Investment Plan for Europe
The Committee consisted of the following Members:
† Baker, Steve (Wycombe) (Con)
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Dakin, Nic (Scunthorpe) (Lab)
† Farron, Tim (Westmorland and Lonsdale) (LD)
† Gauke, Mr David (Financial Secretary to the Treasury)
Hopkins, Kelvin (Luton North) (Lab)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Johnson, Gareth (Dartford) (Con)
McDonagh, Siobhain (Mitcham and Morden) (Lab)
Paisley, Ian (North Antrim) (DUP)
Pearce, Teresa (Erith and Thamesmead) (Lab)
† Rees-Mogg, Jacob (North East Somerset) (Con)
† Watkinson, Dame Angela (Hornchurch and Upminster) (Con)
Dr Anna Dickson, Danielle Nash, Committee Clerks
† attended the Committee
European Standing Committee B
Tuesday 24 March 2015
[Miss Anne McIntosh in the Chair]
Investment Plan for Europe
8.55 am
The Chair: Before we begin, I will outline the procedure. First, a member of the European Scrutiny Committee may make a five-minute statement about the decision to refer the documents. The Minister will then make a statement of no more than 10 minutes uninterrupted. Questions to the Minister will follow. Once questions have ended, the Minister moves the motion. The debate takes place on that motion. We must conclude proceedings by 11.25 am.
Does a member of the European Scrutiny Committee wish to make a statement?
Jacob Rees-Mogg (North East Somerset) (Con): May I begin, Miss McIntosh, by saying what a pleasure it is to serve once more under your chairmanship?
It might be helpful to the Committee if I take a few minutes to explain the background to these documents and the reason why the European Scrutiny Committee recommended this debate. The first document is a Commission communication suggesting a plan to promote investment in the EU-wide economy. The plan would have three strands: a European fund for strategic investments, to mobilise €315 billion or £245 billion for investment; a pipeline of investment projects and an investment advisory hub, to be known as the European investment advisory hub; and a wider package of reforms to improve the investment climate, including action to remove barriers in the single market and improve regulation.
The draft regulation would create the legal framework for the first two strands of the investment plan—the European fund for strategic investments and the European investment advisory hub—thus enabling the Commission to implement and deliver the plan jointly with the European Investment Bank. The draft regulation would provide for the fund to be supported by an EU guarantee fund, providing a maximum EU guarantee of €16 billion or £12.5 billion. The draft regulation is accompanied by a consequential draft amending budget for the 2015 EU general budget, which would provide finance for two new bodies this year and would be budget neutral.
The European Scrutiny Committee has suggested that Members may wish to explore the likelihood of a leverage ratio of 1:15 from the use of the European fund for strategic investments; whether drawdowns from the EU budget for the EU guarantee fund would be a reasonable use of the programmes concerned; whether the EIB’s involvement in the plan poses any risk to its credit standing; what additional risk the plan might pose for the other EU guarantees; what the suggested fast-tracking of the draft regulation might mean for national parliamentary scrutiny, and what financial consequences there might be for the UK.
The Chair: I call the Minister to make an opening statement, and I remind the Committee that interventions are not allowed during that statement.
8.58 am
The Financial Secretary to the Treasury (Mr David Gauke): It is a great pleasure to serve under your chairmanship, Miss McIntosh. I am very happy that we have managed to find a time to hold this debate on the Commission’s investment package before Dissolution. This is not only the flagship proposal of President Juncker’s European Commission but also, I believe, a positive opportunity for British businesses.
Before we examine the detail of the regulation, it is important to remember the context in which it was proposed. The Commission’s investment plan has three pillars: a guarantee fund called the European fund for strategic investment; a pan-European project pipeline with a new hub for technical assistance; and a package of reforms to improve the investment climate.
I want to reiterate the centrality of the third pillar of the plan. At a time of low growth in Europe, encouraging investment and structural reform are urgent challenges. Improving the business climate in Europe is of vital importance. In particular, specific steps on structural reforms to complete the single market and improve the incentives for investment are essential for Europe’s competitiveness and prosperity, and are a long-standing priority for Britain. The establishment of the new investment fund is a positive step, but it cannot deliver the long-term boost to growth that Europe needs if it is not supported by urgent structural reforms.
The EU institutions and member states have a clear role to play in creating an environment that is more conducive to investment by the private sector. The priority areas for reform are simpler, better and more predictable regulation at all levels; the creation of a capital markets union; reinforcing the EU level playing field and eliminating barriers to investment in the single market, including through energy union, the digital single market and the single market in services; and further engagement with our international partners through trade and investment agreements. The Commission’s commitment to those areas was underscored by their inclusion in its work programme. The UK has been active in ensuring that the Commission’s ambitious agenda is followed through with substantive policy action. We welcome the Commission’s focus on boosting investment in Europe. The wider structural reforms to which the Commission is committed are crucial in creating a business environment that fosters private sector investment.
