, and I do not propose to divide the Committee today. However, should the Committee divide, I do not imagine that I could vote with the Government—indeed, for the benefit of the Minister, who is looking at me in a puzzled manner, let me say that I would vote against the instrument.
It is increasingly clear that we have corrupted the principles of markets to direct scarce capital into loss-making projects, which would not go forward if things were determined by the general public expressing their view by buying and selling. These policies do not serve the interests of the poorest and most vulnerable, and we should take this opportunity to put a stop to them.
Andrea Leadsom (South Northamptonshire) (Con): I wish to ask the Minister a question. Do the Government have plans to allow the market, in the fullness of time, to resume control of this agenda? I have great sympathy with what my hon. Friend the Member for Wycombe said. The UK Green Investment Bank is admirable and, unlike him, I support its creation, but I have concerns about why the Government decided to establish a state-owned bank and whether they have plans to return it to the private sector at some point.
Mark Reckless (Rochester and Strood) (Con): It is a pleasure to follow my hon. Friend the Member for Wycombe. Like him, I was impressed by the Prime Minister’s announcement last Wednesday that we would roll back the green levies.
I looked through my papers for this afternoon’s Committee—and particularly the list of Committee members—with some interest. I can only conclude, particularly given the elevation of my hon. Friend the Member for East Surrey from parliamentary private secretary to his new role, that there will be some follow-through. If we listen to our Liberal Democrat colleagues, there will not be a roll-back of levies, just transfers from the energy companies to the taxpayer. I think that is wrong: there will be roll-back of levies and today is an opportunity to do that.
The green investment bank was pushed through, previously. The Minister has said that the order is necessary. I am concerned that if the bank is designated, it cannot be amended or revoked; however, the Minister
I am also slightly concerned to notice that in addition to what was initially put in—it has now gone up another £0.8 billion to £3.8 billion from the spending review—there have been asset sales, the proceeds of which will be transferred to the green investment bank to use on the various projects that the successful rent seekers may put before it.
One of those asset sales is £700 million-odd from the sale of High Speed 1, which goes through my constituency. Many of my constituents were concerned about that, at the time. It had a significant impact on the constituency, and the costs of the commuters who are using HS1 will now go to the green investment bank, so that it can fund these schemes.
The Minister tells us that sectors the bank is investing in include offshore wind. I find the concept of investing in offshore wind quite extraordinary. We have a wholesale electricity price of perhaps about £50 per megawatt, and the amounts that those offshore wind outfits are getting range up to £140-odd per megawatt. I just cannot understand how on earth that can be an investment.
We are told by the Minister that the bank will be working alongside other market participants, but, of course, it is not a market participant. It is a creature of government. The Minister’s predecessor assured us it would be run on a commercial basis. How on earth can that be the case, if it is wholly funded and owned by the Government, and essentially is investing in things that the market would not choose to invest in, because they do not give decent returns and so frankly are a waste of my constituents’ money?
The Library briefing points out that we have learned in written answers—from, I assume, the Minister’s predecessor—about the finalisation of the location decision on the green investment bank. The Library briefing states:
Well, that is good to know. The conclusion was that the headquarters will be in Edinburgh, with the major transaction team in a London office. How on earth does that make sense for the sensible running of any financial institution? It sounds a bit like the RBS structure.
We are told that the bank has various aims set by statute. Yet all that the board is required to say is that it considers that its investments will be likely to contribute to those aims. That is a very loose definition. The board is also required to consider investment activity as a whole—rather than each of its investments—that seems, on balance, to be required to lower global greenhouse gas emissions, as if what we do in this country will have anything but a nugatory impact on the level of emissions.
We could do something about bills. For instance, we could have applied to keep open Kingsnorth power station in my constituency under article 3(4) of the large combustion plants directive—it will be demolished early next year unless we do so—but, instead, we are designating a green investment bank and allowing the Government to give it financial assistance. It has already had £3.8 billion—
Steve Baker: My hon. Friend mentions the demolition of the power plant. He may not know and I do not wish to put him on the spot, but does he happen to know how many billions of pounds of capital are invested in that plant? However much it is, we will be squandering a vast amount of capital to waste more on these other projects.
Mark Reckless: My hon. Friend is of course right. All I can say is that the capital is fully depreciated. The power station was built in the 1970s, and I am not suggesting that it could carry on for a great many more years. We have to get through the crunch, in which capacity may go down to about 2%, and that is on the assumption that energy demand falls. What happens if energy demand increases? Have the Government even considered such a case? How on earth will designating this bank to give various amounts of money to things that happen to be green, such as offshore wind, help to get us through the capacity crunch?
