PARLIAMENTARY DEBATE
UK Development Bank - 20 June 2018 (Commons/Commons Chamber)
Debate Detail
Contributions from Dame Harriett Baldwin, are highlighted with a yellow border.
Motion made, and Question proposed, That this House do now adjourn.—(Mr Richard Goodwill.)
Jeremy Lefroy
Stafford
I start by declaring my interest as chair of the international Parliamentary Network on the World Bank and International Monetary Fund.
In this debate I will put forward the strong case for the United Kingdom to establish a development bank. I believe it is needed now more than ever, and for two particular reasons. As we leave the European Union we will also leave the European Investment Bank as a shareholder. That bank is based in London and has provided large sums of very important capital to projects throughout the UK, not least the Thames tideway tunnel not a million miles away from here and being developed right at this moment. I realise that this particular area does not fall within the Minister’s responsibilities, but they do cover the context of an international development bank, and both the UK aspect of development, which is at present done through the EIB quite considerably, and the international aspect of development financing can come through the same institution; in fact, that would probably be mutually beneficial.
We are one of the few major countries in the world that does not have its own development bank, whereas France has the Agence Française de Développement, or AFD, the Germans have the Kreditanstalt für Wiederaufbau, or KfW, and many other countries also have development banks, often on a very substantial scale. I shall address that point later.
As one of the major challenges the world currently faces, alongside climate change and the environment, is the creation of jobs and livelihoods, particularly for young people, a development bank is needed more than ever. The World Bank estimates that at least 600 million jobs need to be created in the next 10 or so years globally; my estimate is that well over 1 billion new jobs are needed. It is estimated that the population of sub-Saharan Africa will double between now and 2060, to 2.4 billion. If we do not tackle the question of economic development and livelihood-creation around the world and support countries to ensure that their young people have opportunities there, the migration crisis of 2015 onwards will be chicken feed compared with what we will see in future. That is of huge relevance to those young people who are forced to take perilous journeys, and also of great concern to nations in Europe, such as the UK, and elsewhere which will be forced to countenance huge migration on a scale we have not yet seen even in the last few years. This is not a theoretical question of whether it would be nice to have such an institution; it is absolutely fundamental for the development of major public and private projects in the United Kingdom and internationally that we establish a UK development bank, and the sooner the better.
In this debate I will put forward the strong case for the United Kingdom to establish a development bank. I believe it is needed now more than ever, and for two particular reasons. As we leave the European Union we will also leave the European Investment Bank as a shareholder. That bank is based in London and has provided large sums of very important capital to projects throughout the UK, not least the Thames tideway tunnel not a million miles away from here and being developed right at this moment. I realise that this particular area does not fall within the Minister’s responsibilities, but they do cover the context of an international development bank, and both the UK aspect of development, which is at present done through the EIB quite considerably, and the international aspect of development financing can come through the same institution; in fact, that would probably be mutually beneficial.
We are one of the few major countries in the world that does not have its own development bank, whereas France has the Agence Française de Développement, or AFD, the Germans have the Kreditanstalt für Wiederaufbau, or KfW, and many other countries also have development banks, often on a very substantial scale. I shall address that point later.
As one of the major challenges the world currently faces, alongside climate change and the environment, is the creation of jobs and livelihoods, particularly for young people, a development bank is needed more than ever. The World Bank estimates that at least 600 million jobs need to be created in the next 10 or so years globally; my estimate is that well over 1 billion new jobs are needed. It is estimated that the population of sub-Saharan Africa will double between now and 2060, to 2.4 billion. If we do not tackle the question of economic development and livelihood-creation around the world and support countries to ensure that their young people have opportunities there, the migration crisis of 2015 onwards will be chicken feed compared with what we will see in future. That is of huge relevance to those young people who are forced to take perilous journeys, and also of great concern to nations in Europe, such as the UK, and elsewhere which will be forced to countenance huge migration on a scale we have not yet seen even in the last few years. This is not a theoretical question of whether it would be nice to have such an institution; it is absolutely fundamental for the development of major public and private projects in the United Kingdom and internationally that we establish a UK development bank, and the sooner the better.