The focus of today’s debate is the European fund for strategic investment. The EFSI is a guarantee, and it will allow the European Investment Group to undertake additional activity to operate alongside the private sector. The Commission’s ambition is to mobilise €315 billion in total investment across the EU. The guarantee will be worth a maximum of €21 billion, with €16 billion from the EU and €5 billion from the European Investment Bank. The EFSI will act as a first loss guarantee, covering EIB losses from possible project defaults up to the maximum size of the guarantee. For prudent budgetary management in the event that the guarantee is called, a paid-in guarantee fund will be created within the EU budget, building up to €8 billion, or 50% of the target amount of the EU guarantee.
As hon. Members know, the fund will be capitalised by reallocations from Horizon 2020, the Connecting Europe facility and the budget margin. Any decision about the reallocation of the EU budget is given careful consideration by the Government and no decision on the transfer of expenditure away from such areas of high value is taken lightly. On balance, we believe that the reallocation to the EFSI minimises the impact on other programmes where the UK benefits the most, such as the European Research Council and the Marie Sklodowska-Curie actions.
Furthermore, we have been successful in shaping positively the design of the EFSI so that it operates in a way that is complementary to Horizon 2020 and the Connecting Europe facility. For example, research and innovation is explicitly identified as one of the areas to which the instrument offers additional financing. As such, British bodies will continue to benefit from the existing EU budget programmes as well as from the new opportunities created by the EFSI.
I confirm that at ECOFIN on 10 March, the Chancellor secured unanimous Council agreement that all payments to the guarantee fund should be fully consistent with the terms of the multi-annual financial framework. That remains an absolute priority as we head towards final agreement. Hon. Members are rightly interested in the impact of the scheme on the credit rating of the EIB, as my hon. Friend the Member for North East Somerset mentioned, so a second priority is to ensure that the governance arrangements are robust and free from political interference.
I want to emphasise the point about credibility, which is essential to secure the required support from the private sector. Projects must be selected solely on merit, including a full assessment of viability. Furthermore, the role of the EIB in project selection must be fully respected, while new independent structures are created to approve the provision of the EU guarantee. For that reason the Government opposed the participation of member states on the steering board, which will set the strategic parameters of the fund. By leaving membership to the EIB and the European Commission, we secure the most robust and credible governance structure possible. Again, that was the unanimous position of the Council. I also note that, as a final step, all projects must be approved by the EIB board in the usual way, which is a key safeguard not only to ensure that all projects have undergone appropriate scrutiny but to give EIB management the means to protect its triple A rating.
The third priority for the Government is to ensure sufficient flexibility in the design of the EFSI: first, in the range of financial instruments that the EIB can utilise, backed by the guarantee; secondly, in the ways in which national promotional banks and other bodies may interact with EFSI financing, including the potential to operate through investment platforms; and thirdly, by enabling a broad range of sectors to benefit from the financing to ensure that the diverse range of investment needs in individual member states are respected.
The EFSI must be flexible in its approach and respond to market demand, both in project selection and the ways in which it can partner with member states. A one-size-fits-all approach would limit the opportunities to partner effectively with the EFSI, and we have maintained
flexibility to ensure that UK businesses have a full range of options and can approach the EFSI in the way that works best for them.I will now set out the timeline. On 10 March, ECOFIN unanimously agreed the Council’s general approach, and I thank the Committee for, exceptionally, allowing the Government to support that. The European Parliament’s examination of the draft regulation is under way, and we expect it to be completed in a couple of weeks. Following this, trialogues between the presidency, European Parliament and the Commission will commence. The aim is to secure final agreement in June, with the approval of the first projects towards the end of the year.
The priority for the Government going forward is to encourage UK bodies and British businesses to get the best possible return from this opportunity. We are in a good position. The latest figures show that the UK received EIB lending worth €7 billion in 2014, which is a record: it is an increase of 20% from the previous year’s share, which itself was a 56% increase on the year before. That is possible thanks to the Government’s commitment to showcasing UK investment opportunities to domestic and foreign investors through the comprehensive national infrastructure plan, which sets out £460 billion of planned public and private investment to the end of the decade and beyond. In addition, support for small and medium businesses will be delivered predominantly by the European Investment Fund. I am sure hon. Members will be happy to hear that in 2014, the UK received 20% of overall EIF activity—more than any other member state—so we are well placed to benefit from the EFSI and additional EIB group lending.
We are not complacent. In delivering the greatest impact for the UK, it is crucial that all UK bodies—both in the private and public sectors—are joined up and thinking about how they can utilise the array of opportunities presented by the investment plan once it becomes operational later this year. To that end, the Government are working proactively to promote the opportunity that the EFSI represents, and identify projects that could be relevant for EFSI support.