The Minister is not in the business of picking winners, because there is no requirement for the bank to say that what it does is in any sense a win; it just has to claim that an investment is considered likely to contribute to one of the four or five aims and will supposedly reduce greenhouse gas emissions overall. The Prime Minister said on Wednesday that it is time to roll back the green levies, and this would be a very good place to start.
John Hemming (Birmingham, Yardley) (LD): Sadly, I am going to disagree with the hon. Member for Wycombe and his colleagues. One point of principle is whether the state should ever try to innovate or to encourage innovation. As such things as the internet were developed by state innovation, there is clearly a role for the state in encouraging innovation, so the green investment bank, which will do that, is a positive.
All hon. Members are concerned about the retail cost of energy—the Opposition have come up with a ludicrous proposal—but in the long term, we need to reduce the
Sir Richard Shepherd (Aldridge-Brownhills) (Con): I am puzzled about a couple of things. The price of energy has clearly been a major factor in recent discussions across political society. As I read the green investment bank’s document, “Our mission, mandate, purpose and strategy”, my eye was captured by this sentence:
“It is incredibly important that we, along with these investors, are seen to make strong investment returns, because this is the only basis on which we will succeed in attracting into our sectors the much needed incremental capital.”
If I were starting a company, I would like to have a mandate or mission statement about needing to have a large return. That is what the green investment bank is arguing for, because that is how it hopes to seed the hoped-for green economy.
I have great difficulty, however, in reconciling that with the Prime Minister’s criticisms at last week’s Prime Minister’s Question Time, when he indicated that the burden now placed on domestic consumers is too great. He said that in a riposte to the Leader of the Opposition, who has put his finger on what is a genuine concern to us all. The green investment bank will be funded by the public, who will pay for it as taxpayers, and we are told that it is not just important, but incredibly important, that the bank and its investors make strong returns. All of that seems to indicate that it is an engine for increasing the price of energy, rather than for diminishing or abating it. Therefore, I have a great deal of difficulty with the proposal. We do not know what rate of return it is expecting on the lending or receiving of the money. As far as I know, there are no figures on rates of return—I would be grateful if any hon. Friends could identify what sort of rate of return there will be.
I ask the question because this first happened a long time ago. The second Severn bridge was done by private Bill, as is required. The most expensive lawyers in town, as one can imagine, argued the reasons why there should be a second Severn bridge. I watched the Government give not only the second Severn bridge a huge boost, but also the first bridge. It always seemed to me that the cost to the taxpayer, and to the individual communities around the bridges, was far greater than was ever indicated. What was the rate of return? That was the biggest secret of all those private Bills, and in a sense, this is a private Bill.
What is the rate of return and what will it cost those who use it? Without figures such as that or some sort of projection, I cannot see the proposal as anything other than a form of words uttered on the air, in the hope that it gathers an unthinking response. It cannot be right to set up something where we know not what the costs are—the costs to the taxpayer or the consumer. That is why I have sympathy for what the right hon. Member for Doncaster North (Edward Miliband) had to say. Why should I have sympathy for this proposal, when it will not reduce the cost of energy? [ Interruption. ] I do not know why the Opposition spokesman is hysterical.
Mark Reckless: Is my hon. Friend aware that if the Opposition were in charge—or if they had even turned up—things would be even worse? They tabled an amendment to section 4 to say that the bank should have borrowing powers from just two months’ time, to add yet more to our constituents’ bills.
Sir Richard Shepherd: My central concern is that I do not see in what way this helps our fellow citizens and those whom we represent. I am now of the opinion that the overstatement of the green movement and measures for such things is of enormous cost to ordinary people in their lives. It was mentioned a few minutes ago that our energy output represents only 2% of the world’s emissions. It is fractional in those terms. The Government’s answer of a green bank is not the answer, I would suggest. What do we do to help those whom we represent, who are in genuine anxiety and actual poverty in many cases, with the cost of all these measures, which sound so good?
Michael Fallon: Let me straight away agree with my hon. Friend the Member for Aldridge-Brownhills. We have not had an unthinking response to the legislation before the Committee; on the contrary, Mr Robertson, you have presided over a fairly frank exchange of views on the merits of the order. I shall try to deal with some of the points raised, but I am happy to write to any hon. Member whose point I may have missed or not covered correctly.
The hon. Member for Hartlepool asked whether the bank was allowed to invest overseas. The answer is that the bank is not restricted to UK-based investments, but to investments that contribute in the UK to our green purposes, which are set out in the objects section. He also asked how we would measure whether the projects the bank invested in were contributing to the reduction of greenhouse gases. He asked how the bank could be sure, given that there has been an increase in greenhouse gas emissions, that its work was likely to result in a reduction. It is charged with that purpose. Its object is to ensure that its investment-related activity, taken as a whole, is
I was also asked whether we had plans to privatise the GIB, having established it only a year ago. It has always been the Government’s intention to explore options for getting third-party capital into the bank. Privatisation would obviously be one potential means of doing that, much further down the track.
