- Questions over independence and added-value of
first investment deals
- Staffing and governance challenges holding UKIB
back
- Little assurance UKIB will not be sold off like
Green Investment Bank
In a report today the Public Accounts Committee raises questions
about the independence, strength and value of the first deals
made by the new UK Investment Bank (UKIB).
The UK Investment Bank was created in a rush at Ministers’
insistence, which meant it operated with weak financial
governance and very close to the Treasury for its first year. The
significant risk of begin operating without an effective audit
and risk committee and outside the UK’s Corporate Governance code
had to be counterbalanced by choosing low risk early deals,
approved through Treasury processes.
UKIB has deployed £1 billion of its initial £22 billion capital
in 10 deals, but the Committee questions the claim these will
fill gaps in private sector investment markets. So far UKIB has
provided financing to deliver broadband and build solar farms,
which are both relatively common projects. There is also no clear
strategic approach to balancing the risk of investment in new
markets with the risk to taxpayer money. The reporting
arrangements set up by the Treasury do not allow Parliament early
sight of emerging problems.
The UKIB was set up in response to the scale of the investment
challenge facing the UK particularly from Government's Net Zero
and levelling up commitments. The Infrastructure and Projects
Authority estimates that in total nearly £650 billion
infrastructure investment will be needed between 2021 and 2031.
UKIB is well behind on recruitment plans and is only piloting an
intended infrastructure projects advisory service for local
authorities. The Committee says this must be developed to avoid
past mistakes where Government has made loans to local
authorities on property and other capital projects that put the
authorities’ overall finances at risk.
Chair of the Public Accounts Committee:
“The UKIB was set up in haste to shore up Government’s stalled
promises on Net Zero and levelling up, as we lost £5 billion a
year of European infrastructure funding to Brexit. It’s
really not clear what the UKIB is doing that the market wasn’t
already, or would be with better functioning tax incentives – as
just one example.”
“The Treasury didn’t need to reinvent this particular wheel, with
all the attendant risk to benefit, value and taxpayers’ money.
The predecessor Green Investment Bank was also sold to the public
as an ‘enduring institution’ and then sold off to the Australian
private sector 5 years later. It’s now turning bumper profits. We
need more assurance from Government that lessons learned are
being implemented and the catalogue of policy and spending errors
we’ve seen will not be repeated.”
PAC report conclusions and recommendations
-
The Treasury’s decision to launch the Bank at pace had
both positive and negative consequences. The
government identified a clear rationale for the Bank, with the
scale of the investment challenge and the loss of £5 billion a
year funding from the European Investment Bank when the UK left
the EU in 2020. Ministers wanted the Bank launched at pace, and
to make early deals. The planning stage took 10 months. Moving
at this pace meant the Bank could make six early deals in its
first full year of operation. However, corporate governance was
initially weak. For example, without a full suite of
non-executive directors, the Bank did not have an effective
audit and risk committee. It was a significant risk to begin
operating without this governance. The Treasury and the Bank
managed this risk by seconding Treasury officials to Bank
posts, and through the Bank choosing low risk early deals,
approved through Treasury processes. Corporate governance has
since improved, by filling key positions and running a
significant senior recruitment drive, and the non-executive
directors are now in post. The Bank is intended to be
operationally independent, but the issues with corporate
governance initially, and the continued reliance on Treasury
systems, staff, and approvals raises serious questions of the
Bank’s ability to make autonomous investment decisions.
Recommendation:
By April 2023 the Treasury should write to the Committee:
-
Setting out the long-term plans for the institution, including
when reviews will be made and by whom;
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Assessing whether the governance arrangements in place are the
right ones, explicitly considering the level of engagement and
expertise that UK Government Investments as a shareholder
representative brings to bear, and reporting on these to
Parliament;
-
Setting out criteria for assessing whether operational
independence for the Bank is working as intended, and for
reviewing based on those criteria; and
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Identifying lessons learned from setting up at pace and whether
this was the best way to launch an organisation of this type.
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The Treasury and the Bank have not yet put in place the
conditions necessary for the Bank to be a successful and
long-lasting institution. The government wants the
Bank to be a "long-lasting institution", providing financing
for infrastructure projects well into the future. The £22
billion made available to the Bank covers its first five years
of operation; beyond then, the Treasury expects the Bank to be
self-financing. However, there is no guarantee the Bank will
achieve this, with little clarity over whether the Treasury
will provide further funding in the future. If the Bank does
prove to be profitable, there is little to prevent it being
sold off, in a similar manner to the sale of the Green
Investment Bank in 2017, beyond assurances from Treasury
officials that government wants to keep it within the public
sector. Staffing challenges are acting as a brake on the Bank’s
ambition, as its capacity to make complex and innovative deals
is limited by a lack of suitably qualified staff. Currently
there are 16 permanent employees, a significant shortfall
against its plan of having 270 in place by September 2023. The
remaining 150 or so staff are contractors or Treasury
secondees. The Bank is also reliant on the Treasury in other
ways, including its IT systems for day-to-day operations.