The Government are exploring the creation of investment platforms to help to secure EFSI resources to support projects and programmes in the UK. A number of institutions are involved in this work—the UK Guarantee Scheme, the British Business Bank, the Green Investment Bank, as well as relevant Government Departments and the devolved Administrations.
In conclusion, the Committee has the opportunity to support the creation of the European fund for strategic investments, enabling the UK to be on the front foot in ensuring we are well placed to benefit from the additional investment. I look forward to a lively debate.
The Chair: We have until 10 o’clock for questions to the Minister. I remind Members that these should be brief. It is open to a Member, subject to my discretion, to ask related supplementary questions.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): May I take the opportunity to thank you, Miss McIntosh, for chairing various Committees which I have had the pleasure of being involved in during my time in the House?
I have three issues which I wish to pursue with the Minister. If it is in order to group those questions together, I will go ahead and do so. I thank the European Scrutiny Committee for suggesting a number of issues to pursue. Other hon. Members will wish to pursue them, but there are three issues on which I wish to question the Minister.
The first is the reallocation of the investment funding from Horizon 2020. The Russell Group universities secure more than £400 million research funding a year from the EU, which accounts for 11% of the universities’ collective research grant, and the Minister will be aware that in February the Russell Group issued a press release expressing some concerns about funding.
Can the Minister give us some assurance that, given the UK outperforms international rivals and wins EU research funds—the Russell Group has been central to that success—there is no danger of some of that funding being lost in a way that would penalise UK universities? Can he say a bit more about that?
Secondly, can the Minister give us details of any UK investment in infrastructure projects which will benefit from the EFSI, and what that will mean for the UK regarding jobs, investment and wider financial benefits? He referred to some of those points, but perhaps he could respond in the particular context of the EFSI being targeted to invest in what are described as high-risk investment projects. Can the Minister tell us what assessment has been or will be made of the risk attached to those projects?
Finally, the Minister referred to investment platforms, noting that there have been consultations and discussions with the British Business Bank and indeed with the Green Investment Bank. Would he say a bit more about the focus of those discussions? Four member states have already put aside money in their investment banks to leverage as much as possible from the EFSI. We do not have that type of investment bank yet, so how is the Minister planning to compete in that context? If he has not dealt with that in the work that the Government have already done, what plans will he introduce?
Mr Gauke: I thank the hon. Lady for her questions. She began by raising the issue of Horizon 2020, and the reallocation of funds. To put this in context, we have to recognise that the aim is to make the best use of public money to leverage private investment and improve the business climate in Europe. We believe that that is the right aim, and that is why we welcome the EFSI. In setting up the EFSI guarantee fund, it is important that the necessary EU budget reallocations are handled appropriately to protect the MFF ceilings secured by the Prime Minister. That is a Government priority. The draft regulation proposed by the Council includes reallocations from Horizon 2020 and the Connecting Europe facility, as I mentioned. The Government consider aspects of those programmes to be high value.
The programmes will continue to be an important part of the EU budget. Indeed, the Horizon 2020 budget will still increase significantly by about 38% in the 2014-20 MFF period compared with the previous one, even after the reallocation of some of its budget to the EFSI. That is thanks to the MFF deal that the
Prime Minister secured. If the UK maintains our impressive share of Horizon 2020 funds in a competitive bid-based process, we will see a substantial increase in receipts over the current MFF period. I should also emphasise that the EFSI is intended to be complementary to Horizon 2020 and the Connecting Europe facility. We are reassured that research and innovation are explicitly identified as one of the areas covered by the EFSI.As for which UK projects will benefit from the EFSI, it is too early to identify individual projects. Our objective is to maximise the potential for UK projects to benefit from the EFSI, whatever the sector. The key is to get the practical details right, so that the EFSI can support credible, high-quality projects that will have a demonstrable impact on long-term growth. To that end, the Government are working proactively to identify and promote projects that could be relevant for EFSI support, and are exploring the creation of investment platforms to help to secure EFSI resources to support projects and programmes in the UK. A number of institutions are involved in that work: the UK guarantees scheme, the British Business Bank and the Green Investment Bank, as well as relevant Government Departments and the devolved Administrations, as I mentioned a moment ago.
In terms of risk, EIB services will continue to assess the risk of projects on a case-by-case basis, and will make portfolio decisions protecting the EIB’s triple A credit rating. As for how we will compete with other countries that have put sums aside and have slightly different institutional arrangements, it is still the case that the EIB will be making the decisions about which projects are viable. The UK will not be placed at a disadvantage as a consequence of the institutional arrangements that we have versus those of other countries. I hope I have offered reassurance on that point.
