House of Lords
Thursday 9 February 2017
Prayers—read by the Lord Bishop of St Albans.
Hospital Beds: Availability
My Lords, the most recently published figures—for the last Thursday of December 2016—reported that 6,191 people who were occupying hospital beds were ready to return home or transfer to another form of care.
My Lords, I thank the Minister for that reply. I am extremely puzzled because the official NHS figures I have been looking at suggest that, in November, there were 200,000 people blocking beds. What is more significant, all the experts say that the actual number of bed-blockers is three times the size of the official figure. Bed-blocking means that people are not given the best possible care and beds are blocked for others who could be admitted. Surely we have to solve this problem quickly.
My Lords, the figures that the noble Lord is referring to are across the whole month. He may be aware that new figures have been published today, which show that an increasing proportion of delayed transfers is due to the availability of social care packages. He will also know that this reflects the changing nature of the patient demographic, which is becoming older and frailer. I agree with him that this needs addressing urgently, which is why the Government took action in the Autumn Statement to increase social care funding. We need to address the wide variation in the rate of delayed discharge from local authority to local authority. As the Prime Minister has said, in the long run we need a more sustainable solution.
I thank my noble friend for that question. He is quite right that integration of services is the main thrust of policy and has been under successive Governments. This is happening in two ways. First, the Better Care Fund is pooling health and social care budgets at local authority level in order to achieve what he is asking for. Also, NHS England is producing sustainability and transformation plans, several of which are moving towards what is called an accountable care organisation, whereby a single grouping takes responsibility for all the healthcare needs of a population, rather than it being split into different services.
My Lords, integration is of course very important, but has the Minister ever met anybody in the health service who does not believe that you will never fix the pressures in the health service until you put more money into social care? That means helping areas with low-value properties, not just those with high-value properties, such as in leafy Surrey.
The noble Baroness is of course quite right about the need for more money. I re-emphasise that an additional £7 billion or more for social care is going to councils during this Parliament. Councils have the ability to raise council tax, although the leverage obviously varies from place to place. This is why the Better Care Fund was created—to provide extra help to areas that do not get the same income from council tax increases as the better-off places.
My Lords, a year ago, the Royal College of Psychiatrists published a report which showed that about one-fifth of adult mental health beds were occupied by people who were ready for discharge or who should not have been admitted in the first place. They were only admitted because there were no adequate facilities in the community. Could the Minister tell us what the figure is today and what is being done about mental health specifically?
The noble Lord is quite right to raise the issue of mental health. I do not have the specific figure with me but I will write to him with it. We know that there has been a historic disparity between the two services. This was recognised by the Prime Minister in a very important speech she gave a few weeks ago, setting out some of the ways in which the Government are doing more on this. However, there is clearly a lot more to do.
What is the situation of people providing care at home on behalf of councils? Many carers I know are called out at 10 or 11 at night to receive someone who has just been sent home from hospital. However, they are not really trained themselves; they are trained only by the care agency. Is it not time that we provided them with proper training, particularly as so many of them have come from the Philippines and other such places and we are not sure what the future holds for them?
My noble friend is quite right that there has been an increasing prevalence of domiciliary care, which involves carers caring for patients in their own homes. Making sure that those patients can get home at a good time that works for them and those who support them is clearly a critical part of dealing with this delayed discharge issue.
My Lords, the Minister was talking about care workers rather than carers. He has focused on social care but Nuffield Trust research shows that the proportion of discharge delays due to the unavailability of social care has grown by 84% in six years, but also that 57% of delays occurred because of problems in the NHS itself. This is because of a lack of local NHS community or rehabilitation services, and of the availability of home support therapies or access to diagnostic and other services. Are STPs going to be able to tackle this, given the scale of cuts that will need to be made? Is the Minister confident that last year’s NAO report, which warned that the Department of Health and NHS England rely “too easily” on differing local circumstances as a “catch-all excuse” for not improving NHS performance, is being addressed?
The noble Baroness is quite right that there is increasing pressure on the health service. There have been 3.5 million more hospital admissions in the last 10 years and 2.4 million more A&E attendances in the last five years, so there is huge extra pressure. The number of acute beds has been dropping for a long time but at a slower rate in more recent years. Clearly, making sure that the right level of community care is available—step-down or interim care between hospital and home—will be incredibly important, particularly with a growing and ageing population.
My Lords, surely enough is enough. Is it not high time for an unfettered look again at the health service—bottom-up rather than top-down, and therefore undertaken not by a royal commission, perhaps, but by an independent body such as the Academy of Medical Sciences?
A number of investigations and reviews into the future of health and social care are taking place. I quite agree with the noble Lord that a royal commission is not necessary. What we all need to do in government and through the arm’s-length bodies involved in healthcare is to make sure that we are providing the 2.7 million staff, who are doing a brilliant job every day in supporting our health and care services, with the money and assistance they need to continue to deliver world-class healthcare.
My Lords, does the Minister agree that it is not so much a question of old people getting older, because old people have always got older; rather, the difference in the last 30 years is the grotesque increase in the number of young people getting fatter and fatter?
My Lords, the Government are challenging all forms of extremism through our counterextremism and Prevent programmes. We are working closely with faith groups to understand the impact of policies and to improve religious literacy in government. The Home Secretary and the Communities Secretary hosted a round table for representatives of all faiths last November.
I thank the noble Baroness for that Answer, but there are still concerns. The Government paper on the hate crime action plan contained no mention of non-Abrahamic faiths. That suggests something about the religious literacy there. Does the Minister agree that democracy implies being attentive to the legitimate concerns of all sections of the community, not those of a single religious or other majority? Does she further agree that teachings and practices that go against human rights must be robustly challenged, but that we need to know something about what we are challenging before we can do that? Programmes like Prevent cannot be effective without such knowledge. One final point is that I have put the basics of Sikh teachings on one side of A4, and that can be done for other faiths as well. Should that not be essential for religious literacy in government departments?
I missed a little of the noble Lord’s question, but I think I have enough to go on. He said that the hate crime action plan did not specifically refer to non-Abrahamic faiths, but the tenets of the action plan cover points on hatred on the basis of religious belief, disability, sexuality and so on. It is therefore implicit within it that, for example, Sikh communities are included. As for the understanding of religious literacy within both government and wider society, both the Home Office and DCLG engage widely and often with faith communities. Shortly after the referendum, I myself met people from different faiths, including Sikhs, in Manchester to discuss religious literacy, the outcome of the referendum and the corresponding hate crime attached to it.
My Lords, can my noble friend tell us whether the Prevent strand of the Government’s Contest strategy is part of their counterterrorism strategy or their counterextremism strategy? Can she also say whether there is a religious literacy element to the training given to Prevent co-ordinators? If there is, would she be happy to place a copy in the Library?
My Lords, the central tenet of the Prevent strategy aims to protect young people who might be vulnerable to both extremism and terrorist preaching either online or in their communities. Actually, it is a protection mechanism, not a targeting mechanism, as I am sure my noble friend will be aware. It is a protective element to help prevent some of the external forces to which our young people are subjected in a negative way prevailing.
My Lords, just three weeks ago I spent half a day in an immigration removal centre and so gained an up-to-date insight into some of the complex and sensitive issues that are being dealt with there. Concerns continue to be raised about the level of religious literacy among some of the asylum caseworkers. Is the Minister content with the level of training that they are getting in religious literacy and, if not, what can be done to improve it?
The right reverend Prelate raises a very important point about the detention estate. Certainly an awful lot of time and effort has gone into the training of staff in terms of the sensitivities around LGBT detainees; in terms of his important point about religious literacy, I will go back and check on just what training is given in that area.
My Lords, it is the turn of the Liberal Democrats.
Does the Minister agree that last weekend’s Visit My Mosque initiative, which hundreds—indeed, maybe thousands—took advantage of, was a very good and positive example of promoting greater understanding, community cohesion and tolerance in our society? Does she think that we should have more such initiatives from all faiths to bring people together and establish a more understanding and truthful dialogue?
The noble Baroness raises a really good point about community cohesion. There was a mosque event just near to me last weekend and I had reported back that it was incredibly successful. In fact, the same community holds a summer fair, to which all their neighbours are invited and which is a great initiative—so yes, I would encourage more.
Brexit: Consumer Rights Policy
My Lords, we are working with a range of stakeholders to understand the impact that withdrawal from the EU will have on consumers. We will work to ensure the best possible outcome for UK consumers. Wherever practical, the great repeal Bill will convert current EU law into domestic law to give consumers as much certainty as possible.
My Lords, the EU has been good for consumers: we have the European health card—there are some 26 million in the country—safe food and products, because of the European rapid alert system; lower mobile roaming charges; and compensation for delayed flights. But despite what the Minister says, none of those can be entrenched in the great repeal Bill, because they depend on our negotiations with the remaining 27. Regrettably, consumer interest does not appear in the 12 negotiating principles in the Government’s White Paper. Will someone in the Minister’s department or another department undertake to set up the same meetings with consumer reps as are taking place with industry, so that consumer interests can be embedded into our negotiations for our relationships with the EU 27 after we leave?
My Lords, the great repeal Bill will incorporate consumer protections in the European Union into UK domestic law, wherever it is practical. Noble Lords may shake their heads at that but of course it is “wherever practical”; if we were to say that we would incorporate it where it is impractical, the noble Baroness would be the first person to point it out—this is a perfectly common-sense approach. In terms of ensuring that consumer interests are properly represented, my right honourable friend the Secretary of State for Business, Energy and Industrial Strategy is having regular meetings with consumer representatives and we will ensure that consumer interests are properly represented in the negotiations.
My Lords, is not the Minister being, unusually, a little complacent in his answers? The total apparatus of EU protection and consumer laws is more extensive and robust than in any single member state, with very few exceptions. If it all has to be unpicked through the very questionable repeal Bill process, it will take a long time anyway. If we end up bringing all these things back in—which we will have to do—then we might as well stay in the single market and under the consumer protection laws, instead of favouring a dodgy view of national sovereignty that last existed in 1910.
I do not underestimate the complexity of the Brexit negotiations, which is why we all accept, I think, that the implementation of those negotiations will be phased over time. However, in a number of areas of consumer protection the UK regulations are stronger than those in the EU.
My Lords, online scams and internet fraud are rapidly increasing, as my colleagues in trading standards know only too well. Will the Minister tell the House what protection will be offered to UK consumers buying faulty goods across borders once we are no longer part of the EU and no longer involved in developing the EU’s digital single market?
My Lords, the noble Baroness raises an interesting point. It is going to be difficult. I cannot foresee the outcome of the negotiations; all I can say is that we understand the issue she raises. We have already demonstrated through our support for the alternative disputes resolution and the extra money we are putting into the Chartered Trading Standards Institute that this is an issue that we take very seriously.
My Lords, will the Minister say when he will share with the House what is practicable to be included in the great repeal Bill and what is not? Will he also share the result of the inquiries that he says the department has been conducting about the value of this, and has he, by any chance, read the previous Government’s balance of competences review, which went into great detail on this sector?
Of course it will emerge over the next two years. It would be absurd for me to stand here to explain where all the issues that might arise over the next two years will arise. As the Prime Minister has said, the Government will keep Parliament fully informed of developments throughout the next two years.
My Lords, the EU is currently planning the digital content directive, which will give EU-wide protection to consumers on digital content. Unfortunately, the current draft conflicts with UK consumer rights legislation. Since, after we leave, we will have to continue to sell into the EU, can the Minister assure us that the Government are putting all their resources into getting this right, to end the current legal uncertainty?
I can assure the noble Lord that we are doing everything we can to clarify the situation. He mentioned the consumer rights legislation. The Consumer Rights Act is generally recognised by consumers here as an extremely good piece of legislation, and we will be working to have as much of a free market within Europe as we can.
My Lords, does my noble friend not think that it is very sad, and a counsel of despair, that with all the expertise in this House and the other place, it is not possible for this Parliament to devise a scheme that will protect the rights of British consumers?
My Lords, will there need to be a separate agreement on air flights into European Union countries to replace the existing one within the single market, which allowed Ryanair, EasyJet, British Airways —all the British carriers—to fly millions of people in over the years cheaply, successfully and easily? Unless a separate agreement is negotiated with the European Union we will not be able to do that.
My Lords, there is such a mutuality of interest in continuing the existing arrangements that it would be very surprising if we could not negotiate an agreement. I cannot tell the noble Lord whether we will need a separate agreement to do that but I will write to him.
To ask Her Majesty’s Government, in the light of recent seizures, what is their estimate of (1) the number of illegal firearms in circulation, and (2) the percentage of firearms illegally imported into the United Kingdom that have been seized in the last year.
My Lords, offences involving firearms, excluding air weapons, have fallen by 31% since July 2010. The National Ballistics Intelligence Service regularly assesses the volume of illegal firearms in the UK, but this information is operationally sensitive and is not suitable for release. The National Crime Agency and the police continue to conduct specific operations to disrupt the threats posed by illegal firearms.
My Lords, I am grateful for the Answer given by the Minister and intrigued by the fact that on 21 November, in response to another Question on this point asked by my noble friend Lord Rosser, she said:
“Without doing the maths, I cannot give the noble Lord the figures off the top of my head. However, I will certainly write to him with accurate figures”.—[Official Report, 21/11/16; col. 1724.]
I assume from the Answer she has just given that she cannot share the figures that she wrote to my noble friend. Can I put it to her that, if there were 126 illegal arms seized in 2014-15—these are the figures she gave on 21 November—445 seized in 2015-16 and 800 in just four weeks as a result of this joint exercise by the counterterrorism police and the National Crime Agency, this is a situation in which there is an explosion of the problem of illegal firearms and that the Government should do a great deal more?
What the noble Lord points out is not an explosion in the problem but a revelation in the solution, because that four-week operation showed us that a new approach to intelligence collection and sharing is the way forward. The operation that I think he is referring to—Operation Dragon Root—yielded excellent results.
My Lords, most of the illegal firearms smuggled into the UK are from Europe. Can the Minister explain how UK law enforcement agencies can continue to exchange information and intelligence with EU countries about gun smuggling after Brexit without complying with EU data protection laws, which are set and regularly updated by the EU? What are the Government going to compromise on—security or sovereignty?
I think that I have déjà vu here, because the noble Lord asked me that the other evening when we had a three and a half hour debate on the subject of security and policing between the UK and the EU. As I explained then, and will explain now, co-operation will be not just absolutely key going forward but one of the top priorities for this country.
Is the Minister aware that, in the past, amnesties have been used in different parts of the United Kingdom but under very strong conditions, as in the context of weapons which have been used to commit a crime? Can any possible amnesties be looked into with great care, as all the circumstances need to be taken fully into account?
Lord Harris of Haringey.
Does the Minister agree that figures on the numbers of illegal firearms seized each year are not very meaningful without an estimate of the percentage of firearms illegally imported into the UK that are seized each year? Is she able to tell us whether we are seizing most firearms that are illegally imported or only a very small percentage?
That is a very difficult question to answer in reference to the first Answer that I gave. However, I can give examples of seizures, for example through Operation Dragon Root, during a specific period of time. In the October operation, there were 282 confirmed arrests and the recovery of 833 firearms, as I think the noble Lord, Lord Harris, pointed out. There were also seizures of 169 other weapons, 4,385 rounds of ammunition and over £575,000 worth of cash.
My Lords, the operation that my noble friend referred to was indeed a success, and I am sure that the whole House will pay tribute to the police units that were involved. Will my noble friend explain what thinking is being done in government at the moment to reconcile what was an effective national operation against what is a much more localised agenda of policing around the PCCs, who probably would not prioritise such operations?
What my noble friend is referring to has not only a national element to it but also an international element in terms of the multiagency approach. Of course the NCA has regional operations as well, but in terms of keeping the country safe from a national and international point of view the national agencies are very often involved.
There is most certainly a difference between a collector and a criminal, and we discussed this at length in the Policing and Crime Bill. In terms of the arrests and the rounds of ammunition, they certainly will be criminal activities. In terms of the other weapons, there possibly is a distinction. I will try and disaggregate that for the noble Lord, although I will not promise as I did to the noble Lord, Lord Rosser.
Private Notice Question
My Lords, we have not closed the scheme to transfer children under Section 67 of the Immigration Act. The announcement yesterday specified the total number of children that will be transferred pursuant to Section 67, as required by the legislation. Over 200 children have already arrived in the UK under this provision and more children will continue to be transferred from Europe up to the specified number of 350.
My Lords, I must confess that I am slightly puzzled because, if the Government say that there is a specified number of children, then after that total has been reached the scheme has been closed. I remember—it was not long ago—that the Prime Minister, when she was Home Secretary, told me that the Government were prepared to accept the amendment, and on the same day the then Immigration Minister said to me that the Government would accept the letter and the spirit of that amendment. In arbitrarily closing down a scheme without any good reason for doing so, I believe that the Government are in breach of their own commitments.
Noble Lords might rubbish that but the capacity of local authorities is limited. We have relied on their good will. It has been an entirely voluntary approach from local authorities, and of course I encourage more local authorities that think that they might have places to come forward. I refer noble Lords to what this Government have done. Up to September 2016 we have provided in this country refuge or other forms of leave for more than 8,000 children. I am very proud of that.
The implication of the Government’s actions, if we go according to the letter of the amendment—Section 67 of the Act—is that local authorities have reached the end of the road and have no further capacity. However, that reasoning is palpably faulty. There are many people who have expressed an interest in helping, as well as churches, other faith groups and local authorities. I know several people who have indicated their willingness to help to a local authority but have had little response. Obviously the Government are quite uninterested in taking in more children.
My Lords, that is absolutely wrong. We have had informal expressions of interest, and if the noble Baroness has the names of those individuals and church and community groups I encourage her to contact us so that we can get matters in train.
My Lords, I declare an interest as a member of the business task force that was set up after the Syrian donor conference to provide jobs and help families and the dispossessed in the region, to prevent them making the perilous journey to Europe. The Government have to be congratulated on the work they are doing there. When the number of 450 is reached, will the Government still look at the discretionary clauses under Dublin which allow countries to take in the most vulnerable people? I am particularly thinking of mothers with babies and the victims of traffickers.
Yes, the people to whom my noble friend refers in the region are the most vulnerable people on the globe. We do not close our doors to people who genuinely seek refuge in this country. Up to September last year, we gave asylum or other forms of leave to 8,000 children.
Will the Minister explain to us where the figure of 350 came from; what consultations and calculations underpin it; and whether her request that others volunteer from the local authorities means that, if such representations and offers are made, the Government will revise that figure of 350?
The noble Lord asks a valuable question. We do not stop consulting local authorities. Of course if local authorities or community sponsorship groups were to come forward, we would certainly consider that. The figure of 350—in fact, it was 400—came from local authorities. We have revised it down to 350 because, if some of the family cases break down, the children will need local authority care and we need some capacity to provide it. Our consultation with local authorities is ongoing.
My Lords, the Minister will recall that last month I raised with her the disappearance of unaccompanied children. Figures from Europol that I first raised in your Lordships’ House in June showed that 10,000 children had disappeared on the continent and that hundreds were disappearing here in the United Kingdom. One of the reasons why I was proud to be a signatory to the amendment moved by the noble Lord, Lord Dubs, was the disappearance of those unaccompanied children. Last week, I sent the Minister a statement from ECPAT UK, the organisation established to protect children, which said that it is shocking that the Home Office says it has no evidence. Where do we stand on these missing unaccompanied minors?
I presume the noble Lord refers to children both at home and abroad. Obviously, if a child is in Greece, Italy, France or wherever, it is the responsibility of that Government to safeguard that child. I said to the noble Lord that I did not have evidence of disappeared children in this country. That is not to say that in future that may not happen, but at this point we have had no representation from local authorities to say that children are disappearing. Obviously, if that were to be the case, we would follow it up with some urgency.
My Lords, yesterday my noble friend Lord Dubs in this Chamber asked the Government,
“to confirm the news that we have heard about the Government intending to bring to an end the scheme under Section 67 of the Immigration Act”,
namely, the Dubs amendment. In response, the Government told the House:
“A Written Ministerial Statement will underscore that, far from doing that, Section 67 of the Act … stands”.—[Official Report, 8/2/17; col. 1715.]
Why was no reference made yesterday by the Government to any cap of 350 when that response was given to the very specific question from my noble friend Lord Dubs?
Can the Minister also respond to a question about the Written Statement? It says:
“Local authorities told us they have capacity for around 400 unaccompanied asylum-seeking children until the end of this financial year”.
What capacity have local authorities told the Government they have for unaccompanied asylum-seeking children in the 1917-18 financial year on the basis that the current level of government funding is continued?
I am happy to repeat it because it is a quote from the Government’s own Written Statement:
“Local authorities told us they have capacity for around 400 unaccompanied asylum-seeking children until the end of this financial year”.—[Official Report, Commons, 8/2/17; col. 10WS.]
What capacity have local authorities told the Government they have for unaccompanied asylum-seeking children in the next financial year, namely 1917-18, on the basis that the current level of government funding is continued?
I think the noble Lord means 2017-18. Obviously, as I have said to noble Lords, the Government are in constant consultation with local authorities on a range of things, including this. The scheme is entirely voluntary. We do not want to force local authorities to do things that they may not have the capacity to fulfil. Children are of paramount importance.