19:05:09
Jim Shannon
Strangford
I thank the hon. Gentleman for giving way. I spoke to him earlier to get an idea of what this was about, and I congratulate him on bringing forward the debate. I have seen too many cases in my constituency of small businesses that are cash poor and asset rich and that are unable to make payments of even 1p more than the required amount. Does he agree that a development bank such as the one he has outlined that was friendly to small businesses and enterprises would encourage the bigger banks to remember their duty not only to the bottom line but to their local communities, which we represent, and to trust them to do the right thing with their money? Also, if he was looking for somewhere for this investment bank, would he agree that Belfast would be a great place for it?
19:05:49
Jeremy Lefroy
The hon. Gentleman is right, although I am sure that many places will bid for it when it is established, as I hope it will be.
19:05:49
Patrick Grady
Glasgow North
I congratulate the hon. Gentleman on securing the debate. I work with him on the all-party parliamentary group on the World Bank and International Monetary Fund. Is he aware that in Scotland, Scottish Enterprise has established the Scottish Investment Bank to provide the kind of domestic support that he describes? Perhaps that could be expanded in a co-operative manner. Will he say a little more about his concept for a global international development bank to tackle global poverty? In particular, will he make it clear that the loans would be for projects and infrastructure, and that there would not be a return to the days of significant loans to Governments, which led to the debt crisis in the 1970s and 1980s? Does he agree that this would involve a different kind of financing?
19:05:49
Jeremy Lefroy
The hon. Gentleman is right to suggest that we do not want a return to the days when countries were burdened with unpayable debts that eventually had to be relieved, at great cost to the countries themselves and to taxpayers around the world. He rightly points out that there are such financial institutions around the United Kingdom. I was not aware of the Scottish Investment Bank, but it is great to hear about it. No doubt that model could be built on.
19:05:49
Mr Jim Cunningham
Coventry South
I congratulate the hon. Gentleman on securing this debate. Before he moves on to the international aspect, does he agree that, in the light of Brexit, this country will need an investment bank? Let us not forget that we trade a great deal, and that trade creates jobs in other countries as well. We will lose regional aid in 2021 as a result of Brexit, and that aid is vital to the midlands in industrial and development terms. He is a midlands MP, and I think he would agree with me on that.
19:05:49
Jeremy Lefroy
I entirely agree with the hon. Gentleman. That is why I am saying that the development bank should be for development in the UK and globally—not one or the other, but both. The two are intimately entwined, as he rightly suggests.
We already have a financial institution that deals with investment in developing countries. It is the CDC—formerly the Commonwealth Development Corporation—and it does a fine job. The Government have increased its capital, with the support of Parliament, over the past few years, and I welcome that, but that largely involves equity. There are some loans as well, but it largely involves equity and mostly operates in the private sector. A development bank would deal with the public and private sectors, and it would concentrate on long-term loans that would eventually be repaid, as the hon. Member for Glasgow North (Patrick Grady) suggested.
A development bank has three advantages over a grant-making organisation, which the Department for International Development generally is. DFID does a fine job in many areas, but it works largely with grants. Long-term development loans would offer accountability over a long period. When I was a member of the International Development Committee, I sometimes used to ask what DFID had been doing in a particular country 15 or 20 years previously. That was difficult to know, because projects tended to last two, three, five or, at the most, 10 years. There are some fantastic exceptions such as the community forestry project in Nepal, which has been going for decades and has done a great job, but projects tend to be relatively short term. With a long-term loan, development can be tracked, and there is accountability and regular reporting, meaning that we can see year-on-year results for the financing.
Secondly, and obviously, the finance is returnable. It is recyclable. It can be used more than once. In round 18 of the replenishment of the International Development Association, which is the World Bank’s fund for the poorest countries, a substantial percentage of the money—well over 35%—was returned funds from previous loans. The IDA was able to raise around $75 billion in round 18, which runs for three years, and a large percentage of that was money that had come back in repayments. About a third of it was new grants of course, but that shows just how much leverage a development bank has because it uses returned funds. It is not about grants.