Jacob Rees-Mogg: I have a number of questions to ask, but I will begin conceptually. With the banking sector across Europe still being very weak, is the Minister concerned that setting up a state-sponsored effort to make loans risks taking the best available investment opportunities and will in fact delay the recovery of the banking sector, which is of fundamental importance to longer-term growth? Is there a question of unfair competition if such activity is undertaken by the state?
I have specific questions on the text. The Commission paper suggests using innovative financial instruments. I might hint at a little caution. In my experience in the investment world, very few people fully understand innovative financial instruments, which can lead to a good deal of losses if misapplied. That is something that needs to be watched extremely carefully.
The document goes on to deal with the question of the pipeline and how projects would be added and removed. It is a question of what people are looking for and how strong the borrowers are. My final concern, which I often have with European documents, pertains to page 22—page 13 of the Commission document—which states:
“Simpler, better and more predictable regulation”.
That sounds absolutely splendid. The next section moves on to new regulation. It seems that the EU often means more regulation when it says “simpler regulation”. I hope that that will be watched carefully by the Government, because the regulation seems quite detailed.
My final point concerns setting up a capital markets union. Do the Government support a single capital markets union to reduce fragmentation in the EU’s financial markets, and what threat might that pose to the City of London?
Mr Gauke: I shall begin with my hon. Friend’s last question on the capital markets union. We support the proposals produced by the Commission, led by Lord Hill, on a capital markets union. One always has to keep a wary eye on the detail and see how things develop, but the opportunity of bringing down barriers and improving access to finance across the European Union is could be good for businesses across the European Union and very good for the City of London. My hon. Friend is right to raise the question of the implications for the City of London, but it could be a very good thing. We have a sophisticated financial sector, and the opportunity to bring down barriers between our well-developed financial centre and markets elsewhere in the European Union could be good news for all sides.
To deal with my hon. Friend’s last question first, we are supportive, but we are at an early stage in the process and we will see how things develop. It is perfectly possible that there will be different views as to how the policy on a capital markets union might develop. We will endeavour to ensure that it moves in the right direction for both the UK and the European Union as a whole.
On banking sector competition, if I may paraphrase my hon. Friend, he raised a concern about crowding out the private sector. The purpose is explicitly to crowd in other investment. The EIB will lend additionally in order to unlock other investment. To be fair, there is a good history in terms of the EIB’s role. It has lent something like €60 billion and that has unlocked something like €180 billion in investment overall. I understand why he raises that concern, but I hope that he will be reassured.
As for innovative financial instruments and the concern that they are risky and can be misunderstood, the EIB already uses innovative financial instruments. It has good expertise in that area, and it works with clients to improve its understanding of the products available. The advisory hub, which is cited in the documents, will also increase capability in this area. As for the EU pipeline of projects, the creation of a pipeline or directory of projects is separate from the fund itself. Details of how the directory will operate are still to be determined. That will be collated by the EIB, but we have been singled out for our work on our own national infrastructure pipeline, which we expect to be a model for the information projects included in an EU pipeline.
Finally, on the broader issue of regulation, there are concerns that something that might be described as simpler and better actually becomes more complex and potentially worse. My hon. Friend urges us to keep an eye on that, and I can reassure him that we want to do that. The devil is very often in the detail. The UK is a strong advocate of ensuring that regulations are proportionate, understandable and relatively easy to comply with. That can sometimes be an uphill battle, but there is some indication from the European Commission that a number of regulation proposals have been dropped of late in order to focus on what really matters. His
point is well made, and I hope I can reassure him that we share the desire to ensure that regulation is genuinely simpler and better.Dame Angela Watkinson (Hornchurch and Upminster) (Con): My hon. Friend the Minister will forgive me, I hope, if he has already covered this point—I had difficulty in hearing all his remarks. The €21 billion first-loss guarantee fund in effect underwrites investment. Is there anything in the regulations that would control the allocation or apportioning of that fund to prevent the lion’s share being utilised by one country where investment is considered to be particularly risky?
Mr Gauke: First, I apologise if my earlier remarks were of insufficient volume; I shall try to rectify that. As for the projects, it is important, as I said, that they are determined on merit and not on the basis of any political consideration: that is vital in ensuring that the EIB maintains its triple A rating. We do not want to be in a position whereby there are set rules saying that various proportions have to go to various jurisdictions—that would undermine the selection of particular projects on merit. It is crucial that projects are selected on merit, not because they need to proceed to fulfil a geographical quota—that would not be credible.
I think the likelihood of all these investments going to one jurisdiction or one country is very low, because every country will want to come forward with credible projects. The likelihood is that there will be a reasonable spread. The focus from the UK has to be on ensuring that we have a strong pipeline and can come forward with good projects. As I say, if one looks at the track record of where the EIB has backed investments in the past, there is a spread. There is no dominance by one country or another, but the UK does pretty well out of it. We are well placed to do well out of the EFSI, particularly because we have the national infrastructure pipeline. Although we have done a lot of work, inevitably there is more to be done. Our focus has to be ensuring that the UK does well out of this arrangement.