Business of the House
Motion on Standing Orders
Richmond Burgage Pastures Bill [HL]
Bill read a second time and committed to an Unopposed Bill Committee.
University of London Bill [HL]
Bill read a second time and committed to an Unopposed Bill Committee.
Joint Committee on Human Rights
That Baroness O’Cathain be appointed a member of the Select Committee.
My Lords, I have had some correspondence with the Clerk of the Parliaments. I had not realised that at some point this House agreed that any mistakes that are made in relation to room bookings represent a breach of the Code of Conduct. In other words, if a Member books a room and is not present for the whole of the period of that booking, they are then in breach of the Code of Conduct and can be reported to the Standards and Privileges Committee.
This is quite astonishing and I do not know when it got through, how it got through, and whether other noble Lords realised what was happening. I think we should be far more careful when we look at these Motions. We should have an explanation of why they are being put forward from whoever is moving the Motion—whether it is the Senior Deputy Speaker, the Chief Whip, the Leader of the House or whoever—so that we know exactly the implications. It would be quite astonishing if, just because of an inadvertence in relation to room bookings, a Member was in serious breach of the code. Could that be looked at again?
Could I say to the noble Lord, with the utmost courtesy, that this is nothing to do with the Motion that I am proposing just now, which is about a change to the membership of the Joint Committee on Human Rights? However, as always, outwith the Chamber, I will have the most fruitful engagement with the noble Lord at any time.
Privileges and Conduct Committee
Motion to Agree
That the 5th Report from the Select Committee (Process for publishing Commissioner reports; Commissioner and police investigations; Minor amendments to the Code) (HL Paper 99) be agreed to.
My Lords, this report contains various recommendations for changes to the Code of Conduct for Members of the House of Lords and the Guide to the Code of Conduct. First, it recommends a more streamlined process for publishing reports from the Commissioner for Standards when she finds that a Member did not breach the Code of Conduct or where remedial action has been agreed. In those cases, it is recommended that her report and evidence should normally be published only on the parliamentary website and not sent to the Committee for Privileges and Conduct. This is similar to the process in the House of Commons. The commissioner would have discretion to submit a report to the committee if a case involved a particularly serious allegation or if it gave rise to matters of wider interest or relevance. In these instances, the Committee for Privileges and Conduct would report the case to the House.
The second proposal is that the commissioner should be able to continue an investigation into an alleged breach of the code alongside a police investigation. Under the current guidance, the commissioner has to suspend her investigation whenever the police are investigating a related complaint. The committee proposes that the commissioner should be able to continue an investigation in those circumstances but would not finalise a report until the criminal process had concluded. This would allow her to take into account any relevant issue arising from that process. Under the proposed new guidance, the commissioner would always suspend her investigation if the related proceedings become sub judice.
Finally, the report proposes several minor amendments to the code and the guide to reflect developments in practice and to clarify uncertainties. I beg to move.
My Lords, I sincerely apologise to the Lord Speaker, to the Senior Deputy Speaker and to the House for raising my point under the wrong heading. However, if the noble Lord had the powers that I think he ought to have as Lord Speaker, he could have corrected me immediately. I would have sat down and would not have spoken inappropriately. We are now on the appropriate Motion and I thank the Senior Deputy Speaker for introducing it, which I appreciate very much indeed.
However, I go back to the point that where there are breaches of conduct, and Members do things that are clearly unacceptable to the House and bring it into disrepute, of course what the Senior Deputy Speaker says is absolutely right. But, as I say, the issue of minor breaches in relation to the booking and use of rooms has come to my attention, and I have had correspondence with the Clerk about it. For instance, if you book a room and hold a press conference in it when you were not supposed to hold one there, or if you book a room for an hour and you leave halfway through, that is a breach of the Code of Conduct and you can be reported to the Committee for Privileges and Conduct. That seems to me to be using a sledgehammer to crack a nut. It should be dealt with in some other way, not as a breach of the Code of Conduct. I do not know when it slipped through—these things go through on the nod, and sometimes you get confused about what is going through and when. Can the Senior Deputy Speaker take this particular point back to the committee to have another look at it?
I thank the noble Lord for his eloquent repetition of his previous point. Yes, I will look at that and take it back. I repeat my willingness to have a discussion with him outside this Chamber.
Perhaps I can follow up the statement that the Senior Deputy Speaker made. He stated that the inquiry that was carried out by the commissioner—as I understand it—could be carried out coterminously by the police. In other words, both inquiries could be taking place at the same time, subject to the criteria that the noble Lord referred to. Does that mean that there could be, during the course of an inquiry, discussions between the police and the commissioner about a matter that was the subject of an investigation? To what extent would that be then allowed to influence an investigation by the commissioner?
It would allow the police to continue their investigation, but there has been experience in the past where the commissioner has had to pause an investigation because of a concurrent police investigation. In one case—I am trying to remember off the top of my head—that was 16 months. The commissioner was not able to go back it for that time. So the proposal is that the commissioner looks at the issue and collects evidence and when the police report they have a fresh understanding of what has been happening can pursue it further. Previously the commissioner had to suspend their investigation, perhaps for 16 months, and then go back and find that the information was a bit dated and that people could not recall things as sharply. For that reason we discussed this with the commissioner and the new proposal was put forward.
I would not think so. If anything, common sense prevails in this House—and I will make sure that that is undertaken.
As far as I know, yes, but I will investigate that further and I will write to the noble Lord on that point.
Code of Conduct
Motion to Resolve
To resolve that the Code of Conduct for Members of the House of Lords be amended as follows:
In paragraph 19, in the second sentence, leave out “goes” and insert “is normally published only on the Commissioner’s webpages. The Commissioner has discretion to submit a report in such instances.”
Leave out paragraphs 26 and 27 and insert:
“The Sub-Committee on Lords’ Conduct keeps the Code of Conduct and the Guide to the Code of Conduct under regular review. Recommended changes are reported to the House and take effect when agreed by the House.”
Commonwealth Development Corporation Bill
Second Reading (and remaining stages)
My Lords, this is a short, two-clause Bill. It is a necessary piece of enabling legislation to ensure that the CDC is able to continue investing in the world’s poorest countries to create jobs, support local businesses and stimulate economic development. No country can defeat poverty and end aid dependency without sustained economic growth and a thriving private sector. Strong profitable businesses are needed to create better jobs and generate the tax revenues required to deliver improved public services.
There is, however, a huge unmet demand for capital in developing countries. In the poorest and most fragile countries, there is a long way to go to create the right conditions for investors to have the confidence to meet and fill this gap.
In 2015, the UN agreed the sustainable development goals, which are the focus of the Department for International Development through its UK aid strategy. The financing required to achieve these goals is estimated to be $2.5 trillion dollars a year through to 2030. This far outstrips what can be funded through traditional aid-funded programmes and public finance. This is where the CDC comes in.
The CDC was founded back in 1948 and has enjoyed support from successive Governments. It is wholly owned by the UK Government and is a development finance institution, deploying patient public capital to achieve an objective of doing good while not losing money.
The CDC has a portfolio of £4 billion invested in more than 1,200 businesses in more than 70 countries. In 2015, businesses backed by the CDC helped to create 1,030,000 new jobs in Africa and southern Asia. Over three years, these businesses have generated more than $7 billion in tax revenues to the countries in which CDC has invested.
The CDC invests long term to achieve development impact. It has a higher risk appetite and can take a more patient view of financial returns than private investors, but by demonstrating that responsible investing in difficult markets can be commercially viable, it helps to crowd in the private finance that the poorest countries desperately need.
In 2015, the CDC helped to mobilise an additional $832 million of capital from private investors. Over the years, it has made ground-breaking investments in unproven markets, planting the first seeds for industries that have since become mainstream, such as tea exports in Kenya and mobile telecoms in Africa. As an investor, the CDC sees the potential of the people of a country rather than its problems.
The NAO completed a value-for-money study of the CDC last year. Its report highlights the transformation that the CDC has undergone over the past five years, following the agreement of a new strategy and investment policy with DfID in 2012. The CDC now invests only in Africa and south Asia—two regions that account for 80% of the world’s poor. It is the only development financial institution to have this narrow a geographical focus. It now targets the sectors that create the most jobs in an economy. CDC investments in the energy sector are providing the investment needed to improve access and power economic growth in Africa. In the financial sector, the CDC has enabled microfinance institutions and retail banks to advance loans to support small businesses in agriculture and manufacturing in south Asia.
While the CDC continues to invest through funds, it has now built up its capacity to make direct investments and do debt deals alongside equity. It has also tightened controls on costs and cut average salaries by over 25% over five years. It has become a leader among its peers in transparency: it was the first development financial institution to sign up to the International Aid Transparency Initiative and provide full information on the name and location of all its investments.
The Bill is focused on one issue only: raising the limit on the level of financial support that we can provide to the CDC under the CDC Act. The Bill is needed because the current limit, set 17 years ago, has been reached. The Bill will raise the cumulative financial limit by £4.5 billion to £6 billion. It also introduces a delegated power to raise the limit further via statutory instrument, to an upper limit of £12 billion.
To be clear, the Bill is not a commitment to provide this level of financial support to the CDC, nor is it a target to be achieved in a set timeframe. No new capital will be provided to the CDC without a new strategy and business case setting out the market demand, value for money and how development impacts are to be achieved. Both will be published and Ministers held to account in the usual way. Furthermore, after ministerial approval the CDC would be able to draw down the capital only when needed in response to market demand.
The Bill passed its stages in the other place unopposed, reflecting the cross-party nature of its objectives, but not without careful scrutiny. In Committee in the other place, expert witnesses gave oral evidence and several noble Lords—including the noble Lords, Lord Boateng and Lord Stern—provided helpful written submissions which have been taken into account.
There was a healthy debate in the other place, responded to by my honourable friend Rory Stewart, but I would argue that that genuine interest and concern is best addressed through the CDC’s strategy rather than via primary legislation. Work is under way to finalise the CDC’s new five-year strategy. It is critically important to get this right and address the issues raised during the Bill’s passage by NGOs, Members of both Houses and the National Audit Office.
We need to capture better the full development impact of the CDC’s investments. We need to ensure that the CDC’s policy on the use of offshore financial centres is reviewed regularly and meets the OECD’s high standards in this area, and that it pilots new approaches to deepen development impact still further.
The passage of the Bill is an important step to enable the CDC to continue playing a central role in the delivery of the UK’s international development objectives: to boost economic growth and eradicate extreme poverty by 2030. It complements other approaches through which the UK is playing a leading role in the international development market, including in our responses to humanitarian disasters, global epidemics and pandemics.
The CDC is a great British organisation with a proven track record and a clear development focus. The Bill will help the CDC to continue its pioneering work, creating opportunities and bringing hope and opportunity to the poorest people in the world. It is an institution of which British taxpayers can be rightly proud. I beg to move.
My Lords, I thank the Minister for that clear introduction to the Bill. I am glad he is in the post that he is in, because he is a man who has taken our responsibilities in this sphere very seriously during his life. I am also very glad indeed that the noble Viscount, Lord Eccles, will be speaking in the debate, as he made a distinguished contribution to the history of the CDC when he was leading it.
I declare an interest because, for a short while in the mid-1970s, I was the sponsoring Minister for the CDC and I took great interest in it. What I liked about the CDC in those days was that it took very seriously the issue of the development of human capacity. When I visited, the staff took great pleasure in telling me how they were developing hands-on capacity.
That was important to see in the context of the Conservative Party’s own record. I was frankly rather impressed in the 1960s, when the Conservative Government took the initiative in setting up government machinery to meet third-world commitments. They called the department the Department of Technical Cooperation. Indeed, I do not mind telling the House that I spent a certain amount of time at our party headquarters trying to argue that it was a good title; if we were going to have a great emphasis—as we did, thank God—on the central role of overseas development in our programmes, then we ought to look seriously at the title the Conservatives had used. I never felt that the Ministry of Overseas Development quite got to the heart of the concept as the notion of technical co-operation did. I saw the CDC as fulfilling the spirit that says, “Nothing will succeed unless we are developing human capacity”.
I am therefore rather sad that, given the history of the CDC, it has now gone down the road of becoming, in effect, just another merchant bank. It seems to me that the emphasis, originality and creativity that was there has been lost. I do not believe that responsibility for this development can be laid entirely at the feet of the party opposite. Whether it was inadvertent, or however it happened, we were not as vigilant on this point as we should have been.
The Minister has explained the origins of the Bill. It is true that in the informed constituency in this country—a very real and good one on these matters—there is and has been a certain amount of concern. Here I declare an interest as a former director of Oxfam. We are well blessed to have the quality of NGOs we have operating in this sphere, and we should take their concerns very seriously.
What are those concerns? Some are centred on the real development impact of the CDC as it is today and whether recent reforms have adequately improved its effectiveness. It continues to face challenges relating to transparency, monitoring and reporting on its development impact, as well as on routing its investments through tax havens. The Bill provides us with our first opportunity since 1999 to shape the legislative framework for government oversight of the CDC and update it to clarify the purpose of public funding for the CDC, a suitable level for future public funding and the conditions under which it is to be provided and utilised; how the CDC will address the UK Government’s priorities for aid, such as transparency, value for money and achieving development results; and how the CDC can improve its investment standards—for example, on the use of tax havens.
More specifically, concerns have been centred on an overconcentration on the higher rates of returns on its investments. A focus on large formal enterprises, the use of narrowly defined impact indicators, and minimal investment in sectors such as agriculture and manufacturing raise concerns about its development impact for ordinary human beings. The National Audit Office’s recent review of the CDC reported that it,
“remains a significant challenge for CDC to demonstrate its ultimate objective of creating jobs and making a lasting difference to people’s lives in some of the world’s poorest places”.
That observation cannot be cast lightly aside.
As for transparency, the CDC was assessed as poor, with 22.5%, in the Aid Transparency Index, and there have been no major improvements in its transparency since then—or none that I can detect. I acknowledge that the Government and the CDC itself take these concerns seriously but, as late as 2013, 75% of the CDC’s investments were routed through jurisdictions that feature in the top 20 of Tax Justice Network’s financial secrecy index.
During deliberations on the Bill in the other place, Ministers failed to provide a clear and robust case for why the CDC required the level of additional funding and whether it had the capacity and opportunities to invest it effectively. This therefore remains a major question, especially as in DfID’s business case for the £735 million in funding committed to the CDC in 2015 it stated that the CDC had assessed that it had the capacity to invest an additional £1 billion and would require additional funding from DfID only in 2019.
I conclude by putting specific questions to the Minister. I do not want to overdo it, but I repeat the points because I have very great respect for the present Minister and I am sure he will take these questions seriously. First, why have the Government introduced the Bill before publishing the CDC’s investment strategy for 2017-21? Why does the Bill allow the Government to utilise the ceiling of £6 billion to £12 billion for funding the CDC, given that in 2015 it assessed it could invest an additional £1 billion for the Government? Why have the Government not included in the proposed Bill standards that the CDC should meet in order to address the Government’s commitment to transparency, value for money and tracking development results, as well as on issues such as the CDC’s use of tax havens for its investments? How will the CDC be asked to improve its functioning and contribution to development results as a condition of future funding increases? How will the CDC be asked to improve its transparency and reduce the volume of investments it routes through tax havens as a condition of future funding? Finally, how have DfID’s investment plans for the CDC been informed by assessing other options for investing these resources and comparing their value for money and potential for development impact?
As somebody who worked in this sphere for a good deal of my life and who continues to work in an honorary capacity in many ways since becoming a Member of this House, I have difficulty with the term “development impact”. I believe the real heart of the challenge of our co-operation with communities across the world is their empowerment. It is about their taking control themselves. It is about enhancing their capacity. “Impact” suggests it is us bringing something to the country, which we are then evaluating. Our evaluation needs to concentrate far more on how the local community appreciates and benefits from what happens.
My other point, and it is not a popular one in the age of the market, is that in real human terms very often the real effect of this co-operation will not be judged until perhaps decades later. The constant pressure to produce immediate evidence of impact sometimes distorts lasting effective development. I ask the Minister to consider these matters seriously and I look forward greatly to his reply.
My Lords, I, too, thank the Minister for introducing this Bill. It is a privilege, as ever, to follow the noble Lord, Lord Judd, with his long commitment to development and huge experience in this area. The CDC has, of course, played an important part in our development efforts in recent years, particularly since its remit was redrawn in the early days of the coalition and under the stewardship of its current CEO, Diana Noble. It is vital that we promote economic development. That is what will transform societies and pull people out of poverty. We have seen that around the world. Investment in the green revolution in agriculture in India was later to underpin India’s growth in other parts of its economy. The CDC, refocused on poorer countries and frontier markets, has helped in that regard.
Even before that refocusing, it has been a significant contributor. A key investment, of course, was that in M-Pesa in Kenya, to which the Minister referred, kick-starting a transformative method of ensuring that the un-banked were brought within the financial sector. I know that the CDC later regretted that it had no equity stake in the project given the profits now flowing in Kenya and elsewhere, which is a shame. When it is criticised for supporting some developments, it is important to look behind that work and see what skills are being imparted or jobs created. I have seen what it looked to do in Nepal and northern Nigeria in very difficult markets, but finding markets elsewhere easier. Where the CDC leads, it is often then easier to secure other private investment, which is especially important where it is operating in the truly difficult frontier markets.
But we are looking at the CDC as it is now, and even here there have been criticisms as to whether it is sufficiently poverty-focused, for example. I recall the concern in the 2000s about where its focus was. Was it any different, it was asked, from other private equity businesses as it invested in the growing markets of China and India? Andrew Mitchell and Alan Duncan, with their experience in both development and banking, did much to refocus what the CDC did. Diana Noble, as its chief executive, has transformed the organisation most impressively and there is a constant check on how transformative it is in some of the most challenging places. But, of course, she is standing down.
When I was DfID Minister, I was impressed that the CDC had not had its funds topped up in decades because it had so successfully reinvested what it was earning. There was then a relatively small top-up, certainly small compared with what we are looking at here. Did the CDC ask for this increase, and what does it plan to do in terms of attracting staff to manage such increases? What we see here causes me considerable concern, especially as the Bill enables the Secretary of State to increase the amount yet further by secondary legislation. That does not seem wise because I also remember the controversy when there were moves to sell the CDC off, early in Labour’s years in government, and Actis was spun off. Those involved, largely employed by the CDC, profited enormously. Suppose that down the track the Government decided to sell off the CDC. Would we not regret having filled its coffers? It would certainly make it more saleable.
Suppose we were to have a Secretary of State who thinks that this should be the main vehicle for aid money? There is plenty of scope for that. What about all the vital areas that DfID needs to support if we are to improve human development in the poorest countries? Human development underpins the ability of all economies to grow. To meet the SDG of eradicating extreme poverty by 2030, leaving no one behind, that growth needs to be underpinned and to be equitable, including women and girls as well as men and boys.
Suppose the Secretary of State altered the terms on which the CDC invested? What then? It is not at all clear that its funds would be used for addressing the SDGs as the ODA commitment surely means we must do. The Minister will know as well as I do how widely drawn the ODA is, but up until now DfID has been commendably focused on the poorest. Suppose that changed? It is all very well saying that the CDC would have to produce a robust business case, but suppose in the future the need for business cases was dispensed with? They have existed in their present extended form only for less than five years, and even then, having gone through a number of them when I was a DfID Minister, I can say that they are labour intensive and not always as useful as one might want them to be.
Suppose the business case continued, but the parameters that the Secretary of State laid down changed. For example, although in order to count as ODA, benefit needed to be seen in developing countries, it was decided that a close second must be to benefit British investors. The Minister will know exactly what I mean. What then?
This Bill hugely increases the potential capital for the CDC to £6 billion, with the Secretary of State able to increase it further to £12 billion by regulations alone. This is quite an increase from £1.5 billion.
I realise that we have no chance to amend this Bill, as it will go through all its stages here today. Much as I admire what the CDC is doing, I do not think that issuing this relatively blank cheque for a Secretary of State or for a future CDC under a new CEO is wise. The noble Lord says that the CDC will have a new strategy. Surely those in the Commons and the noble Lord, Lord Judd, are right in saying that we should have seen that first.
I know that the Minister will have the situation of the poorest people in the world in his mind. I look forward, therefore, to hearing what he has to say in response to my concerns and what safeguards will be built in, in terms of scrutiny of what the CDC does.
My Lords, I, too, warmly welcome this Bill. When the new world order appears to be more disorder and one of the key themes of the World Economic Forum in Davos is rising inequality and the threat this poses to economic and political stability, the Bill comes at an opportune time.
Clearly, addressing poverty is critical to addressing global inequality. We have moved from the millennium development goals to the sustainable development goals and the role of the private sector has been recognised as a central part of achieving this agenda. Many of the major development initiatives in Africa have come from foreign aid agencies, local and international NGOs and publicly funded multilateral financial institutions. So I wish to focus my few remarks in support of this Bill on the key role that the CDC has played and continues to play in some of the most challenging countries in Africa.