Thirdly, a development bank can raise money on the markets through bonds, and I will give the example of the AFD—the French development bank. Members may be interested to know that it was formed in London in 1941 during the darkest days of the second world war. General de Gaulle wanted a bank to promote development, particularly in French overseas territories, but also presumably in France when it was liberated. So a development bank has been founded here, but it was French, and I long to see a UK development bank founded here.
My proposal is to establish a development bank both for the UK and for developing countries. Funding would come from several sources, including the return of our capital in the European Investment Bank and from the international development budget—it would be a legitimate use of that. We are already rightly putting significant sums into the CDC, which is another form of returnable capital. The International Development Committee has considered the matter and recommended it in at least one report over the past few years. I remember being part of the discussions and the general consensus was that a development bank was something that the UK lacked and needed. We have a fantastic organisation for making grants overseas through DFID—it is probably the best in the world—and we have an excellent organisation for equity capital investing in the private sector through CDC, but we lack that middle, which the French, the Germans, the Japanese, the Brazilians and many others have.
Let me tackle one or two of the arguments against a development bank. One argument is that we already subscribe to development banks—such as the World Bank, the African Development Bank and the Asian Development Bank—so we do not need one. We do have influence with those banks, but we do not control them and cannot specify where their money goes. Clearly, they could not lend money into the United Kingdom.
The second is that such banks are not really what the UK does, and the Treasury views them as anathema. Well, that can no longer be said, because the Treasury supported the establishment of the British Business Bank and the Green Investment Bank over the past half-dozen years. Both have been successful, and I believe that the British Business Bank has a portfolio worth at least £9 billion after a relatively short time. The hon. Member for Glasgow North mentioned the Scottish Investment Bank, which is based in Glasgow. We already have some examples, but I am talking about something on a larger scale and with a larger remit.
The final argument is about the use of taxpayers’ money. I have already said that I am not suggesting that large sums of new taxpayers’ money should go into a development bank; I am suggesting that existing streams could be put into such a bank. In respect of our official development assistance budget, it would seem to me an extremely good use of aid to recycle—I use that word again—development aid through a development bank, because it would mean that it could be used more than once. In fact, DFID already does that through various projects, in which it is called returnable capital. I know that the Treasury has wanted to see DFID do more with returnable capital, and this is certainly one way in which it can.
The European Investment Bank will be leaving us—sadly, in my opinion, but it will be—and here is an opportunity for us to replace it, and to replace it with something that would be very beneficial to the United Kingdom economy and to our work globally. We are a world leader in finance, and this gives us an opportunity to show our innovation and expertise in a type of finance of which the United Kingdom perhaps has not done so much in the past few years.
The United Kingdom now has an opportunity, let us seize it. There is a lot of support for this on both sides of the House. Let us take this opportunity, and let us take it quickly.
We already have a financial institution that deals with investment in developing countries. It is the CDC—formerly the Commonwealth Development Corporation—and it does a fine job. The Government have increased its capital, with the support of Parliament, over the past few years, and I welcome that, but that largely involves equity. There are some loans as well, but it largely involves equity and mostly operates in the private sector. A development bank would deal with the public and private sectors, and it would concentrate on long-term loans that would eventually be repaid, as the hon. Member for Glasgow North (Patrick Grady) suggested.
A development bank has three advantages over a grant-making organisation, which the Department for International Development generally is. DFID does a fine job in many areas, but it works largely with grants. Long-term development loans would offer accountability over a long period. When I was a member of the International Development Committee, I sometimes used to ask what DFID had been doing in a particular country 15 or 20 years previously. That was difficult to know, because projects tended to last two, three, five or, at the most, 10 years. There are some fantastic exceptions such as the community forestry project in Nepal, which has been going for decades and has done a great job, but projects tend to be relatively short term. With a long-term loan, development can be tracked, and there is accountability and regular reporting, meaning that we can see year-on-year results for the financing.