Steve Baker (Wycombe) (Con): I should like to ask my hon. Friend the Minister about the extent to which the taxpayer is on the hook for these guarantees. If we learned one thing from the banking crisis, it was that we ought not to privatise profits and socialise risks. The absence of the loss motive, or perhaps its substantial diminution, means that people take extremely risky decisions. The consequences of those poor decisions end up being projected on to the ordinary taxpayer and ordinary folk, who typically do not have much, in order to draw investment into areas where officials think it is a good idea to do so. We ought not to privatise profit and socialise risk. My question is: to what extent is the British taxpayer on the hook in terms of socialised risk through these projects?
Mr Gauke: First, to provide some context, our assessment is that the net impact of the EFSI on the UK will be beneficial. Calculating the net financial impact on the UK in the long term has to take into account several factors, including the UK’s success in accessing EFSI financing, the UK’s success in bidding for heading 1 expenditure, and the extent to which the EFSI fund is called upon. While the net fiscal impact on the UK
should be looked at across the MFF period as a whole, what ultimately matters is the UK’s net financial position once the EFSI has come to an end, when it will be determined what will happen to the money left in the guarantee fund and when the UK receipts from the EFSI will be accounted for.On the specific point about the extent to which the taxpayer is at risk, the Council position is clear that the EU budget guarantee is within the MFF ceilings. Any call on the guarantee fund would be funded within those, and the UK exposure would be equivalent to our usual financing share of the EU budget. To put it simply to my hon. Friend, this does not increase our risk, given that the MFF ceilings are there and will be respected. It is anticipated that we will make certain gross payments to the EU over the next few years, and out of those payments will be money going to the EFSI.
Steve Baker: One of my correspondents has explained to me that we are on the hook for over £100 billion, separate from our payments through the European Union, in guarantees to provide capital if the European Investment Bank makes losses. Will my hon. Friend comment on that exposure? Is it related to these projects? I am sure that his answer is absolutely correct, but is that additional liability relevant to these projects?
Mr Gauke: There are two elements in terms of the €21 billion. If we focus on the EFSI, there is €16 billion from the European Union—by which we mean the taxpayers of the European Union. We make a contribution towards that, but it is within the MFF ceilings, so that is not an increase in liability. There is also €5 billion from the European Investment Bank. We and other member states stand behind the European Investment Bank.
I am not sure that I can necessarily answer my hon. Friend today, so I may have to write to him. I do not know whether inspiration will strike as to our total guarantee to the EIB. In fact, the more I think about it, I seem to recall that we have a liability of under €30 billion to the EIB, which we do not expect to be drawn. I hope that my hon. Friend and, indeed, his constituent will be reassured by the scale that we are talking about.
Jacob Rees-Mogg: May I follow the important question asked by my hon. Friend the Member for Wycombe? Do the Government have any concerns that in the case of the sort of events that happened in 2008, there may be bail-out requirements? Although the strict guarantee limits are extremely manageable and within budget, if the €315 billion of loans were made and went bad in a large way, we might have a similar economic necessity to bail out the EIB to ensure that, structurally, European financing was refounded. In those circumstances, would the Government simply allow the European institutions to go bankrupt once they had used up their guarantees?
Mr Gauke: I think I can refer my hon. Friend to the answer that I gave a moment or so ago about our liability to the EIB, which is below £30 billion—I may have said euros before, but it is pounds. We do not expect that to be drawn out. It is worth pointing out that €315 billion is not guaranteed. There is only the guarantee loss that we have been talking about. EIB lending will be much lower than that.
My hon. Friend raises a wider point about what would happen if there were a financial crash. The argument is that there is a need to support financial institutions to keep the economy going. In many respects, that is a separate argument from the EFSI. The fact that there is an EFSI structure does not necessarily changes things. There is a case for saying that financial institutions are necessary and that there is an implicit guarantee. We did not have the EFSI in place in 2008 and yet the view was taken that the taxpayer needed to stand behind financial institutions. I am not sure that this fundamentally changes the judgment that would be made should those rather desperate circumstances ever arise again. The Government’s focus is ensuring that we have a regulatory regime in place to ensure that we see no repeat of that. That is why we have introduced significant banking reforms, and capital requirements for European financial institutions now are more significant than they were seven or eight years ago.