During the last 15 years, the growing Africa-focused private equity community has had a unique opportunity to play its role in what is becoming a development relationship. Private equity has been good for African economic development. It has helped to promote a healthy business sector, as well as creating jobs and alleviating political instability, while taking pressure off Governments to be universal problem solvers. Here, certainly, the CDC has played its role in the development of the private equity industry, particularly in the last two decades. It was an early investor in the 1990s, while the DFIs still focused on debt. Since then, the number of private equity funds has grown from around a dozen Africa-focused funds managing some $1 billion, to well over 200 firms managing over $30 billion. The CDC has played an incredibly important role in poverty reduction, working with these private sector companies and investors to create sustainable growth in its target countries.
As the Minister mentioned in his introductory comments, the CDC is now a transformed institution. From 2012, when the CDC invested some £200 million a year in a broad geography from Latin America to south Asia to Africa, with a staff complement of 50, it has now well over 250 staff. It is investing and will continue to invest more than £1.2 billion a year, focused on Africa and south Asia.
I do not agree with the noble Lord, Lord Judd, that the CDC has become just another investment bank. There have been some notable success stories. While the humanitarian response to tackling the Ebola crisis in Sierra Leone, Liberia and Guinea was very successful and essential, the CDC made a valuable contribution in rebuilding many affected businesses by providing much-needed SME loans. As the Brookings Institution rightly mentioned in its recent Foresight Africa report, with many millions of young Africans entering the labour market every year, job creation remains a top agenda item. Here I agree entirely with the noble Baroness, Lady Northover, that human resource development must be a core focus.
The potential threat of climate change has put many parts of Africa at risk of disasters such as floods and droughts. Many Governments continue to face corruption and violence, and global political uncertainty has complicated peacekeeping efforts, aid disbursement and overall investment. Among the many challenges facing sub-Saharan Africa are not just unemployment but lack of infrastructure, food insecurity, inadequate access to education and healthcare and, of course, to clean water, in all of which the CDC is playing a key role. Often the public sector is ill equipped to tackle these challenges, and this is where the private sector can play a critical role. The CDC, with its well-respected 70-year track record, has made a very important contribution in identifying and nurturing management teams and companies that have provided and continue to provide solutions to many of these problems.
Sub-Saharan Africa suffered one of its worst years in terms of foreign direct investment last year. This was due partly to the fall in commodity prices, particularly the oil price, as well to other concerns, including those of international investors about collapsing local currencies, and was exacerbated by high levels of corruption and lack of accountability. Although technology has continued to transform the continent with the introduction of broadband and many other innovative, transformational technologies, the many challenges that Africa faces are unlikely to be solved in the short to medium term. This will obviously impact negatively on the lives of millions of the poorest people. That is why it is important that the CDC continue to provide much-needed capital and mobilise other international private capital to co-invest in well-run businesses with high levels of integrity and high social and environmental standards. I stress the importance of long-term capital in this regard. These projects can range from building schools to the establishment of hospitals, agribusinesses, renewable energy, ports and logistical infrastructure. While these are all needed in most countries in sub-Saharan Africa, the CDC has not shied away from going to some of the most challenging areas. Here I mention some of the agribusinesses in which the CDC has invested in northern Nigeria, which have had a transformational impact on many of the people there.
A good example of the CDC’s work is the development in Virunga in Eastern Congo. The CDC has helped to construct a hydropower plant that has already transformed the lives of many of those in the area who were living in desperate conditions, through providing jobs and training to former child soldiers who became socially excluded adults. This will in all likelihood have an added benefit of reducing the erosion of natural resources in the parks, which includes the rampant problem of wildlife poaching.
I warmly support the Bill, which provides much-needed long-term additional funding to the CDC, but as it is a money Bill that will not be deliberated on further in your Lordships’ House, it is important that a firm business plan is in place outlining the medium and long-term road map for the CDC, with appropriate checks and balances. In this regard I was reassured by the Minister’s comments in introducing the Bill.
Finally, I acknowledge the leadership, commitment, dedication and vision of the CDC’s chief executive, Diana Noble, who will sadly retire in June this year, and pay tribute to the able chairmanship of Graham Wrigley.
My Lords, I congratulate the noble Lord, Lord Bates, on his excellent introduction to the Bill. I declare my interests as set out in the register. I greatly welcome the Bill and wish to speak out in support of it and the CDC. What it has done over the last five years or so is no mean achievement, making successful investments in parts of the world that are difficult to operate in. It has been a civilised and professional body; references to merchant banks are not entirely fair, because it has focused on need just as much as on commercial attractions.
The CDC has also become very capable of investing and managing third-party funds in Africa and India. I hope that that may develop as a new part of its business. As I understand it, it operates in three separate parts. There has been private equity investment, largely in east Asia and Africa, amounting to some $3 billion. A professional fee of, I think, 0.25% is paid for the management of those assets. The Bill will significantly increase the scope here. The second area has been direct equity investment, again in south Asia and Africa, of the order of $1.2 billion, and thirdly debt investment of some $400 million. As has been pointed out, the increase in the size of those investments over the last five years has arisen from their success rather than from additional funding.
The Bill is about significant increases in funding for the CDC—an initial increase from £1.5 billion to £6 billion, and then a route is provided with delegated powers for the Secretary of State to go up to £12 billion. That is a substantial increase, but it is not widely realised that the CDC and its associates are wholly government-owned. This is not the Government funding third-party entities; they are funding another limb of government to operate effectively on a commercial basis. It is still a government entity.
I am a member of the Delegated Powers and Regulatory Reform Committee, which, as noble Lords will be aware, has opined that the Bill inappropriately delegates power without demonstrating the need for it. Personally, I have mixed views. I understand the point but I repeat my own: that this is government advancing funds to another part of itself. I tend to think that is justifiable, and that the case for increasing the funding has also proven itself, so I do not see the need for primary legislation to authorise the additional funding.
The key point is that the CDC’s record, particularly over the last five years, stands for itself. I remember times when there was criticism of it, and it is extremely heartening to see how successful it has been, in very difficult territory.
My Lords, I declare my interest as chair of the Africa Enterprise Challenge Fund. As such, I have had the opportunity to see the work of the CDC in support of agribusiness in Africa and renewable energy. I am bound to say that I welcome this Bill; I welcome, too, the Minister’s championing of the CDC within the department. I think that it will benefit from his attention. Frankly, if truth be told, the CDC has not in the past benefited from any ministerial champion at all, which has been part of its problem. The noble Baroness, Lady Northover, happily gave it some of her attention but, certainly in my time in government, it must be said that it did not have any champions.
We must also recognise that, at one time under the Labour Government, the CDC was being fattened up to be privatised—that was the reality. It was therefore given a mandate of making as much money as it could, but no target at all in relation to its contribution to the eradication of poverty or to development. We have to be frank: we need to learn the lessons of the past in order to ensure that we do not repeat the mistakes of the past in the future. The good news is that, for the past five years, a process of reform of the CDC has been under way, which has seen a renewed focus on the reduction of poverty and is to be warmly welcomed.
My noble friend Lord Judd, whose knowledge of these matters is, in my experience, unparalleled, was exactly on point when he suggested that, going forward, it is absolutely vital that the CDC continues to focus on empowerment and enablement on the African continent; ensuring that small and medium-sized business can grow and link to global markets; and improving value chains across the continent. This is about saying that we will stand alongside Africa as it develops its own agribusinesses and manufacturing capacity, because it is in these areas that there is currently a marked deficit on that continent.
Real gains have made in the past decades in terms of economic growth—six or seven of the top 10 fastest-growing economies in the world now are to be found in Africa, which is a tribute to entrepreneurs there. There have been vast improvements in terms of governance—the recent successful transitions of power in both Nigeria and Ghana are examples. Across the continent, there has also been a renewed focus on the part of African Governments on creating enabling environments in which it is possible for business to flourish.
This creates a real opportunity for the CDC to get alongside those businesses. One particular aspect of Africa’s development on which I seek to concentrate—including the potential role of the CDC—is the role that small and medium-sized enterprises can and must play in the continent’s development. In Africa, they contribute to around 40% of GDP and to some 50% of employment overall. In some sectors, their level of job creation can be even higher. For example, informal and formal SMEs together account for about three-quarters of total employment in manufacturing. However, the reality is that it is very difficult indeed for small and medium-sized enterprises in Africa to obtain funding from the banks. That is because in the main the banks are risk-averse and do not understand the sectors—the agrisector in particular—in which SMEs are emerging. Significantly, SMEs also suffer from very high interest rates. That is the fact of the matter on the ground, on the continent.
To address that, the CDC has seen it as part of its mission to support those businesses through supporting banks. So, taking the example of a recent investment it has made, it has supported the dfcu Bank in Uganda, which focuses on tackling the lack of long-term funding for SMEs in a country—Uganda—where they contribute around 70% of GDP. A bank such as that could not hope to obtain on the open market the sort of funding that the CDC can give it, on the terms that the CDC can give it. If you were simply applying market judgments and the bottom line to support for banks that work with SMEs, you would not be able to raise capital. The CDC, with its focus, is able to do so.
The CDC needs to be encouraged to focus on and address market failure. That, after all, is the justification for putting public money into it—I cannot think of any other. We are putting public money into something that addresses the failures of the market so that markets can work better for the poor, and to support development. As all sides of the House agree, the long-term and medium-term solution to Africa’s problems does not lie in overseas development assistance but in the development of a sustainable private sector and the capacity within Africa to generate, through tax revenues, sufficient money to do all the things that we expect the state to do in our own country. We want enabling states; we certainly want states that encourage and support a private sector that can create wealth and provide employment. That ought to be the focus of the CDC in the future.
I ask the Minister to ensure that this House has an opportunity to discuss the future strategy of the CDC—that an investment strategy is not adopted without consideration of views from all sides of this House—because, as today’s speakers list shows, there is real expertise in the Chamber. That expertise can encourage, support and spread the word about the importance of investment in this area, and all that investment can do.
I end on this note: we are in a challenging time for global security, and the best protection for any of us in the world is job creation. Africa has the fastest-growing population of young people in the world, and if there are young people in Africa who do not really have an opportunity to gain sustainable livelihoods, whether in urban or rural areas—Africa also has the fastest rate of urbanisation in the world—they will fall prey to those who would exploit them for their own purposes.
In northern Nigeria we see a classic example of this. Boko Haram exists because young people feel disaffected, cut off from relevant educational opportunities and the prospect of getting sustainable livelihoods. The great work that the CDC is doing in that area—creating real job opportunities with real employment and providing real added value—is a classic example of the sort of response that we ought to be making to today’s challenges. I wish the CDC all the very best with its task and hope that the Minister will continue to champion it in his department.
My Lords, I am very pleased to follow the noble Lord, Lord Boateng, and I agree with much of what he said. I draw the House’s attention to my entry in the register of Members’ interests. I have a particular interest because when I chaired the International Development Committee in the House of Commons, we carried out an inquiry published in 2011, before the change in strategy. The noble Lord anticipated some criticisms of the Labour Government, which I did not want to make too forcefully, but he was right that the corporation was being looked at for privatisation. Douglas Alexander got it focused more on poverty but it really took Andrew Mitchell and a wholesale review to come to a strategic change.
One recommendation in our report was to split the fund. The Government did not agree, but did split the corporation’s objectives from being just a fund of funds to separating funds and direct investment and going back to some of the traditions of the early days of the CDC when it invested directly in companies and enterprises, not just through funds. That has obviously had an impact over the last few years and is becoming a more significant part of the portfolio, but it is still very small. I hope that the new strategy will help to explain how we can achieve more of that and find ways to fill the market failures in those gaps to make the transformation. The reality is that I do not believe that any country has significantly lifted its people out of poverty without having a vibrant private sector. The role of development finance funds of the CDC’s kind is extremely important in helping that to happen.
My noble friend Lady Northover identified a number of concerns, which I hope that the Minister will directly address. There have been reservations expressed that we are going for a quadrupling, and then a further doubling, when we do not have a strategy nor yet a clear indication of how that money will be spent. The Minister rightly says that there is a huge demand for a huge amount of money; the question is how much of that would be more appropriately met by an organisation such as CDC, as opposed to the wider market. Given the sort of criticisms that the sector currently faces, the Government need to be careful about putting substantial additional funds into CDC—although I would not put it in these terms—without being absolutely clear that there will be proper accountability, proper results and a proper strategy. If they are not, they will find the sort of heat that they have experienced in the popular press being turned on them for exactly this. It would be extremely unfortunate if that were to happen and we must make sure that it does not.
The reality is that we need to invest in projects that are riskier and offer a poorer return, because those are precisely the projects that the private sector, and by definition the market, will not address. The CDC has shown that they are there and can generate a return. The question is whether there will really be £12 billion of that kind of investment available over the next few years.
The Secretary of State has said that she wants the focus of UK aid to be on trade and investment. That is a kind of mantra across the Government, who are desperate to demonstrate that we can get agreements on trade and investment. But there is a consensus in this House, which I hope is not under challenge, that our aid and development focus should be on poverty reduction. That is our fundamental objective. The noble Lord, Lord Boateng, mentioned the importance of creating jobs and livelihoods. Quite terrifyingly, the forecast of job requirements in Africa alone is not in the millions or even the tens of millions. Hundreds of millions of jobs will have to be found in a relatively short time, which is really quite a scary thought because, if those jobs cannot be found, there will be an awful lot of idle hands looking for something to do—and I fear that those things may not always be positive and constructive. There is no doubt at all that we need to do that.
The other thing I will talk about is the mix of our aid budget and focus, because this is a big increase in one particular component of DfID’s spending. The Minister gave me a reply earlier this week relating to the Government’s humanitarian response. He said that our spend over the last three years has gone from £826 million to £1,266 million—that is, from 12% of total ODA to 17%. Everybody understands why that has happened and there is clear public support for that. Nevertheless that is an increasing proportion of the budget which, by definition, is not available for other aspects of development spending. There have been indications of cutbacks in some development programmes, partly because of that pressure.
The second thing is that the depreciation in the value of the pound—on average 20%—means that the purchasing power of our aid budget has been correspondingly reduced and so there is less scope. Those people who seem to think, because of our commitment of 0.7%, that somehow DfID and our development budget is awash with funds are not really facing up to the pressures of impending famines as well as of traditional development.
There is a clear synergy between the role of development and the role of private sector investment. Clearly investors, whether they are indigenous to a country or outside it or in partnership, benefit from having an educated, healthy workforce and decent infrastructure investment. The two things fit together. Indeed, one of the reasons that many enterprises are reluctant to invest in developing countries is a lack of those things, coupled with problems of governance and corruption that make them difficult places to do business. If the CDC and development can work together to make that environment more conducive, the private sector will be able to take more of the burden on itself and help to address the development needs. We can look to countries such as China, India and Vietnam that have demonstrated how that kind of partnership can lift millions of people out of poverty over a relatively short period of time.
There is a clear need to ensure that extra money going into the CDC is not at the expense of development programmes. I completely agree that the objective in the end is for countries to have the capacity and the resources to run their own services and be free of aid, but we should not cut off that aid prematurely before they have actually established that degree of viability. That would be a point of concern for me. I know it is unpredictable but it would be helpful if the Government and DfID gave us a little bit more guidance on their strategic objectives in terms of how much they feel is reasonable for humanitarian support, how much is going into development and how much is going into the private sector. It would help us to get a clearer idea of the strategy behind it.
Just as a general comment, the people in the sector whom I meet, whether they work for private contractors, NGOs or organisations generally working with development, feel very beleaguered at the moment. They feel under sustained attack—not all of it justified or even accurate—not only from the popular press but also from the more serious media with an inadequately robust response and defence from DfID as well as across the Government. Much more can be done to explain how transformational UK aid is and how effective we are at delivering real results, giving people the good-news stories that are out there of how, thanks to our intervention and the partnerships we build both from our own expertise and that of the country we are operating in, we are helping to make a real difference.
People who say aid does not work are simply ignoring the facts. We have reduced poverty, we have massively delivered on health objectives, we have got more children into education and we are beginning to raise the quality of these services. We have set ourselves an ambition of ending absolute poverty by 2030—no mean commitment—and to do that we will have to maintain our level of commitment but we also have to explain it much more fully and clearly.
Therefore, while the CDC has a role to play, its changed focus over the past five or six years makes it better equipped to spend more fully. I still have reservations about whether there are enough of the right kind of projects to absorb this extra spending, and I would be interested to see the strategies around how that could be done. I support what we are trying to do, but it is important that we show how the CDC fits in with the strategy of development, humanitarian response, building resilience and capacity and helping, as the second-largest bilateral donor in the world, to lead the way to end absolute poverty by 2030. This has to be a contribution to that.
My Lords, it is a pleasure to follow the noble Lords, Lord Bruce and Lord Boateng, with their historical experience of the CDC, and I am much looking forward to the speech of my old noble friend Lord Eccles, who has seen the CDC almost from the beginning.
I was surprised that this Bill was made a money Bill, considering the huge questions raised by the expansion of the DfID programme. I know we have limited powers in this House, but I tried to complain. I went to the Chief Whip, who agreed to talk to the Lord Speaker, but I decided I could not take it any further. A central issue in the Bill seems to me whether, in handing over such a large proportion of our aid to the private sector and to one particular body, we may be bypassing some of the core principles that have governed the aid programme over many years.
I know that the CDC has changed considerably under new management. I have discussed this directly with the CEO, Diana Noble, quite recently. My noble friend Lord St John made a very strong case for the CDC. I accept that it has responded to radical change. To take only one example, in 2015 more than 1 million jobs were indirectly created by the CDC in Africa and Asia alone. I also have great admiration for the Minister of State in another place, Rory Stewart, whose work with the voluntary sector is well known, as is the experience of our own Minister, but having read Mr Stewart’s replies to the debate in the Commons, I am not yet convinced that the CDC has embraced poverty reduction, which, incidentally, is not quite the same as job creation.
The Minister used the words “doing good while not losing money”. That does not seem to be an adequate description of our international development programme, because poverty reduction has been the focus of our aid programme for some time. We abolished tied aid a generation ago, and the failures of huge projects such as Pergau and Narmada marked the end of large-scale UK investments during the 1980s. Since then, successive Aid Ministers have listened to criticism and have won public support for more programmes which demonstrate people’s participation, meet the needs of the very poorest in society, create partnerships and bring non-governmental organisations directly into the planning and execution of projects. The noble Lord, Lord Judd, mentioned that. I was encouraged to hear the Minister say that there is still room for improvement, presumably in the direction of the very poorest. That is precisely the dilemma the CDC faces.
As someone familiar with some of the UK’s best NGOs which are working alongside the poorest and in partnership with DfID, I have seen this work at first hand and I know that it brings real benefits to society. I do not need persuading that the private sector, and the CDC in particular, can be an effective channel to the poor. In fact, business is a good route for the voluntary sector to follow. For instance, the business model in which women create their own credit and loan scheme, originated with the Grameen Bank and other microcredit organisations, is still widely respected. The noble Lord, Lord Boateng, mentioned SMEs in Africa, which are another important channel.
When it comes to investment decisions, which are not risk free, and due diligence at a higher level of management, there comes a point when must priorities change. Pay scales rise and the interests of the corporation itself may take over from those of the beneficiary. This is a built-in dilemma which was discussed in some detail yesterday in the Public Accounts Committee which I attended. Investment really belongs to a different tradition, and this is why the CDC is being kept separate from the mainstream aid programme. One might be forgiven for asking whether it needs to focus on the poor at all.
Additionally, there is the issue of accountability. Does the CDC really know how its funds are being used on the ground and where they are directed and, even more importantly, can it monitor progress and impact at a later date? Fortunately, we now have really good watchdogs in the form of ICAI, the NAO and DfID itself, not forgetting the IDC, other Select Committees and occasionally our own EU Select Committees which have occasionally covered the EU aid programme. The CDC is very closely scrutinised.
On the whole, the CDC comes out well from various reports and audits. It has responded to recommendations and its transformation is much admired. There are some criticisms worth mentioning, some of them highly technical, which were examined, inevitably in much more detail, in the Commons debates, and I am sorry that we cannot do that today. For example, the NAO found that the development impact target measures prospective impact rather than actual impact. The noble Lord, Lord Judd, raised this point. There are also recruitment and retention challenges. The CDC may be on the right track, but it still has to demonstrate that it can make a lasting difference to the lives of the poorest. ICAI reports have come out with similar comments, although they recognise the growing role of foreign direct investment in development. My noble friend Lord St John made that point.
Finally, there is also a problem of public information. Far too little is known about the CDC programme, while DfID projects are much more visible, and this creates discrepancies. ICAI last year pointed out the anomaly that the CDC is moving DfID back to BRICs and middle-income countries. While DfID has scaled down its aid programme in India, the CDC’s investment there amounts to one-quarter of its portfolio. Is the tail wagging the dog? Does this mean that India suddenly again becomes a developing country and not a middle-income country? Should not the public be aware of this, because many people have argued that the poorest in India should always be a priority? I also believe that the CDC should arrange visits, perhaps through the CPA as well as the IDC, so that more MPs and others can go out to see the work it is doing because it is so important.