Secondly, and obviously, the finance is returnable. It is recyclable. It can be used more than once. In round 18 of the replenishment of the International Development Association, which is the World Bank’s fund for the poorest countries, a substantial percentage of the money—well over 35%—was returned funds from previous loans. The IDA was able to raise around $75 billion in round 18, which runs for three years, and a large percentage of that was money that had come back in repayments. About a third of it was new grants of course, but that shows just how much leverage a development bank has because it uses returned funds. It is not about grants.
Thirdly, a development bank can raise money on the markets through bonds, and I will give the example of the AFD—the French development bank. Members may be interested to know that it was formed in London in 1941 during the darkest days of the second world war. General de Gaulle wanted a bank to promote development, particularly in French overseas territories, but also presumably in France when it was liberated. So a development bank has been founded here, but it was French, and I long to see a UK development bank founded here.
My proposal is to establish a development bank both for the UK and for developing countries. Funding would come from several sources, including the return of our capital in the European Investment Bank and from the international development budget—it would be a legitimate use of that. We are already rightly putting significant sums into the CDC, which is another form of returnable capital. The International Development Committee has considered the matter and recommended it in at least one report over the past few years. I remember being part of the discussions and the general consensus was that a development bank was something that the UK lacked and needed. We have a fantastic organisation for making grants overseas through DFID—it is probably the best in the world—and we have an excellent organisation for equity capital investing in the private sector through CDC, but we lack that middle, which the French, the Germans, the Japanese, the Brazilians and many others have.
Let me tackle one or two of the arguments against a development bank. One argument is that we already subscribe to development banks—such as the World Bank, the African Development Bank and the Asian Development Bank—so we do not need one. We do have influence with those banks, but we do not control them and cannot specify where their money goes. Clearly, they could not lend money into the United Kingdom.
The second is that such banks are not really what the UK does, and the Treasury views them as anathema. Well, that can no longer be said, because the Treasury supported the establishment of the British Business Bank and the Green Investment Bank over the past half-dozen years. Both have been successful, and I believe that the British Business Bank has a portfolio worth at least £9 billion after a relatively short time. The hon. Member for Glasgow North mentioned the Scottish Investment Bank, which is based in Glasgow. We already have some examples, but I am talking about something on a larger scale and with a larger remit.
The final argument is about the use of taxpayers’ money. I have already said that I am not suggesting that large sums of new taxpayers’ money should go into a development bank; I am suggesting that existing streams could be put into such a bank. In respect of our official development assistance budget, it would seem to me an extremely good use of aid to recycle—I use that word again—development aid through a development bank, because it would mean that it could be used more than once. In fact, DFID already does that through various projects, in which it is called returnable capital. I know that the Treasury has wanted to see DFID do more with returnable capital, and this is certainly one way in which it can.
The European Investment Bank will be leaving us—sadly, in my opinion, but it will be—and here is an opportunity for us to replace it, and to replace it with something that would be very beneficial to the United Kingdom economy and to our work globally. We are a world leader in finance, and this gives us an opportunity to show our innovation and expertise in a type of finance of which the United Kingdom perhaps has not done so much in the past few years.
The United Kingdom now has an opportunity, let us seize it. There is a lot of support for this on both sides of the House. Let us take this opportunity, and let us take it quickly.
19:15:30
Harriett Baldwin
The Minister of State, Department for International Development
I congratulate my hon. Friend the Member for Stafford (Jeremy Lefroy) on securing this debate and on his thoughtful speech, which was laden with his experience and expertise in this subject. This timely debate allows me to emphasise the importance of the UK’s role in international development generally. We have a statutory commitment to development, with a focus on the very poorest people in the world.
Many developing countries have been experiencing rapid economic growth over a sustained period, leading to rising per capita incomes in those countries. That progress has improved millions of people’s daily lives, and the UK can feel proud of our ongoing contribution to economic development around the world.