The Chair: If there are no further questions, we will proceed to the debate on the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Documents No. 16115/14, a Commission Communication: An investment plan for Europe, No. 5112/15 and Addendum, a draft Regulation on the European Fund for Strategic Investments and amending Regulations (EU)No. 1291/2013 and(EU)No. 1316/2013, and No. 5317/15, Draft Amending Budget No. 1 to the General Budget 2015 accompanying the draft Regulation on the European Fund for Strategic Investments and amending Regulations (EU) No.1291/2013 and (EU) No. 1316/2013; agrees with the Government that at a time of ongoing economic fragility in Europe and tight constraints on domestic public spending, a focus on jobs and growth to facilitate the economic recovery of Europe should be welcomed; notes that the Draft Amending Budget is budget neutral and is funded from reallocations from within the ceiling for the 2014-20 Multiannual Financial Framework, which was secured by the Prime Minister in 2013 and which delivers an unprecedented real-terms reduction compared with the 2007-13 period; notes that the proposed structure respects the integrity of the European Investment Bank and does not duplicate or pre-empt the existing governance structures of the institution; and supports the Government’s objective of ensuring that the proposed mechanism contributes to growth and investment in the UK.—(Mr Gauke.)
9.33 am
Cathy Jamieson: I shall try not to repeat the questions and points that other hon. Members have raised. We have been given a good opportunity for scrutiny. However, there are a number of unanswered questions, to which I will perhaps refer in my brief contribution.
As the Minister outlined and as we heard from other hon. Members, the investment plan essentially is built on the three main pillars. First, it creates a new European fund for strategic investments guaranteed with public money from the EU budget and the EIB. The Commission has estimated that the fund will be able to mobilise about €315 billion over the next three years.
As the Minister has responded to various questions about that, it seems there are still some concerns about what the potential liability might be for the public, particularly if risky projects were invested in and the private sector, which is an integral part of the process, walked away at some point. It is not simply about the guarantees on the contribution coming from the EU
budget and from the EIB, but what the role of the private sector is. That has raised some concerns for hon. Members.My understanding is that essentially, there will be €8 billion from the EU budget. That then becomes a €16 billion guarantee given to the fund. The EIB adds an extra €5 billion, making the €21 billion total. With that in reserve, the EIB can give out loans of €63 billion.
As has been said, the measure is essentially aimed at financing the riskier parts of projects. Once they have been funded, the expectation is that private sector investment will follow, with a multiplier effect of 15. We have not had the opportunity to go into detail about how that figure has been arrived at, so is the Minister confident that it can be achieved? If it can, it would mean an extra €252 billion of private sector money, bringing the total to €315 billion, split between long-term investment and investment in small and medium-sized enterprises and mid-cap firms. How confident is the Minister that the multiplier effect of 15 can be achieved, and are we absolutely sure that there will not be unintended consequences somewhere down the line if the private sector walks away from it?
The second pillar is to set up a credible project pipeline, backed up by the technical assistance that will be required. It will match money in the fund with what has been described as
“mature growth-generating projects of European significance.”
That sounds very good and grand, and we all want to see it happen. However, it would be useful to have a bit more information about exactly what it will mean on the ground, and to have some examples. I understand that, since September, member states have been providing the Commission and the EIB with lists of projects based on the relevant criteria. We have not heard a huge amount of detail from the Minister this morning about how it will work in practice.
The third pillar is the proposed “ambitious roadmap” to make Europe more attractive to investors by removing red tape and regulatory bottlenecks, which is very important. However, questions have been asked this morning about the proposed creation of a capital markets union and exactly what it will mean for Europe and the UK.
I understand—this, again, has been referred to this morning—that legislation will need to be fast-tracked to get the fund up and running by June 2015, which is a very short time scale in which to mobilise and move forward. Whether we support the European Union or are sceptical towards it, it is a large organisation, and to move forward in a relatively short time scale will take pressure, the involvement of all member states and a real commitment to making it work. We want assurance from the Minister that the Government are fully involved in that process.
My view and that of my colleagues in the European Parliament is that the fund ought to focus on investing in infrastructure. Particular mention has been made of broadband; energy networks; transport infrastructure in industrial centres; education, research and innovation; renewable energy; and SMEs. I do not want to go over the point I made about Horizon 2020, but it is significant that the Russell Group raised it as a concern. The Minister has tried to reassure us about it, but concerns
remain. We must ensure UK universities do not lose out due to unintended consequences. The direction of travel is correct, but we must ensure we do not lose out.The regulations are due to come into force in June 2015. According to the timetable we have been given, by mid-2015 the EFSI will be operational and a transparent pipeline of projects will be in place, but we have not seen how transparent it will be. The intention is to establish a new investment plan website to monitor progress in real time. Again, I look to the Minister to reassure us that we are absolutely clear about what it will involve, and that it will not simply become another process in which the effort is put into the process, rather than the outcomes. At the end of the day, the plan will have to be judged on the extent to which it mobilises and motivates efforts on growing the economy and creating jobs. I am not clear at the moment about how it will be taken forward.