I am sorry to strike a discordant note during the passage of this Bill, but while I recognise the value of the CDC’s work, I shall need more convincing that it is really about poverty. The noble Baroness, Lady Northover, mentioned the CDC’s effect on DfID, which is important. The SNP and others put down several amendments on these matters, but I think Her Majesty’s Government have still skilfully avoided the answer. The CDC apart, with the future loss of EU channels of funding and the fall in growth rates and commodity prices in Africa, DfID already faces a considerable challenge in rethinking its responsibilities to the developing world.
My Lords, I worked for the CDC from 1981 to 1994. As the noble Lord, Lord Judd, said, for nine of those years, I was its chief executive. There is one other coincidence: my noble friend Lord Flight now lives in a house in which I lived for a while and in which Lord Reith, who was a most successful chairman of the CDC in the 1950s and 1960s, had also lived. I do not know whether there is any message in that coincidence, but it is interesting.
I would like to concentrate on the period from 2010, on which the debate is concentrating. My period is irrelevant, except that I endorse what the noble Lord, Lord Judd, said about technology transfer and capacity building. A development finance institution such as CDC does not have a role unless it is involved in both technology transfer and capacity building and, therefore, the creation of greater human capacity for people to do things that they did not know how to do before. I could tell your Lordships many stories about how CDC has achieved that in the past, but I would like to concentrate on the period from 2010.
Before doing that, I want to refer to some comments made by the noble Lord, Lord Boateng, about the period before 2010. We are all talking about CDC, but that is inaccurate. It is, in fact, the CDC Group. In 1997, the decision was made in the manifesto that a Bill would be put before Parliament which would have the purpose of changing CDC from being a loan-financed public corporation to becoming an institution with share capital which would then become 75% private and 25% continuing to be owned by the Government.
That is the 1999 Act that we are talking about amending today. It set up the possibility of CDC, then renamed the CDC Group with a shareholding, becoming 75% private owned and 25% retained by the Government. That did not happen. I will not go into the story of why it did not happen, although I am pretty familiar with it. I will just say that I believe that the 1999 Bill was a mistake and that there should never have been a campaign to take any part of the CDC out of public ownership. It should always have remained in public ownership. Although I sit on this side of the House, I can assure your Lordships that, when I was chief executive of CDC in the days of Margaret Thatcher, I was completely consistent with my board that it would be wrong for CDC to seek to be privatised; it should stay in public ownership.
That is where CDC is today and that is why what has happened since 2010 is of very great interest to Parliament. It is a great pleasure to find that Parliament is again debating CDC. Although years ago, CDC was quite frequently debated in Parliament, there was a big gap from about 2004 until 2010 when, frankly, the general opinion was, “Sweep it under the carpet and don’t talk about it”.
From 2010, under the Secretary of State, Andrew Mitchell, a decision was made by the coalition Government to see if they could put CDC back on track. It had become, as I think a noble Lord mentioned, a fund of funds. As a fund of funds it was no longer a development finance institution. The chain of accountability to Parliament was broken by CDC becoming a fund of funds and that needed to be restored. That was spotted by the coalition Government and, as has been said, they made arrangements to appoint a new chief executive, Diana Noble, who has done an extremely fine job, and a chairman, Graham Wrigley, who, in my opinion, has also done an extremely fine job. They have been getting the CDC back on track.
While the Bill is extremely welcome, we need to keep close attention on the business plans of CDC. It is a very important duty not only of DfID but also of Parliament to understand where CDC is going. As your Lordships will understand, it takes a very long time for the things that have been brought into CDC’s portfolio to work out. The usual time before a CDC investment is realised may be about 10 years. We are still living with a great deal of what CDC invested in as a fund of funds before 2010, which is going to take quite a long time to work its way out.
In the strategic future, the question which has been raised by many noble Lords is what proportion of the CDC portfolio is going to be directly invested. Only a direct investor can encompass innovation and going to places where the private sector will not naturally go. Several of those places have been mentioned, including northern Nigeria and the Congo. We can all think of many places in Africa where the fully private sector will hesitate to go. These are the places into which CDC in—it is true—70 years has always been willing to go and had the capacity to go without making serious mistakes.
With a small exception in the period between 1999 and 2010, CDC always made a surplus of income over expenditure throughout the years. When we authorise this increase in capital, we should not worry that CDC will lose that money. If it is true to its past, it will not. It will keep that money and use it as a revolving fund which will enable it to do more and more economic development.
As a condition of that economic development, I come back to the transfer of the knowledge of technologies such as from—I do not know—a generic pill manufacturer. That would be a very beneficial thing to be happening to a greater extent in Africa. However, anyone investing in that would need to know about pharmaceuticals and how to set up and manage a factory. It is very important that, when a strategic plan comes, we can see that CDC has proprietary technology of its own. It has always had some and still has—power generation and mobile telephones are two examples of where CDC has had technology and has deployed it.
The people in CDC are also very important. The staff has been built up recently from, I think, 50 when it was just a finance house to about 250 today. Within the capacity of staff employed by CDC, we need people who understand businesses and how to set up and manage them, as well as people who know how to finance them.
I welcome the Bill and believe very strongly in economic development, not only in financial rates of return but also in what I would call, not development impact, but economic rates of return, in which the social as well as other effects are measured. CDC going forward in that way, rebuilding itself as it has already done with very considerable success, will get even more into the forefront of being out there, doing things that the fully private sector is not in a position or not ready to do. As it goes forward, it will leverage in money from less certain people, because they know that if they come in alongside CDC, it is likely to work and to work well.
My Lords, it is a great pleasure to follow so many noble Lords who have had experience of these matters over very many years and particularly of the splendid historical context in which we see the CDC. This short Bill is twice as long as another little Bill that we will have when we return after the recess. We may have a couple of hours now, but of course there are five whole days so far in the weeks that follow, although there could be more. We have no opportunity to amend this Bill, as money is at stake.
We know that there are two basic aims: to quadruple the resources available to the CDC and then, by order, to double them on top of that. Because we cannot amend the Bill at all, it is an act of faith as far as we in this place are concerned. We have to have faith that the funds will be properly used. I do not wish to detract at all from the concerns that have been expressed by so many noble Lords, and look forward to hearing about a sound business plan and strategy.
I have only two points to raise. First, when the resources available are increased, will the CDC, where appropriate, have the opportunity to invest beyond the continent of Africa and the countries of south Asia? I do not think there are any legal constraints on this. It is not in the text of the Bill, and the title says “Commonwealth”, but it certainly seems that investment goes beyond Commonwealth countries. Will the new resources allow investment elsewhere?
The second point, which may not come as any surprise to the Minister, is about the British Overseas Territories. It is government policy that their reasonable needs are the first call on the UK aid programme. For each aided territory, DfID’s objective is to assist it in reaching self-sufficiency. The extension of the potential CDC resources would be but a pinprick for the CDC but could be highly significant for dependent territories such as Montserrat and the St Helena group of islands. I have a particular interest in St Helena, having made two visits there. Even with the delays, the availability of the airport there for mainstream use is keenly awaited, which we hope will happen during this summer. We know that there are detractors around, so it is important just to mention that there have now been several medivac flights of small aeroplanes, and six people are alive now who might not be had they had to wait three weeks to get a boat to Cape Town.
However, St Helena still needs the infrastructure to cater for airborne visitors. When I was there three and a half years ago, two very significant developments were about to happen, but they have not taken place. It would be a proper use of CDC resources to assist with some of these developments in order to take St Helena away from DfID dependency, whether by investment, loan or even guaranteed support.
My Lords, I have no personal relationship with the CDC, although not for want of trying. I went to see Diana Noble but was dismissed—metaphorically, not literally—because she left after 20 minutes. I was trying to find out what it does and how it works, but got nothing. However, that is not the reason why I am speaking today. I was not pleased, but that is not the important part.
I wrote to the noble Baroness, Lady Verma, when she dealt with DfID issues to ask her some questions about the CDC. She did not answer them, but just repeated what the CDC had told her to say. I then wrote to the noble Lord, Lord Bates, and I must thank him, in front of all your Lordships, for writing to me properly and giving me a lot more information. But there are some issues which worry me. The noble Baroness, Lady Northover, and my noble friend Lord Sandwich made the point about poverty reduction. It is difficult to see how some of the investments I have found out about through research, which I will talk about, fulfil the objective of reducing poverty.
The other point which worries me very much is the need for a proper independent review of the CDC’s work. I think most of your Lordships have taken on board what it says, and may know more about its work in depth than I do, but since the Harvard review, which looked at 2008 to 2012, there has not been a proper independent review. Any organisation which receives government money should have regular independent reviews. Some of the things said about the CDC have not been very encouraging. The shadow Minister for Development, Mary Creagh, has said that,
“the government’s own aid watchdog gave their private sector aid spending an amber-red rating and warned that ministers lack targets and a clear focus on reducing poverty”.
Maybe that will be dealt with in the new measures we will read about. She went on:
“Ministers must ensure this new investment in the CDC is transparent, focused on helping the poorest people in the world and delivers value for money for British taxpayers.”
I think it does, but I do not know how much it does for the poorest people. There was also a certain amount of criticism about gated communities, shopping centres and luxury properties in poor countries. According to the Global Justice Now advocacy group:
“CDC have a track record of ploughing money into dubious ‘aid’ projects like the Garden City luxury housing and shopping complex in Kenya and a luxury hotel in Lagos, Nigeria”.
There are issues about the work of the CDC because we do not get outside reviewers to look at it. The noble Lord, Lord Bates, said that the National Audit Office looks at it but that is not quite what I had in mind. It has to be looked at by people who are involved in development, not national audit. Even if it spends its money properly, I doubt whether it manages to keep all of it clean, because I am sure it has to grease some palms in some of the countries it is working in—although the less said about that, the better.
It worries me that there is no real review of the CDC’s work. Let me go through some of its current investments. It has now invested $6 million in Bridge International Academies, a company that runs fee-paying schools in Kenya. That is all very well, but why does it have to invest that much money in fee-paying schools? What people need instead is non-fee-paying schools, or schools where the fees are so small that they can manage to pay them. This deeply concerns me.
Rainbow Children’s Hospitals is a corporate hospital chain in India that provides mother-and-baby care and fertility treatment. The question was asked whether India is a middle-income country or a poor country. India has more poor people than many other countries, but there is so much money that Christine Lagarde said in her lecture two years ago that the Indian billionaires could remove poverty overnight. I do not see why the CDC has to invest in the corporate sector in India. There is a lot of money for money-making in India. People do not give money for the poor or for poverty reduction, but they are very happy to invest in the corporate sector.
Finally—and the worst of all—there is Narayana Health, a corporate multi-speciality hospital chainI have made some enquiries about Narayana. It is not just a hospital chain but one of the biggest conglomerates, and does all sorts of things. Its hub is in southern India and is almost like a small town. Why are we giving it money? I do not understand why we are giving money to Narayana Health, which is one of the richest organisations. I do not want my tax money—if it is my tax money—to go to Narayana Health. It has been given $48 million. It does not need money. It has more money than it can spend.
To me, these things are very worrying. I would like somebody to take a much stronger interest in the CDC’s investment policies: which countries it is investing in and what the return is. It invested in another chain of fee-paying schools, saying, “This is very good because you only pay $6 a month to get your child in there”. Although $6 seems nothing to noble Lords sitting here, it could mean a lot to a really poor person in Africa. Will they be able to find $6 to send their child do school? So I ask the Minister please to make sure that the money is being spent for poverty reduction as well as job creation. Just creating jobs will not change a country entirely. Poverty reduction has to be a priority.
My Lords, I add my thanks to the Minister for introducing this Bill to your Lordships’ House. Having listened to the speeches of other noble Lords, I am also reminded—if I needed reminding—yet again about the wealth of experience, and the breadth and depth of geographical knowledge, that exists in this House. I thank everybody who has contributed to my knowledge in this area.
This is a Bill that seeks to divert the policy of a government department quite significantly. It is a Bill that was neither trailed in the Conservative Party manifesto, nor mentioned in the Queen’s Speech. Moreover, it has been hastened with unseemly speed to its place on the statute book. Indeed, the passage of the Bill through the Commons gave rise to a good number of complaints from NGOs and think tanks that they had not been able to meet the very tight timescales made available to them and had had their submissions to the International Development Committee’s inquiry committee rejected. The Bill has been designated as a money Bill, so we in your Lordships’ House have no means by which to amend it or add conditions and safeguards—in short, no means to carry out our responsibility to give it proper scrutiny and make refinements which the Government may in time have come to appreciate. This is a pity, because taxpayers’ money—quite a lot of taxpayers’ money—is being moved from under the jurisdiction solely of Governments to an organisation which is not wholly accountable, given that it invests through funds of funds, as the noble Viscount, Lord Eccles, pointed out. That money is then outside of accountability through the Government and through DfID.
I am not the only one who thinks that the Bill’s designation as a money Bill is inappropriate. The noble Earl, Lord Sandwich, agreed with me, as did the report of the Delegated Powers and Regulatory Reform Committee, which said:
“We consider that the Bill contains an inappropriate delegation of power unless the Government can provide a convincing explanation of the need for this Henry VIII power”.
The Government did respond, but not convincingly. The need for development aid confronts us daily on our screens. Surely this is not the time to open up another line of attack for the vitriolic campaign that the Daily Mail and other rags are waging against the Department for International Development. That is what I fear this Bill will encourage. As we have seen, the CDC is vulnerable to attacks. In making this momentous and generous increase in the budget of the CDC, the Secretary of State risks exposing the entire 0.7% of GNI available for aid, yet again, to another round of attacks from parts of the media. She could have given herself some ammunition to rebut the attacks by putting some safeguards into the Bill, but then she has hardly been beforehand in rebutting any of the attacks levelled at her department. I know to his credit that the Minister is supportive of the 0.7% ODA, but will he convey to his boss that her history of attacks on DfID during the EU referendum campaign and her record of failing to defend the department on becoming its head are not reassuring?
I move on to why I think this Bill would have benefited from some refinements. It seeks to allow the CDC a massive increase of £4.5 billion to its overall spend to raise the ceiling to £6 billion, with an option to increase it further by another £6 billion by secondary legislation to a total of £12 billion. This raises eyebrows as the CDC has a chequered past—historically coming under heavy criticism in the really bad old days. Before 2012, the CDC spent 100% of its budget through funds of funds in projects that could hardly be described as pro-poor, including as they did, the arms trade. Nowadays, one-third of the CDC’s investments are made in other intermediary funds—funds of funds—a third are syndicated with other funds, co-invested; and a third are direct investments. We hope that the proportion of direct investments which give greater accountability to taxpayers will increase under the new strategy, once that is published.
First, let me address the problems posed with respect to transparency in the reporting of data. This is important because we need to be sure that ODA invested in the CDC can be traceable and accountable to taxpayers, in line with DfID’s international commitment on aid transparency. It is true that reporting has improved; however, a full two-thirds of the CDC’s investments remain opaque.
The CDC needs to take this on board and push for greater transparency in the deals it does with intermediaries, be they co-investees or other funds. These deals are rarely published with clarity, giving rise to allegations of secrecy and nefarious goings-on. It must publish what it funds. This has become even more imperative given that, since 2014, all capital transfer to the CDC is now reported as ODA by DfID to the OECD credit reporting system, but not all CDC investments are eligible as ODA.
The International Aid Transparency Initiative standard in 2012 rated the CDC as poor—a point mentioned by the noble Lord, Lord Judd—and asked it to publish what it funds. Why can it not publish country-by-country data? Neither DfID nor the CDC publishes data that give us a complete picture of how public money is invested. We do not know who is accountable: DfID or the CDC. This is unsatisfactory, and some clarity from the Minister on this question would be appreciated.
Given that 100% of the capital transfer from DfID to the CDC will now count as ODA, it is essential, to avoid controversy, that CDC projects demonstrate that they are focused on ending poverty. Closely linking its performance framework, evaluation and reporting, strategies and policies to the International Development Act 2002, the International Development (Gender Equality) Act 2014 and the UN sustainable development goals would go some way to countering media attacks. However, the recent NAO report on the CDC’s development impact framework does not include indicators for development impact achieved. Moreover, the CDC is not formally required to report on that. Why not?
Will the Government change their current reporting structure so that the CDC is subject to and compliant with the International Development Act 2002—surely not a big ask? Measuring impact is so important, and a really hot topic in the sector. The CDC has £5 million put aside to invest in a research project to develop a methodology to measure impact, yet that money lies unused. That is inexcusable.
The CDC’s preference for using job creation as a measure of impact is crude. Nor is it readily verifiable, as its intermediaries and co-investees can choose to provide no back-up data for their assertions. The CDC itself must not remain silent when it is attacked in the press. It is imperative that it defends itself, and to do so it must have facts and figures at its fingertips. It is no longer enough to say that it is in the business of job creation: that is only one indicator and is, moreover, unqualified. To be more meaningful, we need to know the quality of the jobs, pay and working conditions of employees, gender and age of the workforce and whether any training or education is delivered.
I move on to the criticism that the CDC has come under because of its use of tax havens. I hear what Diana Noble, the CDC’s CEO—for whom I have great regard, incidentally—says in defence of their use: that it is sometimes unavoidable when co-investees will not commit to a project where they believe there are not sufficient safeguards for the money or to avoid double taxation. My response is that the use of tax havens leads to the diversion of tax revenues from the poorest nations in the world—revenues that could be spent on health, education, clean water and so on—and all efforts must be made to put in place extra precautions and lend expertise to develop more robust financial practices that move that agenda forward. Development is, after all, the key word. These precautions may eat into profit margins, but profits at the CDC are still well above the 3.5% agreed with Ministers—for example, last year’s profits were 16%. The Prime Minister cannot on the one hand promise a crackdown on companies’ use of tax havens and at the same time sanction their use by a government-owned company.
The CDC must be careful to guard against scandal. It must not appear in the press for the wrong reasons. Every deal must meet the Daily Mail resilience test. Will it stand up to allegations of propping up corrupt leaders? Can a luxury mall be justified—for example, would the project struggle to attract investment elsewhere if the CDC were not to invest in it? Can the project withstand allegations of “public money, private profit”? The CDC’s remit is to invest in private enterprises that would typically struggle to attract investment elsewhere, as stated in its mission statement. Does it really need to invest in high-end private education or for-profit private health? These highly profitable enterprises, targeted at the well-off, usually in middle-income parts of a country, are justified, the CDC says, because the country is overall a low-income country. The CDC would do itself a favour if it were to cease investing in such businesses and stick to its objective: invest to contribute to economic growth for the benefit of the poor.
That is not to say that investing in health is wrong—far from it. The health sector is a key area where the impact of aid is clear and one that the public can connect with—very important—so the economic benefits of spending on health are strong, estimated to exceed cost by a factor of 20 in lower or middle-income countries. However, recently published figures for UK bilateral aid show that health has dropped from being the largest area of spending to fourth place. There is a trend of moving away from social development sectors into areas such as economic development and infrastructure, which may not always be pro-poor. That is something we must guard against. Each has its place, but we must ensure that one important sector does not lose out in place of another—a point my noble friend Lord Bruce made far more ably than I can. The CDC’s investment in health can be targeted so that it is demonstrably pro-poor.
In drawing my remarks to a close, I highlight the lack of strategy. The current strategy ended last year. During the Bill’s passage through the Commons, the Minister, Rory Stewart, said in his response that the amendments addressing the points I have highlighted were all valid, but that they were best addressed through internal governance and the forthcoming investment strategy rather than primary legislation. We were told by the Minister that this already much-delayed strategy would be with us by last December. It is now February, and we have had no sight of the new strategy which will guide the investments under which up to £12 billion of taxpayers’ money will be spent. This is unsatisfactory.
We must add to that the fact that the current CEO, Diana Noble, is due to leave shortly and the CDC will be under new leadership. I congratulate Ms Noble on her work for the CDC over the past five years. It cannot have been easy. The changes she has wrought have moved the organisation in the right direction. However, as I have outlined, this is very much work in progress. The appointment of a new head of the organisation will inevitably mean a different way of doing things but, without knowing who the new head will be or what the CDC’s vision for 2017-22 will look like, we are being asked to give our consent to a blank cheque.
I confess that I feel uncomfortable about doing that. However, the Bill’s passage is assured. I hope that the Government and the CDC will take on board not only my comments but those made by others in your Lordships’ House, and ensure that the CDC does not become the weak underbelly of DfID and leave itself open to attacks from those elements in the media which have never understood the imperative for the 0.7% commitment of GNI towards international aid.
UN figures tell us that more than 65 million people across the world have had to leave their homes to seek safety and to try to meet basic human needs for both themselves and their families. If we are to deter even more of them, in their desperation, from exposing themselves to the risks of dangerous journeys across continents, then we must work to ease their misery in their own countries. This is a moral imperative that benefits us as much as them.
My Lords, in this House there has been strong support for the 0.7% aid target and Britain’s role in international development. There is also a broad consensus around the role of the CDC, as we have heard in this debate.
Job creation is one of the best ways to reduce poverty; it is important that the Government have a development investment arm that will help poorer countries to create new and innovative jobs. However, the focus for such work must be on the poorest, least developed and lowest-income countries, and on ensuring that the work is consistent with the sustainable development goals agreed by the UN.
