Recommendations & Conclusions
8 items
2
Recommendation
Thirty-Fourth Report - The Creation of …
Accepted
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 …
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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 6 The Creation of the UK Infrastructure Bank 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: • 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. • 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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Government response AI summary
The government agrees and states that the Bank will provide the requested information to Parliament by the end of September 2023 and in March 2024, then information will be provided through the Annual Reports and Accounts process, and that the Framework Document and Strategic Steer …
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HM Treasury
3
Recommendation
Thirty-Fourth Report - The Creation of …
Accepted
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 …
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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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Government response AI summary
The government agrees and states that the Bank published its first strategic plan in June 2022, setting out the investment strategy and priority areas, and plans to publish a further update in summer 2023, which will be sent to the Committee.
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HM Treasury
4
Recommendation
Thirty-Fourth Report - The Creation of …
Accepted
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 …
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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 The Creation of the UK Infrastructure Bank 7 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.
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Government response AI summary
The government will provide the requested information later in Spring 2023 after completion of the pilot projects in Bristol, Greater Manchester, and West Yorkshire Combined Authority. Recognising that the needs of different size local authorities will vary, the Bank has carefully considered how it can …
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HM Treasury
5
Recommendation
Thirty-Fourth Report - The Creation of …
Accepted
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, …
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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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Government response AI summary
The government agrees and states a lead point of contact within the Bank has been assigned for key departments to understand government priorities and originate investment opportunities, supported by engagement with senior officials and examples of partnerships, and are now engaging with new departments after …
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HM Treasury
6
Recommendation
Thirty-Fourth Report - The Creation of …
Accepted
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 …
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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. 8 The Creation of the UK Infrastructure Bank 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. The Creation of the UK Infrastructure Bank 9 1 Accountability and governance
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Government response AI summary
The Bank will work with the Treasury and UKGI to ensure that future metrics are clear and stretching to ensure the Bank continues to deliver against its strategic objectives, and across its remit. The Bank has already published guidance in October 2022 on how it …
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HM Treasury
7
Conclusion
Thirty-Fourth Report - The Creation of …
Accepted
The Treasury told us it took a “phased approach” to the Bank’s set-up with “checks and balances in place” to ensure it would be delivering value for money to the taxpayer.17 The Treasury seconded officials to key Bank posts, and initially had “very tight controls” over the Bank, including retaining …
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The Treasury told us it took a “phased approach” to the Bank’s set-up with “checks and balances in place” to ensure it would be delivering value for money to the taxpayer.17 The Treasury seconded officials to key Bank posts, and initially had “very tight controls” over the Bank, including retaining the authority to sign-off all deals, which it exercised to approve several early low risk Bank deals. Six months after launch, once the Bank recruited the staff it needed, authority was largely transferred to the Bank except for deals above a certain size and any considered novel, contentious, and repercussive, which still require Treasury approval.18 The Bank has now improved its corporate governance arrangements, with most executive positions now filled on a permanent basis and the non-executive directors are in post and independent.19 The Bank told us that the decision to set-up at pace has proved to be beneficial. It announced six deals in its first full year of operation and told us it has now announced a total of 10 deals, of around £1.1 billion in value.20 10 Qq 13, 32, 36 11 Q 2; C&AG’s Report para 5 para 12 Q 70 ; C&AG’s Report para 2.3 13 Qq 3–4 14 Q 70 15 Q 69 16 Q 67 17 Qq 36, 69 18 Qq 4, 67, 70 19 Q 67; C&AG’s Report paras 8 and 2.24 20 Q 31 The Creation of the UK Infrastructure Bank 11 Conditions for a long lasting and successful institution
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Government response AI summary
The Treasury ensured clear governance procedures were in place before opening the UKIB for business, including an agreed Framework Document and appointment of interim Board, with permanent Chair in post, and maintained close oversight as UKIB started to grow its operations.
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HM Treasury
16
Conclusion
Thirty-Fourth Report - The Creation of …
Accepted
The Bank was set up to address market failures and fill gaps in financing for infrastructure investment.41 The Bank told us that it can do this by taking risk that the market is just not willing to take, for example in “first-of-a-kind” technology. It also told us that it can …
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The Bank was set up to address market failures and fill gaps in financing for infrastructure investment.41 The Bank told us that it can do this by taking risk that the market is just not willing to take, for example in “first-of-a-kind” technology. It also told us that it can take policy risks in areas that the market might not be comfortable with, developing an understanding of the direction of policy and working to amplify interventions in those policy areas.42 In general, equity investments are more suitable for higher-risk projects and are more complex transactions to undertake. In due course the Bank plans to build a portfolio of different financial instruments covering a range of different technologies and risk.43 The Treasury has specified the five sectors it wants the Bank to prioritise – clean energy, transport, digital, water and waste.44
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Government response AI summary
The Bank has published its first strategic plan in June 2022, which sets out the Bank’s investment strategy. The Bank has already made 12 deals worth £1.16 billion across a range of priority sectors and have further deals in the pipeline. The Bank’s role is …
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HM Treasury
17
Conclusion
Thirty-Fourth Report - The Creation of …
Accepted
The Bank’s 10 deals to date have mostly been in relatively conventional investments.45 This total consists of seven loans and three equity investments made through funds rather than directly. The Treasury told us that the Bank was deliberately designed to start with “those less controversial things, less equity driven” as …
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The Bank’s 10 deals to date have mostly been in relatively conventional investments.45 This total consists of seven loans and three equity investments made through funds rather than directly. The Treasury told us that the Bank was deliberately designed to start with “those less controversial things, less equity driven” as it builds up resources over time.46 The Bank acknowledged that it is comfortable with senior debt transactions, but does not have the skillset and resource within the Bank to undertake direct equity investment.47 It told us that it took the decision to deploy equity through qualified third-party managers, rather than not deploy any equity until it had the resource to do so. The Bank told us that this is a “technique that has been deployed successfully in Government before”, for example through the Digital Infrastructure Investment Fund and Charge Infrastructure Investment Fund – both of which are now the responsibility of the Bank. The Bank expects such “outsourcing” to moderate over time as it develops the skills necessary to make direct investments, to the point where it will not outsource equity investment further.48
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Government response AI summary
The Bank has published its first strategic plan in June 2022, which sets out the Bank’s investment strategy. The Bank has already made 12 deals worth £1.16 billion across a range of priority sectors and have further deals in the pipeline. The Bank’s role is …
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HM Treasury