Recommendation:
a The Treasury and the
Bank should report to Parliament six-monthly on the roll-out of
the Bank, including updates on recruitment, deals made and
progress towards the operation of their own internal systems
(e.g., IT systems). This should include timescales for future
milestones.
b The Treasury needs to
be much clearer in its reporting of its expectations of the Bank,
including its financing support, its plans for taking dividends,
and the long-term ownership plans by defining more clearly what
it means by the phrase ‘long-lasting institution’.
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We are not convinced the Bank has a strategic view of
where it best needs to target its investments. The
Bank's 10 deals to date have mostly been relatively
conventional investments, including seven loans. While the
Bank’s early deals reflected a sensibly cautious approach, it
is not yet capable of making the full range of investments it
could potentially make, and will not be able to do so until it
has sufficient staff qualified to make more complex
transactions. The Bank claims to be filling gaps in the market
and making investments the private sector would not consider,
but so far the Bank has provided financing to deliver broadband
and build solar farms, both relatively common projects. The
Bank struggled to articulate the priority areas for investment,
and how it will recruit staff necessary to fulfil its role. The
Bank can only deliver on the government’s ambition and wider
objectives if it moves beyond making “safe” investments,
because the scale of the challenge is so severe. The Bank has
not demonstrated it has a clear idea of how its investments
complement each other and provide additionality. In addition,
they are not yet making direct equity investments, instead
investing through equity funds.
Recommendation: The Bank should write to the Committee
within 3 months outlining its investment strategy for making a
full range of investments, including a timeline for when it
expects to be making deals proactively.
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The Bank’s advisory function remains in the early
stages of development and uncertainty remains on how it will be
funded and how smaller local authorities will benefit from its
activities. The Treasury intends the Bank to provide
advisory services to local authorities regarding infrastructure
projects. This function is currently in pilot phase with three
large unitary authorities - Manchester, West Yorkshire, and
Bristol - with the aim of creating solutions that are
replicable across all local authorities. However, we are
concerned that smaller local authorities who may need more
support than larger ones (owing to the size of their resources,
capacity and capability) should not be left behind in receiving
the Bank’s support. The Bank has not worked through how this
function should be funded and is currently planning to offer
this advice for free while it seeks to establish the
replicability of its advice. However particular attention needs
to be given to avoid past mistakes of making risky loans to
local authorities on property and other capital projects which
put the authorities’ overall finances at risk.
Recommendation: Upon completion of its three pilot
schemes, the Bank should write to the Committee setting out how
its advisory function will work in practice, including how it
will design a funding model that reflects the cost of the support
provided, and regulates demand. The Bank should also outline how
it will ensure smaller authorities are not left
behind.
-
Maximising the Bank’s impact will depend on close
cooperation with government departments, but it has not yet
worked out how this will operate in practice. The
Treasury intends the Bank to play an important role in
achieving key elements of this government’s wider agenda on net
zero and levelling up, as reflected in the Banks dual
objectives. The Treasury expects the Bank to set out how it
intends to work with stakeholders, including policy departments
across government. To date the Bank has had limited
communications with key stakeholders at senior levels,
including the Department for Levelling Up Housing and
Communities (DLUHC) and the Department for Environment Food and
Rural Affairs. Engagement with DLUHC in particular will be
critical to understanding the needs of local authorities, which
will then inform the Bank’s loan and advisory programmes. The
lack of clarity surrounding relations with other departments
raises the risk that different organisations responsible for
net zero and levelling-up could be pulling in different
directions.
Recommendation: In its Treasury Minute response, the Bank
should describe its engagement strategy for working with
government departments, focussing in the very short term on how
it engages with those departments most critical to delivering its
mission, including the Department for Environment Food and Rural
Affairs, the Department for Levelling Up Housing and Communities
and the Department for Business, Energy and Industrial Strategy.
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The Bank has not fully set out how it will measure and
report its performance, and how it will evaluate its activities
to ensure that it can demonstrate additionality
Evaluation is crucial to ensuring the Bank delivers
additionality and that the benefits justify the costs of
creating it. The Treasury has set a financial return target,
but the Bank has only just started work on developing its own
performance measures, and has not fully defined what success
looks like, to inform future monitoring and evaluation. There
are tensions within the Bank’s objectives; for example,
pursuing a project that delivers against its economic growth
objective would not necessarily be compatible with its climate
change objective. The Bank is yet to set out how it will
address these tensions in practice. The Bank has also made
little progress in measuring additionality; this is challenging
but essential for determining whether the Bank is genuinely
adding value, and not ‘crowding-out’ private sector investment.
The Bank has developed arrangements for reporting performance
and emerging issues to its shareholder, the Treasury, through
the shareholder representative, UK Government Investments.
However, the Committee has seen other examples in government
where similar arrangements failed to escalate problems to
Parliament.
Recommendation: By March 2024 the Bank should write to us
detailing how it has implemented a full suite of performance
metrics and targets including productivity and green performance,
together with a forward plan for evaluation that includes
additionality assessments. It should at the same time outline how
it will publicly report its performance and the results of its
evaluation over time. /ENDS