As we have heard, the CDC made significant changes following the 2008 National Audit Office report and—as the noble Lord, Lord Bruce, reminded us—following the 2011 International Development Committee report, in line with recommendations to move towards a focus on the alleviation of poverty. This shift in focus is a major achievement of Diana Noble. She has done a terrific job and will be sorely missed. The changes were reviewed recently by a further NAO report released just before the Second Reading of the Bill in the House of Commons in November 2016.
The report was mostly positive. It noted that the 2012 to 2016 investment strategy shifted the CDC’s investment focus, which is clearly welcome. It noted that the CDC had exceeded the targets agreed with DfID relating to financial performance and development impact. However, it also said that the CDC should do more to measure the development impact of its investments. This would not only provide a better basis for investment decisions, but increase the transparency of the CDC.
Poverty alleviation is absolutely central if we are to make a success of the SDGs and Agenda 2030. As the noble Lord, Lord St John of Bletso, said, the adoption of SDGs has resulted in an international consensus that the private sector needs to play an even greater role in delivering a sustainable future for everyone, by integrating the aims of the goals into its business practices.
Developing countries currently face an annual investment gap of $2.5 trillion to achieve the global goals by 2030. The goals can be achieved only by working with the private sector, including with DFI organisations such as the CDC. The CDC states that it is committed to helping to achieve the global goals by focusing on those where it can have most impact: goal 7 on affordable and clean energy—as we have heard, we know there is an infrastructure need, particularly in Africa—as well as goal 9 on industry, innovation and infrastructure, and goal 8 on decent work and economic growth. Noble Lords have made the point that the CDC is investing in areas where labour standards are a key issue for its investment. In the most difficult countries, I know it has even built in proper workplace representation, which is vital in terms of delivering on our SDG objectives.
We are told that the ending of extreme poverty by 2030 is central to the CDC strategy. The 2012 to 2016 investment plan has, as we have heard, expired and we are yet to see the 2017 to 2021 investment plan. Like many noble Lords, I am disappointed that Parliament is being asked to raise the investment threshold before seeing the plans for the next four years of investment.
In terms of measuring the development impact of its investments, I ask the Minister whether he can assure the House that in the new investment strategy a more robust approach to measuring development impact will be implemented. Like my noble friend Lord Boateng, I also hope the Minister will be able to reassure us that Parliament—this House in particular—will have the opportunity to debate and consider the new investment strategy. There is no doubt that the CDC has become more transparent, but more can still be done to ensure that money is being spent as well as possible. One way this could be achieved is to allow the Independent Commission for Aid Impact to play a bigger role—for example, by carrying out a regular assessment of CDC investments, allowing scrutiny so that we can ensure the full effectiveness and value for money of the programmes in which the CDC invests.
We should be proud. The CDC has been a world leader among development finance institutions in publishing details of its investments since 2012 under the International Aid Transparency Initiative. But it would improve transparency further if it published similar details on its entire active investment portfolio, including those investments made prior to 2012. That would enable greater scrutiny of the CDC’s entire portfolio and hopefully provide assurances to the public that all CDC investments are focused where they need to be—on the goal of poverty reduction.
My noble friend Lord Judd and the noble Baroness, Lady Northover, as well as other noble Lords, highlighted two particular areas of concern: first, the volume of the Government’s proposed new investment for the CDC and, secondly, the CDC’s continued use of tax havens. Regarding volume, a critical issue, which noble Lords have raised, is whether the CDC can absorb this funding—does it have the capacity to deal with it? I hope the Minister will be clear today about the schedule for this spending. What is his idea of the number of years over which the increase would be spent before we might require another Act to increase it even further?
On tax havens, it is disappointing that, despite the Government’s stated objective in cracking down on tax evasion, the CDC continues to use them, including the Cayman Islands and Mauritius. I met the chair and the chief executive of the CDC recently and raised this concern with them. They responded in the way that we have heard about in this debate, by stressing the importance of stable financial arrangements for investments. In some countries—this is pretty obvious—it is clearly not possible to set up arrangements within their legal structures to ensure that the right duties and controls are in place.
Surely a way for the Government to address legitimate concerns would have been to include on the face of the Bill standards for the CDC to meet, in terms of the commitment to transparency, value for money and tracking development results. Since this opportunity has been missed, I ask the Minister whether the CDC will be asked—in the strategy that I hope your Lordships’ House will have the opportunity to debate—to improve its transparency and reduce the volume of investments it routes through tax havens.
While I believe that it makes sense to increase the CDC’s investment threshold, we need to ensure, as with any area of government spending, that every penny is going where it can have the greatest effect—the right places and the right people delivering value for money for the taxpayer. One way in which to achieve that would be to ensure that we could have regular scrutiny and proper debates in Parliament on the CDC’s activities.
My Lords, I begin by thanking all noble Lords for their contributions in what has been a thoughtful and fascinating debate that has ranged quite widely over a number of different headings. Broadly, I have categorised those—although there is a significant overlap—into: the CDC’s role in the private sector, which the noble Lord, Lord Boateng, referred to with practical examples, as did my noble friend Lord Flight with other examples, and it was also referred to by the noble Lord, Lord St John of Bletso, and my noble friend Lord Eccles; the CDC development strategy and where this Bill fits into that, which was focused on by the noble Lord, Lord Collins, along with the noble Lords, Lord Shutt and Lord Judd, the noble Baroness, Lady Northover, and the noble Lord, Lord Bruce; and, finally, the question of parliamentary scrutiny that should rightly be afforded to such an important area of public expenditure and investment, which was the focus of the noble Earl, Lord Sandwich, and the noble Baronesses, Lady Flather and Lady Sheehan. I shall take that as my rough template to draw some strands out of the initial remarks.
The first point to make, however, is that, obviously, I echo the comments made by a number of Members during the debate recognising the significant level of expertise resident in this House that can be brought to bear in scrutinising and helping to shape strategies in future.
On the strategy, the noble Lord, Lord Collins, was absolutely right to take us back to the sustainable development goals and Agenda 2030. When we look at a Bill, we look at a particular strategy in isolation, and I want to try to place this Bill in the wider context, which is that of the sustainable development goals. Goal 8 has been mentioned, but essentially it is goal 1 that we are after, the eradication of poverty, which is the mission of DfID. The noble Baroness, Lady Northover, and the noble Lord, Lord Bruce, referred to that. We have made good progress on that goal. In 1990, those living in extreme poverty numbered some 2 billion; as of 2015, that number had reduced down to 705 million—almost to one-third, at a time when global population had gone up. In many ways, that heartened and strengthened the view—because a significant proportion was drawn from the commitment to the millennium goals—that global concerted action and focus could deliver significant change, if it was co-ordinated. That was why the UN Secretary-General set up the high-level panel of which the former Prime Minister David Cameron was a co-chair, which then led to the sustainable development goals.
The sustainable development goals, which have as their target eradicating extreme poverty by 2030, with a number of successor goals to that, are very much at the heart of what we do. Because we now view development activity through the lens of the UN sustainable development goals and have our commitment—which continues to be reiterated, as perhaps it needs to be—to the 0.7%, which has been secured through legislation and our manifesto commitment, we seek to match the 0.7% with the goals. Our strategy across government for implementing the goals will be set out in a new Agenda 2030 strategy document, which will be published in the next couple of months.
I am providing a protracted introduction because my opening remarks perhaps did not quite cover the context that this Bill fits into. We have the sustainable development goals as a focus, we have a plan which is coming and we have a UK aid strategy, which sets out the importance of economic development and of jobs, which are sustainable goal 8, as well as the eradication of poverty, which, rightly, was number one. It talks about partnerships and working together. The UK aid strategy then fits into and drives the single departmental plan of the Department for International Development as the prime lever for doing this.
The noble Baroness, Lady Flather raised a point on data, and one of the most important elements in the sustainable development goals is, to the delight of mathematicians and statisticians, the incredibly complex data that will be required to track progress towards those goals. That is set by the United Nations Statistical Commission, and the Office for National Statistics will have responsibility for collating data from across government—including the Government Statistical Service and many other sources—and uploading those so that we can better track our progress. That rests in the single departmental plan, which is published.
Off the back of that, last week we published our economic development plan, which recognises the importance of private sector investment in infrastructure. Gradually, this has all been built together. All of that is then scrutinised and overseen by the Independent Commission for Aid Impact, ICAI, by the Select Committee on International Development, by the NAO, whose report has been referred to, and by the Public Accounts Committee—the noble Earl, Lord Sandwich, referred to attending the PAC meeting yesterday, where the Permanent Secretary gave evidence.
So that is the context in which this Bill needs to be set. We are arguing that it is not all about economic development; economic development is part of what DfID does—in the current year, economic development sits in an envelope of roughly £1.8 billion out of a £12 billion spend. So we are talking about funding within that envelope on economic development.
Then we come to the question of the CDC Bill itself. The argument was that, because several years had elapsed since the Act had been passed and the cap had not been moved during that time, it was right that, given that economic development was going to play a more significant role in addressing the sustainable development goals, we look at raising that cap.
Of course, the UK Government are the shareholder, so when we talk about hiving off funds, as my noble friend Lord Flight said, we are hiving off funds to ourselves. It is taxpayers—it is ourselves—who are the owner and shareholder, and we have the ultimate power as the shareholder, without wishing to worry current holders of posts, to appoint the board and appoint the chief executive. We can have a quite significant impact. I want to reassure noble Lords on that, because there was some concern in that regard.
On the CDC and its strategy, I took on board the point that was made. We are now drilling down: we have gone through the sustainable development goals and the cross-government approach to delivering on aid; we are now into economic development and we have the economic development strategy; and now we are saying that it is right that there should be an investment strategy for CDC, which should be published and discussed initially with the shareholder—namely, Her Majesty's Government.
When that was being discussed, we felt there were two alternatives: to publish the strategy alongside the Bill, or to allow the Bill to make its progress through the House and do the House the courtesy of listening to its scrutiny of the Bill. Some comments, such as the ones mentioned by the noble Lord, Lord St John of Bletso, have made a profound difference, and others, such as those brought to our attention by the noble Baroness, Lady Flather, perhaps less so. We chose to let it go through the House and for the wisdom and expertise that exists in this House to be incorporated into the final strategy that is published.
At the same time, when agreeing our process on this, we had a couple of choices regarding parliamentary scrutiny, and I want to address this quite directly. There was a debate about whether we put in £12 billion, which was what we assessed looking forward. The noble Lord, Lord Collins, referred to the estimated $2.5 trillion funding gap, so this is significant but, in terms of the need, it is not vast. It is also fair to say that the amount we allocate, as a percentage of overseas development assistance, to capital in financial institutions is significantly less than countries such as the Netherlands, Germany, France and the USA. We asked whether we should go straight to £12 billion or have an interim stage. I suppose the conclusion was that we could take this in cycles, so the initial plan will be for the next four years and then there will be a successor plan for the following five years, which will be published and discussed. Off the back of that, there will then have to be an affirmative resolution, before your Lordships’ House and the other place, to give permission for that investment to occur. We considered that point very carefully and came to the conclusion to do it in two steps. That was the rationale behind that.
The noble Baroness, Lady Sheehan, and the noble Earl, Lord Sandwich, asked about the CDC Bill being certified as a money Bill. I would like to say it was part of a strategy, but of course we have no control over that. The certification of a money Bill is the preserve of Mr Speaker in the other place, and I do not think he would take any advice from Her Majesty’s Government on this or probably any other matter. He certifies it and it is what it is, and we must work within that.
I was struck by the points made and the quality of the debate. Noble Lords suggested it would be useful to have a debate on the strategy when it is published. There will be a number of other strategies around at a similar time on a sustainable development goals—sorry, let me just clarify that there will be an affirmative resolution before the House of Commons only, which will have the opportunity to comment on this second step. On whether there should there be an opportunity for your Lordships’ House to discuss this, that would be for the usual channels to agree, but I will be very sympathetic to it on the basis of the discussion we have had this morning.
I have set out the broad headings, so let me turn in the time that remains to some brief responses to specific questions that I have not covered in my general remarks. The noble Lord, Lord Collins, asked whether there would be full disclosure of the CDC’s investments on its website. I can reassure him that a full list of investments, including the legacy investments, can be viewed on the website.
The noble Baroness, Lady Flather, and the noble Earl, Lord Sandwich, raised the point about measuring the CDC’s contribution to poverty reduction. The contribution is clear, as it is made through jobs, local taxes and infrastructure.
However, this economic development and investment have to be seen alongside the work we are doing with our multilateral partners in the development banks. The World Bank operates in a lot of these countries and international finance institutions in some regions have been mentioned, such as the Caribbean Development Bank. We also have a UK Caribbean Infrastructure Fund partnership. We use many different vehicles and direct investment is just one.
We also have a huge commitment, rightly so, in education—which the noble Baroness, Lady Northover, oversaw as well during her time as Minister. It is true that no one has ever got out of poverty by aid alone and therefore trade is required, but it is equally true that, as well as economic development, you need education. Without the skills and the workforce, then I am afraid it is not going to happen. We have a major programme in education, which then feeds into economic development and our work with our international partners in respect of that.
In terms of independent evaluations, there was an evaluation commissioned in 2015 by a team from Harvard. It reviewed the CDC’s investment for the period 2008 to 2012 and concluded that the CDC’s investments had been transformational—a point made by my noble friends Lord Flight and Lord Eccles and the noble Lords, Lord St John of Bletso and Lord Boateng—such as in the work of the Africa Enterprise Challenge Fund particularly with small and medium-size enterprises.
My noble Friend, Lord Eccles, asked about the proportion of the CDC portfolio that is now direct. The noble Lord, Lord Bruce, referred to the report on this from when he chaired the Select Committee. The CDC has built up its capacity and moved significantly from operating as a fund of funds to operating more directly where it could exert greater control and measure the results. In 2015, 67% of new commitments by value were direct investments, and we expect this ratio of about two-thirds direct to one-third through funds to continue.
The CDC was set a great challenge, and many noble Lords rightly paid tribute to the work of the current chair and current—and outgoing—chief executive, Diana Noble. I certainly echo that. The CDC’s staff are immensely high-quality and combine private sector expertise with a compassion for the world and a determination to ensure that we improve our performance in relation to the poor.
There was a criticism that the CDC has gone for easy wins. Perhaps that applies to a bygone era, as the noble Lord, Lord Boateng, referred to, when it was perhaps being “fattened up” for privatisation. When we decided during the coalition Government, when Andrew Mitchell was Secretary of State, that we wanted this to be a long-term public vehicle as part of our economic development strategy, we narrowed the focus. We said, “Where are the poor people?”. The answer is that 80% of that 700 million-plus that I mentioned still living in extreme poverty are in Africa and south Asia. Therefore, that should be the focus of our attention.
What is the greatest need in those areas? Is it for financial sector instruments? That may be part of it, but I agree with the noble Lord, Lord Collins, that the greatest need is for jobs and better jobs in those areas. So we said that the focus should be on the areas of greatest poverty and on job creation as being the objective. That is a fair area to head for.
That is right. The noble Baroness refers specifically to India, which is of course itself a signatory to the sustainable development goals and the eradication of poverty by 2030. That will have to be its focus.
A number of other questions and particular points were raised. I will review the record, particularly with reference to the points made by the noble Lord, Lord Judd, at the beginning, and where there are gaps or I can add anything, if it will be convenient for the House, I will write to noble Lords. I reiterate my commitment to continue to engage with the House as the CDC progresses with its strategy and we finalise the new business case.
I am grateful to the Minister for what he has said and the fact that he will write to me, although it is a pity that, because this is a money Bill, we do not have the opportunity to go into these things in Committee. However, will he agree with what has been said by quite a number of noble Lords in this debate, that the CDC, which of course has a lot of admiration, must remember that job creation and the eradication of poverty are not synonymous? Job creation can play an important part, but the eradication of poverty is a greater issue. We must not let one become a substitute for the other.
I defer to the noble Lord’s great experience in this area. He is right. He is also right to say that it must not be perceived as an imposition. This must be something that comes from the ground up. It must be about strengthening capacity within the countries. That is why education, healthcare and all the other things that we are doing in terms of infrastructure are so critical to the overall success. I accept that.
The CDC is the oldest development finance institution in the world. It is a great British institution that reflects the values of the British public, who consistently demonstrate their concern for and generosity towards the poorest. We will make sure that we can all continue to be proud of the life-changing, pioneering work that this institution does. With that, I ask the House to give the Bill a Second Reading.
Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.
Immigration (Health Charge) (Amendment) Order 2017
Motion to Approve
My Lords, the House will be aware that the immigration health charge was introduced in April 2015 and is paid by non-European Economic Area temporary migrants who apply for leave to enter for more than six months, or who apply to extend their stay. The charge, which is set at the competitive level of £200 per annum, per migrant, and at a discounted rate of £150 per annum for students and youth mobility scheme applicants, ensures that migrants make a fair and proportionate contribution to the National Health Service in a manner commensurate with their immigration status, subject to limited exceptions. Those who pay the charge and are granted leave to enter or remain in the UK currently receive NHS care in the same way as a permanent resident, subject to the same clinical need and waiting times, for as long as their leave remains valid.
In setting the level of the charge, careful consideration has been given to the range of health services available without charge to migrants, the valuable contribution that migrants make to our country and the need to ensure that the UK remains an attractive destination for global talent. Indeed, there is no evidence at present to suggest that the charge has deterred the brightest and best from coming to the UK. In 2015, the Government estimated that the introduction of the health charge could raise as much as £1.7 billion, at 2015-16 prices, over 10 years—an average of around £170 million per year. Performance in the first year of the policy was, I am pleased to say, broadly in line with these estimates.
In its first year of operation, the immigration health charge collected £164 million for spending on the NHS. Of that amount, £140.1 million was made available for spending on the NHS in 2015-16. The remainder will be made available to the NHS in 2016-17. This year, the Home Office has transferred £120 million for spending on the NHS and is expected to make a further transfer of income to the NHS before the year end. Income from the charge is shared between the NHS in England, Scotland, Wales and Northern Ireland to spend as they see fit.
The draft order before us today amends the principal order—the Immigration (Health Charge) Order 2015—in two areas. First, it removes the exemption from the health charge for intra-company transferees. Secondly, it creates a new and explicit exemption for victims of modern slavery. It also makes a number of minor and technical changes. Intra-company transferees are employees of multinational employers who are transferred to the UK either to take up a role that cannot be filled by a UK recruit, or for training purposes. It is the only route within tier 2 that is exempt from the health charge.
In 2015, the independent Migration Advisory Committee conducted a review of a number of potential changes to the tier 2 route. It was asked specifically to look at the case for applying the health charge to users of the tier 2 intra-company transfer route. While partners to the review pointed out that a large proportion of intra-company transferees may be in receipt of private healthcare, the MAC noted that they nevertheless have access to the NHS, whether they use it or not, and indeed there may be instances where they do need to make recourse to it—for example, for a GP referral to a private consultant. The MAC also noted that contributions to a universal service are not made on the basis of whether an individual makes use of that service, and that, for example, UK residents can opt for private healthcare without paying less tax to reflect their lower use of the NHS.
The MAC therefore concluded that it could not see a good reason why intra-company transferees should be exempt from payment and recommended that this group pay the health charge in line with other users of the tier 2 route. The Government accepted this recommendation and the draft order amends the principal order to that effect. The increased cost to intra-company transferees of paying the health charge is small, relative to their expected income over the duration of their stay in the UK. By applying the health charge to intra-company transferees, we estimate that an additional £136 million to £205 million could be raised for the NHS over the coming 10 years.
The second area of significant change is the explicit exemption from the health charge for victims of modern slavery. Where a victim of modern slavery has been trafficked, they already fall within an exemption on the face of the principal order. Where they have not been trafficked, the charge is waived. However, the recent review into the first six months of operation of the charge recommended that, rather than waiving the charge in these circumstances, an explicit exemption should be set out on the face of the principal order. The Government have now addressed this important point. The draft order makes it clear that all victims of modern slavery—whether trafficked or not—applying for leave under modern slavery policies fall under an explicit exemption.
Turning to more minor changes, the draft order also amends the principal order to make it clear that applications for further leave to remain as a visitor are exempt from the charge. This is a minor, clarifying amendment that does not change the status quo. The Government have been clear from the outset that all applications for visitor visas do not attract the health charge.
The draft order strengthens the wording of the principal order to ensure that migrants granted temporary leave following a reconsideration of their application or an otherwise successful challenge to a refusal of leave must pay the charge when requested to do so. It also makes it clear that those granted an additional period of leave on appeal must also pay a health charge for that additional period. These amendments are in line with the Government’s general policy that temporary migrants should make a proportionate contribution to the NHS through payment of the charge, irrespective of the process by which leave is granted.
Finally, and in order to provide certainty for those migrants whose applications are already in train, Article 4 provides for transitional arrangements. The amendments introduced through this draft order will not apply to an immigration application submitted to the Home Office before the order comes into force.
The Government believe that it is only right and fair that migrants—including intra-company transferees—should contribute to the extensive and high-quality range of NHS services available to them during their stay, in line with their temporary immigration status. It is also right and fair that victims of modern slavery should not pay the charge. I am delighted that this draft order makes this explicit. I beg to move.
My Lords, I welcome the noble Baroness to her new role. We welcome the exemptions and clarifications that she has just outlined. I should like to use this opportunity to express some concerns and ask some questions about the Government’s policy of charging foreign nationals for the use of the NHS, and how this will work.