We are working closely with the bank over coming months to establish how it can best scale up mobilisation of third-party capital, which is currently on a project-by-project basis. There are several ways of doing that. For example, we have already seen moves to investment clubs, through a memorandum of understanding with the Masdar fund of the United Arab Emirates. The fund and the bank have agreed to explore co-investment opportunities.
Andrea Leadsom: As my right hon. Friend might recall from when we served on the Treasury Committee together, when the GIB was announced, I was interested in whether the state could continue to have a shareholding but sell shares to the private sector, so that taxpayers and financial institutions would own shares in the GIB. It could then have a high credit rating and be able to access the capital markets in a way that could give some ownership of the whole green agenda to taxpayers. It was that that I was quizzing him about. Has that now been ruled out by the fact that the GIB will not be borrowing money and that, as he said, it is not envisaged that it will be privatised any time soon? I take the point that it has only just been created.
Michael Fallon: The bank has been going for only a year, but my hon. Friend’s suggestion of a possible route towards greater private capital is interesting. I would like to reflect on that. I will come to the point about borrowing in a moment.
I have not fully answered the question asked by the hon. Member for Hartlepool on how the bank would work with project developers involved in each of its investments to assess the likely carbon savings and how it would place its requirement on recipients of investment to measure and report on the green impact of each project. If recipients of the investment cannot show evidence of the green impact, they are at risk of having the funding removed. That is a potential sanction.
Regarding borrowing, we have provided the bank with all the funding that it requires for the spending period through to the end of 2015-16—a total of £3.8 billion, which is subject to the approval of the latest tranche of £800 million by the Commission.
In the longer term, we have said that we will keep under review the position on the bank’s borrowing from capital markets as levels of public sector debt begin to fall. I am sure that those who would like the bank to borrow openly on the capital markets would be wary, as I am, of the impact on our overall borrowing requirement. As a coalition Government, we are committed to our path of fiscal consolidation, and we hope that we will soon get to that stage. In the interim, the bank has the option of borrowing up to £500 million of its £800 million provision for 2015-16 from the national loans fund.
My hon. Friend the Member for Aldridge-Brownhills asked a question about the rate of return. Paragraph 5.1 of the framework document, attached to the explanatory memorandum of the order, states that the GIB should
I will take his other point together with those made by my hon. Friends the Members for Wycombe, for South Northamptonshire and for Rochester and Strood. All four exhibited to a greater or lesser degree some scepticism about the position of the bank, and the justification for using public money in this way. I say to them that there is a case for our funding support mechanisms in markets that are extremely immature, where we want to encourage innovation, and where we have legally binding commitments to meet, so far as decarbonisation and climate change exist, and where we
The hon. Member for Hartlepool asked me a number of final questions, including about the green deal. The green deal has been launched. It is a very ambitious 20 to 30-year programme and it is far too early for the Opposition to condemn it as a failure. A huge number of assessments have been carried out now. The green deal finance providers that are signing up are giving it the impetus that it needs to make the take-up of the assessments more widespread.
The hon. Gentleman also asked specifically about offshore wind, as did one of my hon. Friends. Offshore wind is an expensive source of renewable energy, but of course the draft strike prices that we have put out—and we have just closed consultation on them—are degressive over time. I do not think that any member of the Committee would want to see the support mechanisms for these new emerging high-cost technologies continue for a minute longer than necessary.
Finally, the hon. Gentleman asked me about the action that the Government are proposing to take on the so-called green levies and green charges. Let me be clear about this: we are responding to the pressure that hard-working families feel on their bills, not with some unsustainable gimmick—it was admitted within hours that the price freeze would not work, because it almost certainly could not be pegged to wholesale gas prices—but with our unrelenting focus on ensuring that the bills that our constituents pay are no higher than they need be.
We have seen an increase in wholesale gas prices, and some dramatic increases in electricity and gas bills have been announced in the past few weeks. We are faced with a situation in which the current green levies are increasing and will go on increasing as a part of overall bills. In those circumstances, just as the Government have frozen council tax and fuel duty, it is only right that we should look extremely hard at the levies, to ensure that they do not bear any harder on hard-working families than they absolutely need to.
Further detail will be forthcoming. My right hon. Friend the Secretary of State is due to make his annual energy statement, which will touch on what we are doing to help bear down on these bills and introduce more competition into the energy market. We want—I know that my hon. Friends want this—to move energy policy closer to the market. We also await the Chancellor’s statement in a few weeks.
I hope that that answers some of the major points made today. The order is sensible and shows that the bank is in accordance with the provisions of the Enterprise and Regulatory Reform Act 2013. I commend it to the Committee.
The Committee divided: Ayes 7, Noes 3.