Chapter 3: The impact of Brexit on the UK’s relationship with the EIB
42.Brexit has already had a material effect on the UK’s relationship with the EIB. This chapter considers those effects before turning to review the provisions in the Withdrawal Agreement concerning the EIB’s repayment of the UK’s capital. Finally, we survey options for the UK’s post-Brexit relationship with the EIB.
Lending since the referendum
43.Many witnesses told us of a substantial reduction in EIB and EIF funding since the EU referendum and the triggering of Article 50. In 2015, the EIB lent €7.8 billion to 47 projects in the UK; in 2016 it lent €7 billion to 54 projects. This contrasts with €1.8 billion lent in 2017 to 12 projects and €932 million in 2018 to 10 projects. This represents a decline in EIB lending of approximately 88 percent in three years.44
Figure 2: EIB lending to the UK, 2008–2018
Source: European Investment Bank
44.There has been a corresponding reduction in EIF funding. The BVCA stated: “Pitchbook data from February 2018 shows that the total capital raised by Europe’s venture groups fell by a quarter in 2017 to €7.4 billion and the total number of new funds dropped to a 10-year low of 54 in 2017, compared with 75 in 2016.”45 Tim Hames, the BVCA’s Director General, told us: “There is no question but that the referendum, never mind the actual date of Brexit, has already had a pretty fundamental impact. EIF investment in the UK fell by 91% between 2016 and 2017, which is a large enough number to make you suspect that it was not an accident or a coincidence of timing.”46
45.The reduction in the EIB’s lending may reflect uncertainty as to how contracts will be governed after the UK’s departure. As Energy UK said, the reduction “is likely due to the EIB adding guarantees to loans as a result of the UK’s withdrawal”.47 This was also the view of the Welsh Government: “The [EIB] is clearly concerned about its immunities and privileges to such an extent that a great many approved UK deals are not being signed.”48
46.Currently, EIB loan contracts are automatically governed by Union law by virtue of the UK’s EU membership. But David Lunn, Director for EU Exit at HM Treasury, confirmed that after the UK’s decision to withdraw “the EIB changed the approach it took to UK loans, and new clauses were introduced in contracts with UK borrowers protecting their privileges and immunities after exit”, which “had an impact on the willingness of UK [borrowers] to take out these loans, and on the general relationship with the EIB.”49 Piers Williamson cited the Wheatley Group, a Glasgow housing association, which had “closed a deal”, but with “some very unusual pre-payment events linked to the nature of Brexit”. This meant that, even when a loan was on offer, “Borrowers are quite reticent to draw these loans ahead of certainty on Brexit.”50 Negotiations are also taking longer, and Philip Harding gave the example of UCL, which began negotiating a loan with the EIB in 2015, when it was known that there would be a referendum:
“We spent quite a bit of time with the European Investment Bank on pre-payment terms and the events that would cause a prepayment. We ensured that the outcome from our point of view was one whereby, if we left the EU, which was still uncertain at that stage, under any circumstances, the terms of our loan would be completely unaffected. We were very careful to make sure that the drafting of our loan was fully Brexit proof.”51
47.An increase in due diligence may also have played a role in the decline in EIF funding. Victoria Roberts, from Innovate Finance, noted the “press reports in which the EIF said that additional due diligence is now being undertaken on UK funds”.52 In contrast, Mr Hames doubted that the decline in funding could be entirely attributed to an increase in due diligence:
“It is certainly true, as Victoria said, that the EIF line is that it is only additional due diligence, but when there is a 91% fall between year A and year B, one suspects that the additional due diligence is to check every week, ‘Are they still British?’ A 91% fall is a moratorium that dare not speak its name. You do not make it 100% because that would be too obvious.”53
48.Some witnesses seemed unclear on whether existing EIB loans would be affected by the UK’s exit; others questioned whether loans that had been approved in principle could be drawn on before the end of any proposed transition period. For example, Universities UK asked that “the UK government press for assurances that UK universities with existing loans will not be impacted by the UK’s exit from the EU and that they will not break existing covenants by seeking out alternative funding sources”.54 The East of England European Partnership stated: “In the short to medium-term, a key worry of current EIB debt holders in the East of England is knowing with cast-iron certainty what will happen to existing finance contracts with the EIB in the short to medium term, irrespective of what type of Brexit is implemented from March 2019.”55 In contrast, some witnesses had received assurances: UCL’s Philip Harding said universities had been told by the EIB that “no matter what the terms of Brexit are, the terms of their loans will be unaffected”.56