We welcome the measure generally and want to ensure that all member states are playing their part and contributing to the investment fund, because that is how we will get some success out of it. However, it is of course important that there is ongoing monitoring, that it is judged on the basis of growth and the number of jobs created, and that the public do not have to bail it out if the private sector walks away from any of these high-risk projects.
I support what the Minister is trying to do, but with the caveats that I mentioned, to ensure that we keep on top of the situation.
9.40 am
Steve Baker: It is a delight to be in this enormous Committee Room once again, to debate 129 pages of EU documentation. I observe the participation level—eight officials and 10 Members—despite so much time and space having been provided. I hope Labour Members will not mind my saying that their Benches are almost empty. We have three doughty—
Jacob Rees-Mogg: Quality, not quantity.
Steve Baker: I was just about to say that, of course, we have at least three doughty Conservatives to defend the cause of freedom. I am grateful to see my hon. Friend the Member for Westmorland and Lonsdale here, because he remind me of Shakespeare’s “Henry V”:
But one ten thousand of those men in England
If only they were here to debate this important proposal.
I want to pick up on the point I made earlier. We have, or should have, learned that it is not a good idea to give private investors guarantees that alter the profile of their investment decisions. If people do not have a loss motive, they are bound to take riskier decisions. It is well established in psychology that people have a loss motive, not merely a profit motive. It is no surprise that private investors should choose to put their capital in places where the return is fairly certain—possibly guaranteed by the taxpayer—and where their losses will not be borne by them.
I am concerned in principle about the measure. It is bound to go wrong. In this regard, I think particularly of how I am struck by the quality of Spanish infrastructure every time I go to Spain—unfortunately, much less frequently over the past five years—including the four
runways at Barcelona airport and the excellence of that hub airport, which is now capable of out-competing our own national hub. If I recall correctly, from a programme I once watched, an entire airport was built as the result of an entrepreneurial error, with capital misdirected almost certainly by state decisions.We cannot afford to waste scarce capital like this. We cannot afford to allocate scarce resources through official decision making, rather than through entrepreneurship, profit and loss. That points to something that has gone profoundly wrong with our society. I reassure the Minister that I will not give him quite my usual speech.
We have two choices, one of which is official planning and collective risk bearing through the state. That is socialism. The Minister appealed for joined-up thinking. It is always the same: when officials do things and plan, they ask for joined-up thinking. It never works. We need a system of society where people can adjust spontaneously to one another and do not need joined-up thinking. That system is private enterprise and profit and loss. We know what it is, yet time and again we find ourselves in rooms like this saying we believe in private enterprise and talking about private sector involvement, but putting in place institutions that corrupt and pervert that free market system.
Dame Angela Watkinson: On the theme that my hon. Friend has been following, does he share my concern that the countries having great difficulties with their economy—for example, Greece—might be extremely attractive to investors if they knew that they had that guarantee behind them for projects they might not have invested in had that fund not been there?
Steve Baker: My hon. Friend is right. This goes to the heart of the matter. It is precisely because we care about the plight of these peoples, and the course of their nations, that we should put in place institutions that direct scarce resources to the best purposes. In Greece, they clearly need to have an entrepreneurial revolution and to recapture some of the best of their tradition of enterprise and civilisation. We ought not to encourage investors to put infrastructure that might often be unnecessary into countries that perhaps do not need it with all the risks socialised. I think that it would be a terrible mistake.
In the end, on this proposal, we see something that has gone horribly wrong in Europe for 100 years; a kind of managerialism has grown up. My favourite book on the subject is by an American Trotskyite, called Burnham. It is called “The Managerial Revolution”—I am happy to reassure the hon. Member for Kilmarnock and Loudoun that he did in fact turn away from socialism due to some dispute over the nature of Marxism, Leninism or whatever it was. It is nevertheless an interesting book about the rise of managerialism across the western world: the idea that it is for the state to direct where resources should go to best serve the public. That is the crux of the matter and here once again, in 129 pages, we see realised the huge enthusiasm or tremendous optimism that if only there were more official power, if only there were more state guarantees, we could all be prosperous.
What we are living through is the failure of that doctrine; we really should abandon it, rather than sit here discussing with one another how we can make the
best of it in order to divert the greatest amount of these resources to our own country. We should stop putting resources through these mechanisms and allow, overwhelmingly, private enterprise to direct things to where they best serve the needs of a public who are desperately in need of the best use of scarce resources.9.46 am
Mr Gauke: I am grateful to hon. Members for their contributions or perhaps I should say, in the light of the comments from my hon. Friend the Member for Wycombe, to the “band of brothers”, and sisters, for their contributions to this debate. Those contributions will inform the Government’s position going into the final discussions.