But we cannot simply step away as countries transition to middle-income country status. They still face substantial poverty and inequality challenges, and progress is often precarious. Economic and political shocks have resulted in dramatic reversals, even in relatively prosperous countries. A defining challenge—I recognise my hon. Friend’s personal contribution here—is to create mass numbers of productive and good jobs for the many millions of young people who need real economic opportunities to meet their aspirations, to provide for their families and to take their countries forward.
Sustaining economic progress is important not just for these countries but for whole regions and for global issues that directly affect the UK, as set out in the Department for International Development’s economic development strategy, which has a focus on jobs, investment and trade. The type of financing and support these countries want is also evolving. As countries get richer, they are better able to finance their own development. They are able to transition away from grant support for basic service provision and business environment reform and move towards mobilising private sector capital for investment.
Indeed, the economic development strategy, which the Department launched last year, sets out our clear ambition to support countries in transforming their economies and attracting much-needed finance for their private sectors. As my hon. Friend recognises, this House agreed last year to allow the Government to invest more equity into the CDC so it can invest more in companies in Africa and south Asia in key sectors such as infrastructure, financial services and agriculture that create jobs across the economy. Between 2014 and the end of 2016 alone, companies backed by the CDC in those two regions created an estimated 3 million direct and indirect jobs—that is 1 million jobs a year, on average.
These countries also have a continuing need for long-term public sector investment, but many are unable to finance it from domestic resources and have insufficient access to external commercial borrowing on affordable terms, particularly to support infrastructure development at scale so they can readily address the challenges they face meeting the sustainable development goals.
My hon. Friend mentioned, and the House will be aware, that a $13 billion capital increase for the World Bank Group was agreed in principle earlier this year, of which the UK contribution will be £390 million. As part of that, this Government negotiated and secured a commitment to better pricing from the World Bank Group. Discussions are also likely to start next year about a possible capital increase at the African Development Bank.
Capital increases for multilateral institutions such as those can be counted as ODA, according to the OECD committee’s rules. In contrast, capitalising a bilateral sovereign lending institution such as a UK development bank would not be considered ODA. Instead only a proportion of each loan from the bank would be considered ODA, depending on the level of concessionality and the type of country borrowing. The £1 billion UK prosperity fund, which targets middle income countries, is, on the other hand, 100% ODA, because it is grant-funded technical assistance.
So the question in front of us is whether our own approach needs to evolve further to match country needs. That could mean, as countries become better off, a shift away from grant assistance towards other forms of partnership, other financial instruments and helping to leverage other financial flows. Different countries have different needs and we need to consider how best to deploy different instruments in different places.
As I said, this debate is therefore very timely. A UK development bank is one of a range of possible new instruments that could be considered. I noted that hon. Members got in some early lobbying about locations for this still hypothetical and possible new instrument. The Government have a range of instruments available to them to support developing countries. The Secretary of State for International Development has asked officials to explore what new instruments could be developed to meet the changing needs of countries as they get richer and give the UK greater flexibility to respond to individual country needs.
These are complex issues that require careful and detailed consideration, and the work is still at a very early stage. However, in considering all options for potential new instruments, including a development bank, the Government will need to be satisfied on a range of issues. First, such an instrument would have to ensure very clear value for money for taxpayers. Any option involving a new institution would of course involve significant up-front costs, which would need to be justified by the scale of subsequent benefits. Secondly, we would need to be confident that any option contributes sustainably to development and poverty reduction. For loan instruments that includes ensuring that they do not contribute to unstainable debt burdens. Thirdly, we would need to ensure that any option is affordable, considering its impact on UK Government finances. Lending options will require provision of a significant non-ODA budget, as well as ODA, which presents a particular challenge. Fourthly, we would need to ensure that any option contributes to the wider UK national interest, in line with the Government’s aid strategy.
My hon. Friend has made an important, timely and very well-informed contribution, and I assure him that his advocacy will be taken fully into account as we explore these options further.
Question put and agreed to.
Many developing countries have been experiencing rapid economic growth over a sustained period, leading to rising per capita incomes in those countries. That progress has improved millions of people’s daily lives, and the UK can feel proud of our ongoing contribution to economic development around the world.