It is right that those who are not entitled to the free use of our NHS should pay for their treatment—or it should be paid for by their insurance or their Government. Some hospitals have already introduced the policy successfully but, irrespective of its merits, the focus on collecting the equivalent of 0.5% of the NHS’s annual spend reflects the Government’s skewed priorities. It ultimately serves to mask the main challenge facing the health service—a lack of cash.
The principle that those not eligible for free NHS care should pay up front for non-urgent treatment is sound. However, there must be clear safeguards in place to prevent profiling of people who have surnames that sound “not British”, and to protect vulnerable people such as the homeless who cannot prove their right to treatment by providing the correct documents. We must also guard against any temptation to extend this policy to urgent treatment. How do the Government plan to ensure that this does not happen?
Health tourism should be properly addressed, but it is not particularly significant in terms of the overall funding of the NHS. The recent government announcement cannot mask the refusal to address the serious failures of care which are now routine across the NHS as a result of impossible financial pressures. Only this week we have heard about increases in waiting times for operations, and in unexplained deaths among those with mental health problems. One hospital trust in Kent has halted all non-urgent operations until the end of the financial year. The Government need to tackle important problems such as staff shortages and retention and a lack of social care. Recent statements reflect a warped sense of priorities. I hope that my right honourable friend Norman Lamb MP’s cross-party meeting with the Prime Minister last week will lead to a genuine consensual process to deliver a long-term settlement for the NHS and social care.
Ultimately, the NHS must not lose the humanity and compassion that are the hallmarks of an institution of which this country is rightly proud. Doctors do not see their jobs as being border guards or revenue collectors. Can the Minister assure us that clinical staff will never be expected to collect money? This would completely change the relationship between doctor and patient. Can she also assure us that hospital administrators will get funding for extra help, and if they do, will the policy be cost-effective? Talking of capacity, I heard a Minister on the radio recently whom I felt was actually encouraging people to come from abroad to use our NHS—as long as they paid for it. As waiting lists and queues in A&E and for GP appointments get longer, I would have thought the last thing we should be doing is encouraging more customers from abroad. Can the Minister say whether hospitals are charging a full cost-recovery amount—or more, or less? Does the hospital keep the money, or does it go straight to the Treasury like the rebate on drugs?
My Lords, this is the first opportunity I have had to welcome the Minister to her new role. I thank her for the explanation of the purpose and thinking behind this order which we support. It brings into effect amendments to the Immigration (Health Charge) Order 2015. That order led to an annual immigration health charge, introduced, as the Minister said, on 6 April 2015, being imposed on non-EEA nationals applying for leave to enter or remain in the UK for a limited period. Those who pay it can access NHS services free of charge, apart from payments in respect of treatments or prescriptions for which UK residents have to pay.
The Minister has set out the reasons for making the amendments provided for in this order which, in essence, remove the immigration health surcharge exemption of intra-company transferees and their dependants, extend the human trafficking exemption to include victims of modern slavery and provide greater clarity in the interpretation of some rules in the Immigration (Health Charge) Order 2015.
I have two brief points. One of the amendments in respect of ICT workers has emanated from a recommendation of the Migration Advisory Committee. Are there any committees or other bodies looking at issues that might lead to further amendments to the Immigration (Health Charge) Order 2015? Or have we now reached the stage where the Government can confirm that they have no reason to believe that further amendments will be needed in the foreseeable future—and certainly not prior to our departure from the European Union?
In the House of Commons the Government said, as the Minister has reiterated today, that the immigration health charge collected £164 million for spending on the NHS in its first year of operation. These amendments could provide an additional minimum amount of £136 million for the NHS over 10 years. Can the Government give an assurance that the money raised from the immigration health charge represents additional money for the NHS which would not have been available had the charge not been in existence? The money raised must not simply be used to enable the Government to reduce the amount they provide to the NHS by the sum raised by the health charge.
My Lords, I thank noble Lords for their contributions. I shall address the specific issues raised where I am able to do so.
I say to the noble Baroness, Lady Walmsley, that I do not think this is a case of skewed priorities. It is, indeed, right and fair that we look to overseas visitors to make a contribution to the cost of the National Health Service when they use it. The noble Baroness seemed to imply that this was not a particularly large problem. However, overseas nationals using the NHS cost the NHS £2 billion a year, which I do not think is an insignificant sum. Non-EEA migrants cost the NHS £950 million a year. Again, that is not an insignificant sum. The cost for non-EEA temporary migrants, for example, amounts to £800 per person per year, which is quite a lot.
As regards the other issues raised by the noble Baroness, I am responding on behalf of the Home Office, not the Department of Health. Therefore, I hope that noble Lords will forgive me if I refer certain issues to the Department of Health for that department to answer their questions on those issues. However, I can address certain issues. The surcharge is collected by the Home Office but the NHS is currently, and will be, responsible for ensuring that charges are collected from the right patients. However, there will also be safeguards to ensure that no vulnerable patient is denied care when they need it.
The noble Lord, Lord Rosser, asked whether there were any other committees or bodies that might make further changes to the order. Removing the exemption for intra-company transferees was a recommendation of the Migration Advisory Committee, as was mentioned. The Government are not aware of any forthcoming committees or commissions that will make recommendations in connection with the surcharge. However, as with all government policies, the health charge is kept under regular review. The noble Lord also asked whether this money was additional cash for the NHS. I can confirm that the surcharge brings in additional money to the NHS to be spent in England, Wales, Scotland and Northern Ireland. The surcharge is an important source of new income for the NHS, which is shared by the NHS across the country using the Barnett formula.
The amendments bring intra-company transferees in line with other temporary migrants and provide an important clarification in respect of victims of modern slavery. The health charge helps the NHS remain sustainable, with migrants making a fair contribution to our health services while ensuring that our country remains the destination of choice for the brightest and the best. On that basis, I commend the order to the House.
Immigration and Nationality (Fees) (Amendment) Order 2017
Motion to Approve
My Lords, the purpose of this order is to make minor technical changes to the Immigration and Nationality (Fees) Order 2016, which remains in place and continues to set out the overall framework and maximum amounts that can be charged for immigration and nationality functions, as agreed by Parliament last year.
The order before your Lordships’ House does not itself set fees; they are set by regulations which are updated annually. The regulations for 2017-18 fees are due to be laid before Parliament in March. The minor technical changes made by this order include bringing fees for entry clearance to the Channel Islands within the scope of the 2016 order. This change is being made following the extension of provision in the Immigration Act 2014 to those jurisdictions by way of Orders in Council, the effect of which will be to enable the Secretary of State to set fees in relation to them.
The order also makes express provision for the Secretary of State to charge for an approval letter in respect of applications for entry clearance to the Isle of Man as a tier 1 exceptional talent migrant. It will ensure that the scope of the charges set under the Immigration Act 2014 for above-basic Border Force officer services, such as attendance at premium airport lounges, or port-owned fast-track services, is broadened for the future, for example to cover above-basic services provided at sea. The order also permits a charge to be set for providing information in addition to the current services that include providing advice, training and assistance. We consider that this charge will better reflect the nature of the information and advice services we provide.
To be absolutely clear, this change does not affect existing Home Office basic status checking services, for example those provided to employers or landlords in the UK, which will continue to be provided free of charge. It does not affect in-country services, for example calls to employers’ or landlords’ helplines, or the nationality helpline, which will continue to be charged at local rates. Nor will it affect the availability of information for sponsors and educators. This order makes provision for international services only. Customers using these services are able to access more detailed information over and above the basic level of the service which is available online. This is a standard, free-to-use service available on GOV.UK in all cases.
We are also seeking to change the way in which fees for some information and advice are structured, adding scope for a fixed fee in addition to the per-minute fee currently provided for in the 2016 order. This is to accommodate likely changes to the overseas contact centre services, where a new service provider, who will assume responsibility for the service in May 2017, may offer and charge for webchat and email services in the future. The proposed maximum amount that can be charged for these new services is based on the per-minute rate set out in the 2016 order. To be clear, under the new contractual arrangements there are no plans to increase the per-minute fee for accessing telephone services overseas.
Lastly, the order will also update the description of an electronic visa waiver so that it accurately matches the process and policy intent, as set out in the Immigration Rules. This service enables visitors from Oman, Kuwait, the UAE and Qatar to travel to the UK without a visa.
I emphasise that we are not seeking to change the overarching framework for immigration and nationality fees, or the maximum fee levels that were agreed by Parliament and set out in the 2016 order. As I have already mentioned, the next set of immigration fees regulations, which are due to be laid in Parliament in mid-March, will come into force in April. They remain completely within the parameters agreed by Parliament and in line with the impact assessment published with the 2016 order.
It is important that we strike a good balance between the economic interests of the UK and the need to maintain a sound immigration system. Be assured that this Government will ensure that fees for immigration and nationality services enable the UK to retain its position as an attractive destination to work, study and visit. I beg to move.
I thank the Minister once again for explaining the purpose and thinking behind the second order we are considering this afternoon. The order makes changes to the Immigration and Nationality (Fees) Order 2016, which sets out the maximum amount that the Secretary of State may charge for the provision of certain immigration and nationality-related services and products. In particular, this order extends certain provisions of the 2016 order to the Channel Islands and the Isle of Man. The powers that this order will give the Government in relation to the Channel Islands and the Isle of Man have until now been exercised by the Government under the terms of other fees regulations and powers.
In extending certain provisions of the 2016 order to the Channel Islands, this order, among other things, sets the maximum fee which the Secretary of State may charge a person who applies for entry clearance to the Channel Islands, with the actual fees to be set in subsequent regulations. As I understand it, though, in setting such a maximum fee—and, indeed, the maximum fee in relation to the approval letter in connection with entry clearance to the Isle of Man—the level of that fee must be consistent with the Home Office’s current laid-down approved charging policy. On the assumption that my understanding on that score is the case, I have no questions or queries to raise on the order.
My Lords, I thank the noble Lord for his contribution, and I can confirm that that is indeed the case. As I said earlier, we aim to set out shortly the individual fee levels for 2017-18 in regulations to be introduced by the negative procedure. This amendment to the 2016 fees order does not increase the maximum amounts that can be charged for any immigration or nationality service. The Government believe that those who use and benefit most from the immigration system should contribute more to the cost of the system, reducing the burden on the taxpayer. It remains the Government’s ambition to move towards a border, immigration and citizenship system that is fully funded by those who use it. I commend the order to the House.
Brexit: Financial Services (European Union Committee Report)
Motion to Take Note
My Lords, I am delighted to introduce this European Union Committee report. In doing so I congratulate the noble Baroness, Lady Neville-Rolfe, on her recent appointment to the Treasury and on her role as Minister in charge of “EU exit financial services”. I hope to have a very positive interaction with her in the future.
In the wake of the referendum of 23 June last year, the EU Select Committee agreed to undertake a series of short, co-ordinated inquiries into the implications of Brexit for various policy sectors. The Financial Affairs Sub-Committee began by looking into the impact on financial services. The committee took evidence from nine panels of witnesses—21 in total—during September, October and November 2016 and received written evidence. We are extremely grateful to all those who contributed to our work.
At this juncture it is customary for a chair to thank the members of the committee, but I do so today with particular emphasis, because we all, as a committee, worked at a frantic pace to produce this report in a timely manner so that the Government might take our views into account in setting their strategy for Brexit and financial services. So far we have not had sight of their response. I also want to single out for particular thanks the committee clerk, John Turner, who with depleted resources—as our policy analyst had been recruited by the Treasury—heroically managed to get us to this point. He was periodically assisted by Pippa Westwood, on loan from the EU Select Committee, and we owe her thanks as well.
From the outset we were aware of the huge importance of the financial services industry to the UK economy. The UK is the world’s leading exporter of financial services, with net exports in 2013 of $71 billion. The industry employs more than 1.1 million people—double that if related professional services are included—and contributes around 7% of UK GDP. The implications of a change to our trading status with the EU are potentially enormous. The consultancy Oliver Wyman estimated that £40 billion to £50 billion of the sector’s annual revenues—around a quarter of the total—were related to its business with the EU.
The relationship between UK-based financial services providers and the EU is underpinned by a system of so-called “passports”, which grant rights to do business across borders. This system is not as straightforward as it first appears: passporting rights are provided for by different pieces of EU legislation, affecting the provision of different services, and their use does not map onto the business models of firms in a straightforward manner. Unpicking the reliance on passports is therefore complicated—we were told that even the firms themselves did not have firm grasp of their own reliance on passporting—but it was clear that UK-based firms were likely to suffer from loss of access to the single market and the passporting rights that came with it. That has become more evident since our report was published.
As we were undertaking our inquiry it was not clear what model of engagement with the single market the UK would seek. The Prime Minister, in setting out the UK’s negotiating aims on 17 January, and in the subsequent White Paper of 2 February, said that the UK would seek a free trade agreement to allow for,
“the freest possible trade in goods and services between the UK and the EU’’,
but she ruled out,
“membership of the Single Market”.
This would also rule out any automatic passporting rights: they would need to be negotiated as part of the bespoke agreement she is aiming for.
If the UK were unable to negotiate a bespoke deal on access, it would have to fall back on third country equivalence provisions. However, we found that these were,
“patchy, unreliable and vulnerable to political influence”.
They are patchy because they do not cover the full range of activities in which businesses engage: a bank might be able to rely on provisions under MiFID II for its investment activities but could not carry out traditional banking services because the relevant legislation underpinning that, CRD IV, does not include equivalence provisions. Third country equivalence provisions are unreliable because financial regulation is liable to change: as EU legislation evolved, the UK would have to adapt its own regulation in order to remain equivalent, and be assessed to be so every single time. They are vulnerable to political influence because the European Commission has a role in deciding whether a country is equivalent.
We concluded that any bespoke deal should seek a deal to bolster the current equivalence arrangements, to cover gaps in the regime and to ensure the continuation of equivalence decisions as regulation develops. There was, and still is, considerable uncertainty over the level of access to the single market that the UK will retain. Our witnesses were consistent in advocating a transitional period during which businesses could plan for and adjust to the new circumstances. We were told that a “cliff edge”, with regulation and market access changing suddenly and without sufficient warning, would represent a grave threat not only to the business interests of the firms involved but to financial stability more generally. So the “new deal” scenario might prove extremely damaging.
I therefore welcome the Prime Minister’s reassurance that the Government will seek a “phased process of implementation”. An early declaration on this transition period by both parties—the UK and the EU—would help allay the fears of businesses and possibly prevent them moving operations out of the UK on the basis of a worst-case scenario. I draw noble Lords’ attention here to the advice prepared by PricewaterhouseCoopers for the Association for Financial Markets in Europe, which found that it would take banks between two and four years to put in place contingency plans for a hard Brexit.
The UK has been Europe’s dominant financial centre for some time. It has been particularly dominant in recent years in derivatives clearing through central counterparties. In April 2013 the UK accounted for half the world’s turnover of interest rate derivatives, and one-third of foreign exchange derivatives. It was even more dominant in euro-denominated interest rate derivatives, accounting for nearly three-quarters of world turnover.
This has drawn unwelcome attention from our EU partners. In 2011 the European Central Bank launched its location policy, which would have required euro-denominated trades to be cleared in the eurozone. The Government successfully resisted this at the European Court of Justice, but it is possible that the scheme could be revived—with appropriate legislative changes. It was notable that the President of France, François Hollande, made such a suggestion on 28 June, just five days after the referendum.
So the political incentive is there, and so are the legal means, with some tweaking. But would it be wise to remove London’s ability to clear euro-denominated trades? Clearing works through counterparties posting a margin, or collateral, with the clearing house. Because this is done centrally, the margin can be netted across multiple trades in multiple currencies, reducing the amount of collateral required. Research by Clarus Financial Technology suggests that disaggregating the euro component of one clearing house’s operation—LCH.Clearnet’s, for example—would cost the financial services industry $77 billion in additional margin, which would then not be available to lend to the real economy.
Our witnesses expressed doubts about whether a clearing operation comparable to that in London could be migrated to another European city. Some suggested that New York was the only plausible alternative location for such a service. Of course, any revival of the location policy would also apply to New York. This suggests that the benefits of the UK’s clearing system currently enjoyed by businesses throughout Europe would be lost or greatly diminished. Ultimately, it would not be in the EU’s economic interest to repatriate euro clearing. We hope that pragmatism will prevail.
This leads me to my final point. The real economy in the EU benefits from the financial services provided in the United Kingdom to an extent that militates against any large-scale attempt to prevent UK-based firms doing business with the EU. We heard a lot in our inquiry about the financial services “ecosystem”: the various services provided in the UK that interconnect in such a way that the effects of unpicking the ecosystem would be unpredictable. Unless another European centre could replicate that system, real businesses in the EU would lose out.
London has recently been ranked as the world’s number one financial centre again. Nowhere else in the EU comes close. Luxembourg is 12th and Frankfurt is 19th. We were not convinced that another EU location could step up and provide the services as efficiently and effectively as the UK currently does. If the economic argument trumps the political one, the EU should be willing to do a deal—but deals are ultimately dependent on rationality as well as goodwill. We hope that the UK Government will approach these negotiations with enormous goodwill and pragmatism, as the costs to the real economy of both the UK and the EU—and to real people’s lives—could be very high indeed. I beg to move.
My Lords, I thank my friend, the noble Baroness, Lady Falkner, for her introduction and the rest of the committee for its work. Sadly, I am no longer on that committee so I did not take part in this report; but I declare my interest, which is that I remember the 1950s and 1960s very well and do not want our grandchildren to live under such years as we lived under when Britain was going downhill rapidly. One reason why Britain has turned that corner is the financial services, which are the whole subject of this report.
Although the noble Baroness has said that London is the world’s leading financial centre, it has no divine right to be. It was not when I was a child, but it has now got to that position—and there are many countries interested in taking it away. Our change in status as we go from within to outside the EU is undoubtedly an extra threat to the dominance of London, and another undermining factor. The other side of the argument is of course that the EU has lost a major player in its financial discussions. Britain was always at the forefront. When I was a Treasury Minister, we were at the forefront of changing regulations in Europe—we took the lead because nobody else had the experience to do so. The capital markets directive, led by my noble friend Lord Hill of Oareford, and how that has changed direction is just one example of Britain’s influence no longer being in the right place.
We made our decision on 23 June and we must now make the best of it. This report will help the Government to achieve that. I was particularly pleased to read paragraphs 109 and 110, which refer to the transitional period and trying to avoid a cliff edge. As the noble Baroness has just said, the Prime Minister has been firm on that and given a positive lead, which is to be welcomed. Third-party equivalence and passporting are also important. In paragraph 56, the committee tells us that the Government are,
“analysing the difference between the opportunities afforded by passporting and third-country equivalence”.
It would be helpful if the Minister told us where the Government have got to with that.
Paragraph 58 refers to possible regulatory divergence between the UK and EU, and indeed between the UK and US. I thought this was a very good point to make because, since the report was published, we have all seen in the press what has been happening. We have a new President Donald—in fact we have two President Donalds: one in the EU and one in America. President Donald in America has made it absolutely clear that it is “America First”—and, indeed, America second and third—with the rest of the world about fourth. He has been backed up by Patrick McHenry, the Republican vice-chairman of the House Financial Services Committee, who wrote to Janet Yellen at the Federal Reserve, warning her that:
“Continued participation in international forums such as the Financial Stability Board, the Basel Committee on Banking and Supervision and the International Association of Insurance Supervisors is predicated on achieving the objectives set by the new Administration”.
That is worrying.
Let us take away the froth: we all know that America has always put America first in international negotiations, but what worries me is America not standing by its international obligations. Can the Minister say whether there was any indication in the Prime Minister’s meeting with President Donald of the USA—President Trump—that the US will not stand by those international obligations? If it does not, it is serious not just for the UK but for the EU and the rest of the world. Sir Jon Cunliffe at the Bank of England has said:
“It is important that we have proportionate, highest quality regulation – robust and in line with best international standards … The UK – in order to be a successful financial centre, you need good regulation … robust regulation and … regulators that have credibility and experience”.
Those are very wise words from Sir Jon, with whom I had the pleasure of working when I was a Treasury Minister. Abiding by those international obligations is so important. Sir Jon is also quoted in paragraph 51 of the report:
“If we want globalised financial services, we all have to have confidence in each other’s regulatory and supervisory machinery”.
That encapsulates it extremely well.
It is not just a trade negotiation between the political parties that is important, but agreement between the regulators. Can the Minister confirm that the intention is that provisions on international regulatory co-operation in financial services supervision will be included in all future trade agreements, both with the EU and other states, and that this would be an additional requirement in the future mission of the Financial Conduct Authority and Prudential Regulation Authority?
I turn from the report specifically to a wider view of financial services, because if we are no longer members of the EU, we will have to increase our trade around the world. There is no doubt that there is a new world financial order. Europe, the old aunt to the world, is getting even older and more irrelevant. In a recent report PwC said that by 2040, the E7—Brazil, China, India, Indonesia, Mexico, Russia and Turkey—could be double the size of the G7, which comprises the UK, Canada, France, Germany, Italy, Japan and the US. That will certainly change the dynamics. PwC went on to predict that, whereas in 2016 five countries in the world top 20 of projected GDP rankings, based on purchasing power parity, were in Europe, by 2050 there will only be three, all at a lower level than now.