I shall pick up on some of the points that have been made. First, on the question of how confident we are on the leverage ratio, which was raised by the hon. Member for Kilmarnock and Loudoun, the EIB is a well-established institution with proven expertise in providing finance for sound and sustainable investment projects that contribute to European growth. Leveraging wider investment is a key part of the EIB’s operating model and existing EIB operations are taken forward alongside other sources of investment. We are confident that the EIB has a proven history of delivering high leverage; for comparison, the EIB’s capital increase in 2012 targeted a capital-to-investment ratio of 1:18, and the latest data suggest that it is well on the way to achieving that.
Concerns were expressed about unintended consequences for the private sector. The fund aims to unlock investment in projects that might not otherwise receive financing. We have secured in the Council’s position a key criterion for EFSI projects, namely maximising where possible the mobilisation of private sector capital. UK taxpayers will not be at risk specifically as a result of the EFSI, for example, of bailing out. In terms of how projects will be chosen from the list that has gone to the Commission, member states were asked last autumn to provide an indicative list of potential investments. That list is of all investments, public and private, so not all projects are relevant for EFSI. As I mentioned, the EU pipeline is separate from the new fund. Projects will be identified and assessed by the EIB in the usual way which, as I have set out for colleagues, certainly does not put the UK at a disadvantage.
On the issue of what the Government are doing to ensure that the UK has access to the EFSI, the proposal sets out a wide range of sectors for receipt of EFSI funds, including infrastructure, research and development, innovation, education and training, energy and information, and communications technology. That remains a priority for the United Kingdom. It is a Government priority to ensure that British bodies from all these sectors get the best possible return from the EFSI. Concern is sometimes expressed that all the investment will flow to more developed countries. Although it is crucial that projects are selected on merit and not to fill a geographical quota, as I mentioned earlier, that would not be credible. A European advisory hub will be established as part of the regulation, which will help in providing technical support for investment project identification, as well as preparation and development for project financing within the Union. The hub will impose the capacity and capability for all member states across Europe to assist anyone who needs to identify and introduce viable well-developed projects.
The EIB is the bank of all EU member states and they are all shareholders. The EIB already lends in all member states. Investment does not flow exclusively to the most developed countries. I recall that the Committee has previously asked if countries in need of investment, citing specific examples of Italy and Spain, would be less likely to receive it. We should note that Italy and Spain receive high levels of investment from the EIB, with Spain receiving more last year than any other member state. My hon. Friend the Member for Wycombe pointed out that he is frequently impressed by the quality of infrastructure on his visits to Spain.
Steve Baker: It is because of my extensive travels in Europe before my election that I have always been impressed by the relative quality of European infrastructure. That is one reason that I think scarce British capital might be better directed at Britain.
Mr Gauke: Let me address that point. As I set out earlier, we believe that we have a very good pipeline of investments and that our national infrastructure plan lends itself to this type of project. Given our record of securing high levels of investment from the EIB—I set out the numbers earlier—the UK is well placed to be a net beneficiary of these arrangements.
Jacob Rees-Mogg: Can my hon. Friend assure me that, if we are beneficiaries of these arrangements, we will not have to have that dreadful little flag put on any signs near any infrastructure that is being put in?
Mr Gauke: My hon. Friend raises an interesting point and I may have to come back to him with the requirements. I have some sympathy with the point he makes.
Overall, the regulation has been greatly improved in Council. It is important that we maintain the changes as we enter—to use the jargon—trialogues with the European Parliament. In particular, we must continue to emphasise the importance of EU structural reform to foster a positive environment for private investment.
I hope that is a view that all hon. Members would share. We need to secure budget neutrality, ensuring that all payments fall within the MFF. We must secure credibility through political free governance structures and a focus on viability in project selection. We must protect the EIB’s existing processes and financial position.We must also achieve flexibility in the types of investment that can be used and the sectors that can access EFSI support, so that a broad range of sectors and institutions can benefit. In the context of those objectives, I seek to reassure my hon. Friend the Member for Wycombe that this is not about politicians carving up politically popular projects. This is about having a hard-headed look at the viability of particular projects, with an institution that has a good track record on acting in an appropriate way in these circumstances, to provide support to private sector investment. Projects that have capacity to attract private sector support with a guarantee are perhaps more viable than they would otherwise be.
None the less, this is not about white elephants that would attract no private sector support. We have set out our objectives; those remain the key issues and the Government will continue to work to ensure that the final agreement reflects the priorities we have discussed today. Miss McIntosh, as I assume this is my last opportunity to serve under your chairmanship, I thank you for all you have done today and on many other occasions. I commend the motion to the Committee.
Steve Baker: On a point of order, Miss McIntosh. If I may, I would like to correct the record. I earlier referred to the four-runway hub airport of Barcelona, when of course I meant Madrid-Barajas.
The Chair: I did wonder. I did not think Barcelona had quite achieved that greatness yet. The record will be corrected.