But we cannot simply step away as countries transition to middle-income country status. They still face substantial poverty and inequality challenges, and progress is often precarious. Economic and political shocks have resulted in dramatic reversals, even in relatively prosperous countries. A defining challenge—I recognise my hon. Friend’s personal contribution here—is to create mass numbers of productive and good jobs for the many millions of young people who need real economic opportunities to meet their aspirations, to provide for their families and to take their countries forward.
Sustaining economic progress is important not just for these countries but for whole regions and for global issues that directly affect the UK, as set out in the Department for International Development’s economic development strategy, which has a focus on jobs, investment and trade. The type of financing and support these countries want is also evolving. As countries get richer, they are better able to finance their own development. They are able to transition away from grant support for basic service provision and business environment reform and move towards mobilising private sector capital for investment.
Indeed, the economic development strategy, which the Department launched last year, sets out our clear ambition to support countries in transforming their economies and attracting much-needed finance for their private sectors. As my hon. Friend recognises, this House agreed last year to allow the Government to invest more equity into the CDC so it can invest more in companies in Africa and south Asia in key sectors such as infrastructure, financial services and agriculture that create jobs across the economy. Between 2014 and the end of 2016 alone, companies backed by the CDC in those two regions created an estimated 3 million direct and indirect jobs—that is 1 million jobs a year, on average.
These countries also have a continuing need for long-term public sector investment, but many are unable to finance it from domestic resources and have insufficient access to external commercial borrowing on affordable terms, particularly to support infrastructure development at scale so they can readily address the challenges they face meeting the sustainable development goals.
My hon. Friend mentioned, and the House will be aware, that a $13 billion capital increase for the World Bank Group was agreed in principle earlier this year, of which the UK contribution will be £390 million. As part of that, this Government negotiated and secured a commitment to better pricing from the World Bank Group. Discussions are also likely to start next year about a possible capital increase at the African Development Bank.
Capital increases for multilateral institutions such as those can be counted as ODA, according to the OECD committee’s rules. In contrast, capitalising a bilateral sovereign lending institution such as a UK development bank would not be considered ODA. Instead only a proportion of each loan from the bank would be considered ODA, depending on the level of concessionality and the type of country borrowing. The £1 billion UK prosperity fund, which targets middle income countries, is, on the other hand, 100% ODA, because it is grant-funded technical assistance.
So the question in front of us is whether our own approach needs to evolve further to match country needs. That could mean, as countries become better off, a shift away from grant assistance towards other forms of partnership, other financial instruments and helping to leverage other financial flows. Different countries have different needs and we need to consider how best to deploy different instruments in different places.
As I said, this debate is therefore very timely. A UK development bank is one of a range of possible new instruments that could be considered. I noted that hon. Members got in some early lobbying about locations for this still hypothetical and possible new instrument. The Government have a range of instruments available to them to support developing countries. The Secretary of State for International Development has asked officials to explore what new instruments could be developed to meet the changing needs of countries as they get richer and give the UK greater flexibility to respond to individual country needs.
These are complex issues that require careful and detailed consideration, and the work is still at a very early stage. However, in considering all options for potential new instruments, including a development bank, the Government will need to be satisfied on a range of issues. First, such an instrument would have to ensure very clear value for money for taxpayers. Any option involving a new institution would of course involve significant up-front costs, which would need to be justified by the scale of subsequent benefits. Secondly, we would need to be confident that any option contributes sustainably to development and poverty reduction. For loan instruments that includes ensuring that they do not contribute to unstainable debt burdens. Thirdly, we would need to ensure that any option is affordable, considering its impact on UK Government finances. Lending options will require provision of a significant non-ODA budget, as well as ODA, which presents a particular challenge. Fourthly, we would need to ensure that any option contributes to the wider UK national interest, in line with the Government’s aid strategy.
My hon. Friend has made an important, timely and very well-informed contribution, and I assure him that his advocacy will be taken fully into account as we explore these options further.
Question put and agreed to.
House adjourned.
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