One might think that gives us a great opportunity in dealing with the E7, but then comes the crunch. TheCityUK has done a lot of work on service trade restrictions and produced an index. It is interesting that, on that indexed basis, the E7 countries—which are going to be double the size of the G7 countries—are the most restrictive with regard to accountancy, commercial banking, insurance and legal services. We will have a tough job breaking into those markets. We have a lot of work to do, and if the US is not working to the international standard it will be even harder. I agree, therefore, with what the noble Baroness and her committee say in their report. If the City of London loses its status as the world’s premier financial centre, it will not be to other countries in Europe but to overseas—to New York, Singapore and China.
Can the Minister also comment on currency devaluation, through which we have the potential to really mess up the world and our financial services? We have been told that the euro is undervalued and the American dollar overvalued. Does the Treasury think that a currency devaluation between countries will start, which would be hugely damaging to us?
I will comment briefly on what I call “language and perception”. Language is hugely important in Europe. Phrases such as “common ground” and “a good compromise” are perfectly acceptable in Europe, while here they are portrayed in the press as wishy-washy and as Britain giving everything away. It is not as the press portrays it: it is 27 countries all having to give something and take something to reach a good compromise. I am greatly concerned that language will play a big part in our negotiations, and I hope the Minister is fully aware that this could be a major problem.
As for perception, a lot of people are influenced by it. If the perception is that Britain is not doing as well as before, that will compound our difficulties. One need only look at today’s papers: it is predicted that 30,000 jobs will be lost—that is the headline, the bad perception. That, however, is 0.5% of the people working in the financial services industry, and although the figure comes from the Bruegel think tank, it is at the worst end of TheCityUK’s projections, which thinks, at the other end of the scale, that as few as 3,000 jobs could go. Perception is of major importance.
We have no idea where we will end up at the end of our negotiations with the EU. I hope that the press and both Houses of Parliament will let the Government get on with the negotiations and do the best job we can. One good thing about Brexit is that if it all goes wrong, we have nobody to blame but ourselves.
My Lords, it is a pleasure to follow the noble Earl, and I also thank our chairman, the noble Baroness, Lady Falkner, for guiding us through this extremely complex subject. The more I study the problem of Brexit, the more complicated it appears to be, and I am sure that no one, when they ventured into this territory, knew exactly how complicated it was.
As the noble Earl also said, the City has seen both good times and bad times. The 1950s and the 1960s saw an involuntary exit from the sterling area. I do not know whether noble Lords remember the sterling area, but it was not a great thing after India had become independent and various former colonies began to have their own monetary policy. The City was lucky in then having the Eurodollar market—a result of the folly of American taxation policy—and soon after, when the US renounced its dollar-gold link, a huge market in foreign exchange transactions sprang up and the City was ready for that market.
At about that time—in 1971-72—we entered the European Economic Community, as it then was. In a sense, therefore, we entered the European Economic Community at a time when the City had recovered from its gentle decline and got into totally new activities for which it had, or soon got, the expertise. We know, therefore, that the City can suffer a shock and respond to it.
At the same time, we have to decide among ourselves—or, I hope, the Government will—what is the maximum loss that we could suffer. One of the best negotiating tactics is to figure out the worst-case scenario that we could face, and then find out if there is any way of avoiding it. The worst-case scenario is, obviously—as I said—that if there is not a good deal, we walk away with no deal. A no-deal scenario would mean no passporting, no equivalence and starting from scratch. We should mentally work out what that would mean for the City. Among our witnesses, some were, I would say, rather complacent, saying, “Oh, we are just so good that they will have to come to us”. They say that our eco-system—I was fascinated by that word, because I am sure that most of those people do not like any of this global warming stuff, but they use the word—is so fine and beautifully calibrated that our sheer competitive advantage will make them come to us. I am not so sure about that; it would mean that we do not need to worry about passporting or equivalence and we would still come out on top on sheer competitive advantage. Just as we are willing to suffer an economic loss for the sake of our sovereignty, they are capable of suffering economic loss through their reluctance to come to London. We must not assume that they are going to be terribly rational and will come to us. I keep hearing that, and I doubt it very much.
One advantage for us is that the regulatory system of financial markets is global and not confined to the EU: the EU melds in to the regulatory system headed by the Bank of International Settlements, the IMF, and so on. We have played a major part in the architecture of that system, so, in or out, we shall continue to be relevant to the architecture of the global financial system. To that extent, we ought to be able to put it to the EU that, in or out, the rules that we all have to obey are pretty common, and they are almost the equivalent of equivalence. We all have to follow certain global rules, so there cannot be too much of a disruption between us and them in the area of financial regulation.
I am not worried either that although we may establish equivalence in today’s terms, in the future they might change—and then what will we do? I do not think they will change arbitrarily, independently of the global system, because we will all have to dovetail with each other in that system. The technology is changing so fast that we all have to be ready as new products and technologies come up. The framing of financial regulations will therefore have to be a fast, global and innovative process, and I am sure that we will play our part in that.
Can we work out what we prize most within our interests in keeping the financial centre in the front? It might turn out that immigration is a crucial topic. It might be that our need to access the best talent internationally, and therefore have flexible immigration rules, will be more central to our position on the financial sector than anything else. In agreeing to whatever we agree with the EU, one thing that we ought to remember is to retain the flexibility of admitting highly skilled global experts in the financial markets, and not make the mistake of going overboard in restricting immigration by not distinguishing between those who are likely to be helpful to us and those who would be less helpful.
In the final analysis, we will have to be ready for the worst-case scenario—a repeat of the sterling area scenario, as it were—and to hope that new markets spring up for us while the damage is minimised. At the same time we ought to try as far as possible, consistent with our general aims of a hard Brexit, not to lose an advantage which we could retain.
My Lords, I too pay tribute to my noble friend Lady Falkner of Margravine, who has steered us through several of our deliberations over the last year or so. The report, like all those which come from our EU committees, is based on the evidence. What those of your Lordships who have not been on the committee are getting is what we have heard from other people and the questions that we have been able to put to them.
There is no doubt that financial services are a highly significant sector of the United Kingdom economy. We are told that they employ 1.1 million people, two-thirds of whom are outside London. It seems to me that 1.1 million jobs are likely to support 4 million United Kingdom citizens. On any basis that is significant, serious and important. I have three points to make in my contribution, which really concerns livelihoods. I will come to these in order because I want to speak of some of the people who came to see us.
First, on 19 October a man by the name of Simon Kirby, the Economic Secretary to Her Majesty’s Treasury, came to see us. The noble Lord, Lord Desai, asked him about clearing and said:
“We have had conflicting evidence about what will happen to clearing houses”.
The response from Simon Kirby was:
“There is a lot of noise about clearing. The whole of Europe, the UK included, would be worse off if that particular part of the financial services that London offers was dismantled and redistributed across Europe”.
In a further question, the noble Lord, Lord Desai, talked about clearing and Simon Kirby said:
“It is an element of the negotiations. Is it the most important element? Probably not, but it is … significant”.
That sounded complacent to me.
On 2 November we then had a visit from Xavier Rolet, the chief executive of the London Stock Exchange Group, and I quoted Simon Kirby’s evidence to him. We were aware that Xavier Rolet had earlier indicated that 100,000 jobs were at stake if clearing were to relocate. He confirmed that,
“we stand by our estimate of 100,000 jobs”.
When I pressed him a little further as to where these jobs were, he said that he would,
“provide a more detailed estimate”.
That was to happen “reasonably shortly” and so it did, in that on 11 November we had further written evidence sent from Xavier Rolet, together with an EY report that had been prepared for the Stock Exchange. He said that the report estimates that up to 232,000 combined financial and non-financial jobs throughout the UK could be lost. This was a detailed 44-page report, which sets out where those jobs are. Those 232,000 jobs suggest to me that we are talking about the livelihoods of 1 million people.
The last thing that we had was not presented to our committee but—as things keep moving—was the White Paper from Her Majesty’s Government on 1 February. Perhaps it is better to call it a grey book. In its section 8 on pages 42 and 43, there are a few paragraphs about financial services. Paragraph 8.25 says:
“In our new strategic partnership we will be aiming for the freest possible trade in financial services between the UK and EU Member States”.
So Simon Kirby’s complacency has now moved to an aim. Where is the determination? Will it come from the noble Baroness, Lady Neville-Rolfe, who I now congratulate on her new role?
My Lords, I declare my interests as noted in the report. After the figures of potential job losses given by the noble Lord, Lord Shutt, I hope to cheer the House up a bit. I have come to think that since the report which we are discussing was published in December, the impression it gave about the problems presented by Brexit for the UK’s businesses and financial services is perhaps too pessimistic.
As a member of the sub-committee which produced the report under the courteous and skilful chairmanship of the noble Baroness, Lady Falkner, I believe that it correctly reports the importance of our financial services to the UK economy; the unreliability of the equivalence and passporting regimes which enable UK financial institutions to provide services to the rest of the EU; and the need for a regime to ensure that UK financial services do not face a cliff edge when the UK leaves the EU. All that is correct, but the reason why I have become more optimistic is that this report is understandably UK focused. It is about what UK businesses want and need and not so much about what EU businesses want and need. When the issue is considered from the EU perspective, more grounds for optimism emerge. The reference to avoiding a cliff edge implies that there is a sharp fall on the other side of the cliff, but when the interests of the EU partners are taken into account, I wonder whether that implication is correct.
The report received many representations from outside—for example, from the British Banking Association—which urged the need for a transition period to avoid the cliff edge, which has already been referred to. It is widely recognised that the phrase “a transition period” has two meanings. It can mean an extension of the period in which existing arrangements continue to apply while a new bilateral agreement is negotiated. It can also mean a period after a new bilateral agreement is reached before it comes into effect so that businesses on both sides have time to adjust to the new arrangement. Certainly a transitional period—in both senses of the phrase—is better than a cliff edge, but a rapid agreement respecting the mutual interests of both sides is better than either. The refrain that we most insistently hear from businesses is that they want certainty and they want it as soon as possible.
A report by an official working group for the European Parliament’s Committee on Economic and Monetary Affairs, seen by the Guardian newspaper, warns of the importance of the London market to the EU partners. According to the Guardian, it says:
“The exclusion of the main European financial centre”—
that is, London—
“from the internal market could have consequences in terms of jobs and growth in the EU. It is in the interest of EU 27 and the UK to have an open discussion of this point”.
It is relevant that, while 5,500 UK firms benefit from passports for trading financial services in the EU, more than 8,000 EU firms benefit from passports for trading into the UK. It does not follow that we can take equivalence and passporting regimes for granted but I believe it does follow that the EU partners have an interest in not using them in a vindictive manner.
I do not go along with TheCityUK in its view reported last week that Brexit will enable London to become more attractive to worldwide businesses by tearing up those parts of the EU regulatory regime which UK firms find finicky and burdensome. It will still be necessary for the UK to retain harmony with EU regulations. This may involve conforming to regimes and requirements which we will have no formal role in formulating but it does mean that we will have a mutual interest in keeping close to each other. Since the UK has often been a leader in formulating effective regulation, this is likely to be in the interests of both sides. Certainly, when the UK’s approaches have differed from those of our EU partners in the past, it has not been because the UK has been less rigorous.
Those are important issues for companies but there are also important issues for individual citizens. One illustration is the provision of insurance. It would be tedious for UK motorists if they had to start applying for green cards again or pay extra insurance for trips to Europe because it is no longer recognised that UK insurance policies provide the same minimum cover as their EU counterparts, but it would also be tedious for European motorists if their policies were no longer accepted in the UK. A similar point applies to the European health insurance card.
The old injunction against cutting off one’s nose to spite one’s face is particularly apt in both the UK’s and the EU’s approach to these matters. In all these areas we must hope that the negotiations take proper account of the mutual interests of both sides and are not driven by ideology.
My Lords, it is very usual to say how pleased one is to follow the previous speaker but I find myself in a slight embarrassment because I so completely agree with the noble Lord, Lord Butler, that I am not going to be able to put it without repetition and nothing like so well. I congratulate the sub-committee and its chairman on this report. It is a very useful document and needs to be studied with great care. It has been slightly overtaken since the days of the referendum by the 12 principles and the White Paper. Nevertheless, that gives us a theme which is “exit from” and “a new partnership with”. I 100% endorse everybody who says that we need and want a new and productive partnership with the EU and this needs to be negotiated with the best possible will on both sides.
I hope we can achieve an agreement within the two years. There I very much agree again with the noble Lord, Lord Butler. I do not see the argument that two years is never going to be enough as a positive one. I regret that people keep saying two years is not enough. The important thing about the two years is to reach an agreement and then to be clear, because we have a new partnership, on how we are going to handle all the changes that will inevitably follow after two years, and changes would have followed whether we remained a member or not.
Within those two years there is nothing more important to negotiate than financial services. In considering the negotiation we should take very careful account of the present position. As the noble Lord, Lord Desai, said, the background is very complex and quite troubling. After all, 2008 is not so long ago and many things happened then which were unexpected. Although we have made much progress since then, there is still a great deal of risk out there in the world as a whole. Indeed, I think we would be incorrect to think about financial services in the way that we might think about the effect of the single market on, say, the building of aeroplanes or the production of motor cars. The European context does run there to a large degree but it does not run in financial services because they are truly global.
In the G20, which is representative of two-thirds of the world and 85% of its economic activity, we have got six members of the EU and the European Union itself, and based in the Bank for International Settlements there is the Basel Committee, again with nine EU members and the EU and the Financial Services Board. Much of what has been done which applies to Europe, which has 7% of the world’s population, has been achieved by these international institutions. The European Union, some of its members and ourselves have been very deeply involved in all that.
So far, so much the better as a result of all those efforts since 2008, but this is not a time to disrupt the progress. It is not a time in which either the 27 or we have an interest in disrupting the processes which have been going on. That highlights the partnership, the need for it to be approached positively and the need for it to work.
Just as a note of dissent, there is the question of the dealing and settlement in euros. If you look at that on its own, changing the rules in the way that has been suggested is nothing more nor less than a trade barrier and would be very disruptive. It cannot be in anybody’s interest to generate that disruption.
On passporting and equivalence, I hope that the effect of the great repeal Bill will be that on the day we exit, we continue to abide by all the law and regulation which has come to us through the European Union. Logically, that means that equivalence is there. I cannot quite see what the argument against it would be. If we get to that day, the question then becomes: what do the deals say about the way in which we and the 27 approach any changes that they or we feel are necessary? In that sense, we would have a “transition period” that would never cease, because we are going to need to have arrangements for dealing with changes as they take place. I am more optimistic than some other people who approach this problem. I join the noble Lord, Lord Butler, in that optimism.
My Lords, it is a pleasure to follow the noble Viscount, Lord Eccles. I have always respected the sensible approach he has to these practical matters of markets and business. I add my thanks to the other speakers in this debate, particularly the very distinguished, competent and professional chairman of the committee, the noble Baroness, Lady Falkner of Margravine, and her colleagues who produced this excellent report. This is a complicated area, but the report is not too long.
Unusually, I do not agree with my noble friend Lord Butler who said that he feels very optimistic, in contrast to this report. The report is realistic, but it espouses a not irrational, not excessive, but sensible and proper degree of pessimism about the difficulties we will see in the future.
There are many warnings in this excellent report, and I shall quote briefly two significant parts of it.
“We conclude that, if the current passporting regime is not maintained”—
and we cannot assume that it is necessarily going to be—
“the Government should seek a deal to bolster the current equivalence arrangements for third country access, to cover gaps in the regime and to ensure the continuation of equivalence decisions as financial services regulation develops”.
“Negotiations on the UK’s new relationship with the EU are likely to take longer than the withdrawal negotiations under Article 50”.
That is a very serious problem. The report also states:
“A transitional period will therefore be needed in relation to financial services following the completion of the Article 50 process, when the UK leaves the EU. This may need to be adapted and extended in the light of subsequent negotiations on a new long-term relationship with the EU. This will enable firms and others such as regulators to adapt to any new business conditions”.
There has been a lot of coverage in the press of the Article 50 Bill, which has now successfully passed its Commons stages and will come to us when we resume after the mini-recess that is just about to begin. It is very interesting to observe how the intelligent commentaries in various parts of the press—but not all of them, unfortunately—are coming increasingly to the conclusion that it would be much better to maintain the status quo in the relationship between the new separate UK total market—financial and other markets, including physical markets—and the rest of the EU.
I was therefore very impressed when the Prime Minister in her Lancaster House speech outlining her plans and the details said:
“I know that this—and the other reasons Britain took such a decision—is not always well understood among our friends and allies in Europe. And I know many fear that this might herald the beginning of a greater unravelling of the EU.
But let me be clear: I do not want that to happen. It would not be in the best interests of Britain. It remains overwhelmingly and compellingly in Britain’s national interest that the EU should succeed. And that is why I hope in the months and years ahead we will all reflect on the lessons of Britain’s decision to leave”.
Astonishingly it has not been noticed by many people, but in the first paragraph of her Sunday Telegraph article on 8 January the Prime Minister emphasised that the Brexit decision was only part of the reaction as a result of those who voted no in the referendum. The rest of it was a general disaffection with the state of people in the British economy, their feeling of job insecurity, older people feeling they were being left out—although pensions have been more generous in recent years—and, of course, 16 and 17 year-olds were grumbling because they were not included in the voting system this time round.
There was an astonishing mixture of things in an advisory, opinion-giving referendum. We have to bear that in mind. I make no criticism of the Prime Minister; she was not herself elected and she could not be under the system. She took over from the previous Prime Minister, Mr Cameron, whose vote was less than one-quarter of the total voting population. I believe that Theresa May knows that the more she thinks about it, the more she has to sustain the very good relationship that we ought to have with the EU.
Sixty per cent either abstained or voted against the referendum result. That meant that the total amount of the population will have enormous second thoughts. Those second thoughts are developing. We see the post coming in and more and more emails, particularly on the financial sector and worries about the famous London market. I declare an interest tangentially as a member in those days of the London Stock Exchange and a partner in a big institutional firm. We were not part of the financial markets, as such, although we were indirectly. We were all very proud of what the city has achieved and of the London financial markets becoming the leading market in the world. It is a tremendous asset. It is ironic that the very market that has sustained and cultivated the success of the euro itself as a currency—the main market in the world—is in a country where a good number of people have become increasingly psychologically afraid of the euro, because we were driven out of the exchange rate mechanism in humiliating circumstances in 1992. That has lingered as a feeling.
Since the war, there have been eight devaluations of Britain’s currency—three by government action and five in the marketplace. The recent one when the referendum result was announced was modest, and not too bad against the dollar and the euro. That is not a good background for us to be too overoptimistic about our ability to do what we were intending to do for those who did vote in the referendum and voted just about Brexit and nothing else.
I think there was also a blending and mingling of all those emotions, not least the fear of immigrants. Theresa May as Home Secretary was responsible with others for not bothering to invoke some of the articles of the Rome treaty—the TFEU as it now known—that gave some restrictive possibilities to limit the number of immigrants as if there was no reason to have a free-for-all, which we seem to be accepting, including from Romania.
The definition of optimism given by the noble Lord, Lord Butler, is, I think, a little esoteric for the purposes of this debate. It reminds me of the lovely old Hollywood joke: the true definition of optimism was a 98-year old man who got married for the seventh time and deliberately bought a new house near a school—that kind of optimism, maybe. We have to face up to the realities of this difficult matter.
In the debate last autumn in the Moses Room on the single currency, I noticed how the noble Earl, Lord Caithness, praised the euro for being a successful currency. It is now the second world reserve currency after the US dollar. It is getting closer and closer to the US dollar. The European Union, of course, has a much lower overall national or international debt coefficient than the United States. As noble Lords know, the difference is $19 trillion for the federal Government in the USA and $12 trillion for the European Union with 500 million people.
There is a lot to be working for. In this feeling that we have a lot of negotiations to come, I wish the Minister very well in terms of the details and add my congratulations on her new post. The conclusions are more and more to do with somehow leaving the European Union in a formalistic sense, but keeping all the relationships going—the markets, the physical relationships and the acquis communautaire. Of course, it will be put into what is going to be the repeal Bill, if it comes along. I do not use the adjective “great”, by the way, because I have my doubts about it. Therefore, we are ending up with the same kind of bureaucratic input that people who did not like Europe were madly complaining about when they said that the European Union was far too bureaucratic and heavy. All those instructions, regulations and requirements will be inserted into the repeal Bill if we maintain the status quo in all the markets in Europe that we are suddenly so keen on.
The whole thing is becoming more and more shaky as an approach for a mature Government in a mature Parliament in a mature country. This country needs to recover the self-confidence we had as an upstanding and successful member of the European Union, whatever the future structure and decisions may be. The Article 50 Bill has only just started. There is a long, painful and bumpy road to come. No one can predict how it is going to turn out, but I think the second-thought syndrome is becoming increasingly powerful.
My Lords, it is a pleasure to follow the noble Lord, Lord Dykes, with his lovely clarity of expression and thinking all round. I declare my interests as set out in the register, particularly in respect of Hiscox insurance group and Schroders plc. I warmly join in the many congratulations for the noble Baroness, Lady Falkner of Margravine, and her committee and staff on producing in double-quick time a carefully thought through and thought-provoking report.
I will confine my remarks to three high-level areas and not descend into the detail. The first is people. There has been a lot of debate and comment from all parts of the House about the 3 million people from the EU 27 who are here in Britain. A strong moral case has been made, saying that the uncertainty they are living with should be made certain.
There are probably two other things relevant to this debate to think about, the first being the need to engender a good atmosphere as we begin the negotiations. I should also have said that I am a Member of the European Union Select Committee, and in that capacity visited Strasbourg a couple of weeks ago for three days. We met 17 MEPs from more than 10 countries and were able to talk about a lot of issues, both on and off the record. What was interesting was how many of these people had friends and relatives living in the UK and how they too felt the uncertainty, in a slightly vicarious way. It would be good to address that, which would help to engender the very positive atmosphere we will need at the start of what will be complex and long-lasting negotiations.
The second and possibly harder-hitting point is the old City adage that capital follows talent. In my commercial career, I have seen that adage acted out time and again. The Minister has a tremendous commercial career behind her too, and a wonderful, sharp and seasoned brain. I am sure many here are thinking what I am thinking: that it is jolly good news that she has appeared at this time for our country in this role. She will be a great help. I have managed financial services businesses, including in continental Europe, for a number of years, using passports of course, and in Bermuda using the equivalence regime. Everything that one did was about trying to manage the talent and keep them attracted to and retained in the business, and when new talent was needed, to attract it. Anything that damages the ability of businesses to attract and retain talent is definitely not in our national interest, and I worry enormously that the uncertainty that people from the EU 27 in the financial services sector are living under at the moment is doing just that. That therefore needs to be coped with, and I would very much welcome the Minister’s comments on that line of thinking.
The second line of thinking, again born out of my business experience, concerns the mindset we should have going into the negotiations. Our mindset should be very much about having regard to the interests of the 500 million in the EU 28—including the United Kingdom—rather than to the narrow interests of the 65 million in the UK. In my experience with repeat order customers—the EU 27 are most certainly repeat-order customers of UK plc—at the end of every transaction one needs to achieve equity in the consideration that has passed between the parties. Everything is about communication, and again, it would be extremely helpful to make sure that our own people who are engaged in the negotiation at every level have that mindset.
I saw as well during our three days in Strasbourg that a number of what one might call macho statements by political commentators and politicians were being reported through the British press and other media. The lingua franca in Strasbourg and Brussels is of course English, so everyone reads the British press and watches the BBC and CNN, for example. Those statements were being faithfully reported, and it is not helpful to the sentiment there if it is seen that we are not having regard to the 500 million but solely to the 65 million. Again, I would appreciate some comments on that.
When we come to the negotiation, there are certain sectors where we have an incredibly strong hand, and we should not play that hand ungenerously. One is the reinsurance sector, which I am very familiar with, where we have the strongest hand. So we should act generously and be seen to be doing that, because that will help us in sectors where possibly we have a weaker hand.
The third area I want to talk about is the cliff edge and the very helpful paragraphs in the report about that, beginning at paragraph 100, and the transitional arrangements. Again, I am happy to report from Strasbourg—where the cliff edge came up—that there was a generally warm feeling towards the transitional arrangements on the part of MEPs. They are just MEPs, but I do feel that their warmth is probably reflected in their countries. I am going to mix metaphors in an appalling way now, but there was certainly a feeling that the cliff edge cuts both ways. They too felt that this was important.
I want to sound a warning bell, again born out of business experience. As the noble Lord, Lord Butler, said, businesses hate uncertainty. Using just an interim arrangement, with the ability to push a horrible negotiation down the road for two or three years, is possibly damaging to business as well. We should try to sort out everything we possibly can in these two years, putting into a transitional arrangement only those things that have to be put there. If we do not, we will cause damage to business.
I cannot resist talking about optimism, because others have. Regarding the bits that I know—the insurance sector and to a lesser extent the fund management sector—I am in the Butler camp. For those sectors, good and sensible deals can and probably will be done, and I feel reasonably optimistic. I do not at all underestimate the very many hard yards ahead. I commend again the noble Baroness, Lady Falkner of Margravine, for her tremendous report.
My Lords, I too would like to express my sincere thanks to the noble Baroness, Lady Falkner, her committee and the members of the EU Financial Affairs Sub-Committee for producing this report as well as to all those who have spoken in this afternoon’s debate. I am grateful to the committee for looking at this issue first of all. Having read the report, I think it is clear this decision was a wise one, given the number of knowledge gaps that undoubtedly exist both in government and industry, and the lack of a strong evidence base which will be required.
In the months following the referendum, the overriding concern has been on what our future relationship with Europe and the rest of the world will look like. In that, there has been an implicit assumption that we have a sufficient knowledge, capacity and basis upon which to make such decisions. The people of this country voted to leave the European Union, and it is our duty to facilitate that. That being said, it will be a process that goes against all the natural instincts of the Houses of Parliament. We are not as institutions good at making a lot of difficult decisions quickly. It will be a strain. That is why reports like the one we are debating today are vital prisms through which we can explore such complex issues. But even such reports, produced and debated in such a short period of time, have to be considered in the current political climate. I wonder, for example, how different this report would have been if we had heard from the Prime Minister prior to its publication.
It will come as no surprise to noble Lords that I am interested in process. I am interested in the mechanics of the system. This report confirmed my suspicions that at present we are not sufficiently prepared for the monumental task of extracting ourselves from the European Union. I do not doubt the determination of the Government in wanting to maintain a strong and vibrant financial service sector here in the UK. However, I doubt whether they have the strategy to achieve this. I fear that, instead of a clear plan, the Government are clinging on to the notion that our position as a global leader in financial services is unshakeable.
Many noble Lords this afternoon have discussed this issue, and there has been a general conversation about being sensible, about this being two-sided and about Europe needing us as much as we need Europe. There have been conversations in Strasbourg and the rest of Europe where that impression has come across. The problem is that the negotiations will not necessarily be conducted by rational people looking at economic advantage; they will be conducted, dare I say, by politicians, who on occasions have been known to be irrational—indeed, tragically irrational.
Our lack of knowledge is well illustrated by passporting, which has become the issue to be discussed whenever Brexit and financial services are mentioned. Passporting is obviously related to equivalence—and, separately, the cliff edge—and those seem to be the key areas of concern. Why has passporting caught the imagination of so many people? Because it perfectly exemplifies our relationship with the EU. Passporting has become integral to the way in which banks operate. As Douglas Flint, group chairman of HSBC, told the committee,
“Everyone is affected by passporting rights to a greater or lesser degree”.
It also cuts across the most significant debates we will have about Brexit—notably, our membership of the single market, which the Prime Minister has confirmed Britain will no longer be a member of, as well as equivalence and regulatory divergence.
Despite all this, it appears that our knowledge of the system in which we are operating is limited. Before we can make a decision about where we want to go, we surely need to figure out what we have been doing and where we are. As the report states,
“It is striking that some firms do not themselves appear to be aware of their reliance on the current passporting arrangements”—
the implication being that they do not have a full picture of the reciprocal impacts that passporting has on both the UK and EU financial markets. I for one believe this to be a startling realisation. There is a responsibility on the Government and industry alike to rectify this deficit as quickly as possible.
In a Written Answer to my noble friend Lady Hayter on 24 January, the Minister stated that:
“Government ministers have met with a full range of institutions from across our financial services sector”.
It is encouraging that such conversations are taking place, but I wonder whether the noble Baroness could go into more detail than she has provided on meetings that related specifically to passporting rights. Do the Government share the view of the EU Select Committee about the awareness of passporting access across the industry? If so, I would be interested to hear how the Government intend to resolve this problem.
Given that the Prime Minister has made it clear that she has no intention of Britain remaining a member of the single market, could the Minister outline what implications the Government believe that will have for our ability to maintain passporting rights, and whether it will be a priority for the Treasury in the negotiations?
That brings me to the evidence base more generally. I appreciate that not all communications, let alone the detail of those communications, will or should be available for scrutiny. What I am asking for—and I believe that I am justified in doing so—is evidence that the Government are building the robust analysis and filling the gaps which the report made clear are so apparent. Can the Minister say whether, further to the request by the EU Financial Services Sub-Committee, the Treasury is modelling the effect of different scenarios on the deal that will be struck between us and the EU?
Related to that, will those models take into account the executive order signed by President Trump, which seeks to review the working of the Dodd-Frank Act? I know that the Government have been keen not to comment on the domestic policy of the US, but surely when minimum standards of financial regulation are at risk we have a responsibility to advocate measures which were designed to protect consumers.
Indeed, the report warns of the challenges associated with possible regulatory divergence between ourselves, the US and the EU. The UK has played an integral role in the design, implementation and management of financial service regulations. Do the Government intend that we continue to work with our European partners on regulation setting?
We have heard today some of the more intricate matters that the Treasury will have to consider. However, the point that I am trying to make is that, if we do not understand the basics of the overall industry, we will not be properly prepared to discuss the parameters of a debate on, for instance, as mentioned by a number of noble Lords today, our continued position as the European clearing centre, or—we have heard less of this, but it is important to London—as a hub for fintech development. Too often these basics are overlooked.
We must not confuse the mass of detail that we have for understanding the industry as a whole. The report left me with the impression that we do not have the necessary understanding of the industry to enter these negotiations, that the industry does not have a complete understanding of itself and that the Government have yet to find the tools with which to fill these knowledge gaps. I hope the Minister’s response will put my concerns to rest.
My Lords, the noble Baroness, Lady Falkner of Margravine, and her committee have produced an excellent, clear report. I thank her, and others, for the warm welcome they have given me in my challenging new role. I join others in thanking her and members of the committee—some of whom, along with others, have spoken with great clarity today—for their work. I especially thank the clerks, who have done a really good job at great speed.
It is obvious that financial services will be an important component of the EU exit discussions and it is helpful to have a comprehensive document covering all the issues at this exact stage—as well as to have this debate before we submit our government response to the committee. This debate is especially useful to me, as only last week I was given responsibility within the Treasury for EU exit on financial services. I can reassure noble Lords that I have a long history of working with, and operating in, the EU and I believe that we can build a strong new partnership on financial and economic matters.
The links between the UK and our nearest neighbours in Europe are numerous and long-standing, as the Prime Minister said when she highlighted financial services as a priority. Above all, it is in our interest for the EU to flourish and we will be aiming for the freest possible trade in financial services between the UK and the 27 member states.
I am especially grateful to my noble friend Lord Caithness, who gave us the benefit of his experience at the Treasury and an insight into the global future. This underlined to me the importance of maintaining the UK’s pre-eminence in financial services. Having, like him, operated for many years in the EU, working with EU partners, I very much agree about the importance of language. Notions such as seeking common ground are good concepts in negotiation.
The noble Earl asked about the risk of currency devaluations. He will remember that Treasury Ministers have to be very careful about what they say regarding currency. However, since the financial crisis, the Government have strengthened the domestic financial stability policy framework and, as the Governor of the Bank of England noted, the UK financial system has passed several tests over the past year. The Treasury, the Bank, the Prudential Regulation Authority and the Financial Conduct Authority will continue to monitor any risks closely. That is very important and reassuring.
As a glass-half-full person, I was glad to hear the noble Lord, Lord Butler of Brockwell, sound more optimistic than he did at the time the committee produced its report. My noble friend Lord Eccles and the noble Earl, Lord Kinnoull, felt the same. The noble Lord, Lord Butler, is right about the interest that the EU has in a sensible outcome. He may well know that four-fifths of EU 27 capital market business is conducted through the UK, and he is also right to say that we need to keep close to each other.
One key issue that the report discusses is that of access to EU markets. I listened with great interest to the noble Lord, Lord Dykes, who said how important it was to remain a confident country in this time of change. The Prime Minister helped us here with her speech at Lancaster House, in which she made it clear that we would not seek membership of the single market. Instead, we are seeking a new strategic partnership with the EU that complements the needs of our industries, including the needs of financial services companies and their customers.
That means that we are working closely with firms to understand what issues Brexit raises for them and what a good outcome might look like. Our work so far shows that the answer to that question varies enormously according to whom you ask. Many firms, for example, across banking, asset management, insurance and payment services, which currently trade across borders, benefit from passporting rights, but that is less true of firms that provide retail financial services chiefly within the UK, such as domestic insurance firms and high street retail banks.
We are working to understand the needs of the wide spectrum of financial services interests in the UK. That includes, for example, the car companies, which provide lease financing for most new cars bought in Britain today. It means understanding the interests of the wider financial and related professional ecosystem—a word that others have used—including accountants and lawyers, as well as thinking about the interests of consumers of financial services, including the less well-off or those who might be misled. I liked the example given by the noble Lord, Lord Butler, about car insurance for travellers in Europe.
As the report rightly notes, various elements of EU financial services legislation contain equivalence provisions, some of which can offer a basis for firms from third countries to provide services across the EU. We have heard calls from our stakeholders on this and studied the industry analysis proposing these equivalence regimes as the basis for future market access.
The noble Lord, Lord Tunnicliffe, asked about the depth of discussion on passporting rights. The simple answer is that at nearly every meeting on financial services interests there is a discussion of passporting rights—but, as with equivalence, different people are talking about different things. We need some flexibility in our negotiations, but I reassure this House that in our new strategic partnership we will seek the freest possible trade in financial services between the UK and the EU. In the Prime Minister’s words, it will be on the basis of a “bold and ambitious” free trade agreement.
As the committee’s report noted and our debate today has illustrated, this is an exceptionally complex set of issues. For this reason, I am determined that consultation with our industries and stakeholders should continue throughout the negotiating process, which will enable us to improve our evidence base and understand the impact of different scenarios. Those themes from the report were picked up by the noble Lord, Lord Tunnicliffe. The noble Lord also asked about Dodd-Frank. It is frankly early days on that. Our simple aim is to secure the future of a sector responsible for 7% of GDP and over 1 million jobs.
A second area of enormous significance to the sector is to avoid a so-called “cliff edge”. As the report highlights, this will be important to a large number of industries across the entire EU. For financial services firms, this is of particular importance because of the deeply integrated market for financial services and long-established regulatory coherence. To pick up on the points made by the noble Baroness, Lady Falkner, we want to give businesses enough time to plan and prepare for the new arrangements that will be in place. We want the change from where we are now as EU members to our new relationship with the rest of the EU to be as smooth and orderly as possible. It is in recognition of this that the Prime Minister has made it clear since the committee reported that a phased process of implementation will be sought.
I understand the noble Baroness’s point about the need for an early agreement on phasing to help allay the concerns of the financial services industries. We also believe that such a phased process of implementation can be in the mutual interest of the UK and the EU. Inevitably, the details of the timing of the implementation period will have to be discussed through the process of negotiation with our EU partners.
A third priority that many noble Lords touched on, including the noble Lord, Lord Desai, and the noble Earl, Lord Kinnoull, and which I think is extremely important, is access to talent. The noble Earl, Lord Kinnoull, warned that capital follows talent. I certainly remember that from my time in business. For some, it is the overriding issue. Fintech firms, for example, tell us they rely on drawing from an international talent pool. Europe leads on fintech, much of it here in London, and we are committed to staying at the cutting edge of financial innovation. Let me highlight the statistic from the report that is so telling on talent: of the 1 million or so people who work directly in our financial services, 60,000 are EU nationals and 100,000 are non-EU nationals. To respond to the noble Earl, we recognise that the ability to attract and look after highly qualified staff and transfer them easily between the UK and the EU is a key issue, including for insurance.
In future we must ensure that we can control the number of people coming to the UK from the EU. We are considering the options for our future immigration system very carefully. As part of that it is important that we understand the impacts of different options on different sectors of the economy and on the labour market. Companies are not only discussing with us how we keep attracting new talent; they want to know what it means for the international staff they already have and value. It is a priority for the UK to be able to guarantee the rights of EU citizens already living in Britain, and the rights of British nationals living in other member states, as soon as possible. That must be agreed on a reciprocal basis and we stand ready to sign up to this and to do so soon if it can be agreed with our EU partners.
I turn now to the international dimension. My noble friend Lord Caithness asked about the Prime Minister’s meeting with President Trump in the United States. The trip in January was very positive. I felt very proud of the Prime Minister. Obviously I cannot comment on the private detail of the conversation but the Prime Minister set out that there is a shared commitment to economic co-operation and trade between the United States and the UK. The UK has always been a leading voice for free trade in the EU and globally. That will continue. I always say that trade is in our DNA.
The Government agree with the committee’s assessment of the UK as a global financial services hub and the depth of capital market activity it fosters—to the benefit of Europe as a whole, its pensioners, its businesses and its public sector bodies and their customers. The UK and the EU have a mutual interest in ensuring that specialist activities, such as clearing do not end up in New York. The noble Lord, Lord Shutt, talked about possible job implications. I will say two things. First, I saw Mr Xavier Rolet today. He is one of the first experienced leaders in this industry that I have had the pleasure to consult. He gave me a copy of the EY report.
Secondly, as the committee’s report identifies, many firms in the UK, in the rest of Europe and internationally benefit from London’s multicurrency clearing structure. The Chancellor himself has pointed out that any changes to the structure could force up the cost of clearing, with a substantial cost to the European economy and to firms in the 27 member states—and cost is an important motivator. We will look at the committee’s recommendations on clearing very carefully in responding to the report.
My noble friend Lord Caithness asked about financial services regulatory co-operation in future trade deals, which was a very good question. The Prime Minister has said that the UK will be free to strike trade deals around the world after exit because of the approach that we have taken. That includes financial services. Trade deals involving non-tariff barriers, which have been mentioned, such as regulation, are also important and can be part of discussions on any new trade deal.
As the noble Lord, Lord Desai, said, we have played a major part in the architecture of the international financial system. We agree that we need to ensure that the UK, with its expertise, experience and eye for detail, continues to have influence over international standards with a voice on things such as the Basel Committee, the Financial Stability Board and other international fora such as the International Organization of Securities Commissions and the International Association of Insurance Supervisors. These international bodies could not be more important.
A priority of the Government is to consult external expertise extensively at this time and I am grateful for the vast amount of input that we have already had at every level in the Treasury and in DExEU. We are not talking just to those businesses with whole new Brexit strategy departments and consultants. We are also talking to those with none and to start-ups, supply chains and other stakeholders. We are also engaging outside London, where, as the noble Lord, Lord Shutt, said, we have large numbers of financial services jobs. There are, for example, around 140,000 people in this sector in Scotland, Northern Ireland and Wales—think of Standard Life or Virgin Money in Edinburgh, Legal & General in Cardiff, and Citi in Belfast. Indeed, next week I will visit Wales in my new role and hope to meet some financial services stakeholders.
We will keep up this process of listening to expert views from a range of standpoints as the negotiations kick off and progress. I hope not to be criticised by this House for lack of vigour. I know that many noble Lords have expertise in these areas. I therefore take this opportunity to invite them to contact me if they have advice to proffer.
I have focused my remarks largely today on two things: the needs of our varied financial services sector as we leave the EU, and how we are researching, understanding and analysing those needs. While some are more optimistic than others, there is a wide measure of agreement today that we need to secure the freest possible market access, the smoothest possible transition, and the ability to recruit and retain the best and the brightest. This matters to those people whose jobs depend on this industry—more than 1 million people in this country. It matters to the wider UK economy. Financial services contribute around £66 billion a year in tax and represent a growing percentage of our exports. It matters to our partners across Europe—and, of course, we are a gateway to the world of international finance.
It has been a pleasure to debate this perceptive and timely report. I again express my appreciation to the noble Baroness, Lady Falkner of Margravine, and the team that she chaired so expertly, for their conclusions.
My Lords, this has been an extremely fruitful debate and I am particularly grateful to the Minister for giving us, in the absence of a formal government response, a clear line of vision about how she is proceeding with her role. I particularly want to thank those noble Lords who spoke in this debate today who were not members of the committee—the noble Earls, Lord Caithness and Lord Kinnoull, the noble Viscount, Lord Eccles, and the noble Lord, Lord Dykes. We have benefited greatly in this House from hearing from them as well.
The tone of the debate touched on optimism and pessimism. As all Select Committees should do—and I believe do—we followed the evidence. When our interlocutors were extremely concerned about their future businesses, workforces and livelihoods, we reflected that in the debate. Frankly, we did not encounter too many voices cheering the impact of Brexit on financial services from the rooftops.
Where I entirely agree with the optimists is about the durability of the City of London to innovate, reinvent itself anew and adapt. Voltaire picked this up in the early 18th century when he was in London—enriching himself on the back of the City of London. He exhorted the French to move in the same direction. “Nobody understands commerce like the English,” he said. As I reminded the House today, President Hollande is, somewhat belatedly, trying to take France in that direction.
In conclusion, it is people who are at the heart of this. It is not fashionable to defend bankers, nor to say that the financial services sector does a very good job in liquidity and capital markets. Our committee saw how important it was that the livelihoods of people in this country and in the European Union should continue to benefit from that most essential commodity—capitalism.
House adjourned at 4.31 pm.