49.On the effect of Brexit on existing loans, Article 118 of the Withdrawal Agreement specifies that the existing “privileges and immunities” that apply to the EIB shall continue to apply to loans made before the end of any transition period.57 And on loans that had been approved but are unsigned, Article 151 states that:
“The signature of financial operations relating to the United Kingdom, to United Kingdom entities, or to United Kingdom projects approved by the EIB group before the date of entry into force of this Agreement, may take place after that date on the same basis as that on which they were originally approved.”58
50.The Minister confirmed the effect of these provisions. He told us that “projects that have already been financed will continue to be supported”, whereas those which have been approved before exit date “will be able to be signed and financed during the implementation period.”59 Guidance from the Government published on 10 January 2019 also noted that, in the event of a ‘no deal’ Brexit, the EIB’s operating rights for UK projects are preserved through section 4 of the EU Withdrawal Act 2018, meaning that “existing UK project contracts should be protected and organisations do not need to take any action.”60
51.There was a marked decline in funding from the EIB and EIF after the referendum and triggering of Article 50, which appears to go beyond what could be explained by the increased due diligence for UK projects. The scale of this decline suggests that there may be financing gap in the UK for projects that have previously benefited from investment by the EIB and EIF.
52.For ongoing projects, we recognise that the Withdrawal Agreement safeguards existing loans as well as those approved but not made prior to Brexit. If the Agreement is not approved, the Government notes that existing UK projects should be protected through section 4 of the EU Withdrawal Act 2018 and that affected organisations do not need to take any action in this regard. We are however disappointed that this announcement was made on 10 January, with only 78 days until Brexit, and gave no indication about possible replacements for EIB funding.
The return of the UK’s capital
53.As the EIB’s shareholders, Member States have committed to €243.3 billion in capital. Of this, €21.7 billion is paid in, the rest callable by the Board of Directors in the event of this being necessary for the EIB to meet its obligations. The Withdrawal Agreement provides that the UK will receive its share of the EIB’s paid-in capital in 12 annual instalments (11 of €300 million and a final instalment of approximately €196 million), from December 2019 until 2030. This comes to a total of just under €3.5 billion, representing the UK’s 16.1 percent share of the EIB’s paid-in subscribed capital, without interest or dividends. The UK will remain liable throughout the period for the uncalled subscribed capital. The amount for which the UK will be liable will depend on the underlying events that trigger the liability, specifically whether they are attributable to financial operations approved by the EIB before the entry into force of the Withdrawal Agreement (calculations are also included for liabilities that will not reduce over time).
54.The EIB has been profitable over its life, raising the question of whether the UK might be expected to benefit from a share of these profits. We asked the Minister whether the Government had attempted to secure any share of the retained earnings of the EIB, which at the end of 2017 stood at approximately €47.3 billion. A 16.1 percent share of those retained earnings would have amounted to approximately €7.6 billion, more than twice the paid-in capital.
55.David Lunn, Director of EU Exit, HM Treasury, told us that the UK’s capital could not be compared to an investment in a private sector entity, emphasising that “there is nothing in the treaty and the EIB statutes that says what happens when the shareholder leaves the bank, and how the shareholder gets his money back”.61 He was then pressed further on this point:
“Clearly, we are aware of how you would value a shareholding in a conventional organisation. All I can say is that this is not a conventional organisation, and the negotiation was driven by the statute and our rights under that statute. I am not sure that there is much more I can say”.62
56.Under the Withdrawal Agreement, the UK will receive the capital it has paid in to the EIB but not any share of the profit, as reflected in the retained earnings, nor any interest or dividends for the 12-year period over which the capital will be repaid. While we recognise that this was part of a complex and wide-ranging negotiation on the financial settlement, and that the EIB’s statute is silent on the issue, we regret that the Government failed to provide a cogent explanation of the rationale for the position taken in the negotiations. Given the substantial amounts of money potentially involved—representing up to 20 percent of the UK’s obligations under the financial settlement—we call on the Government to explain in clear terms why it did not press for the EIB’s profitability to be taken into account in the final calculation of the financial settlement.
Options for a future relationship with the EIB
57.Article 151 of the Withdrawal Agreement effectively precludes EIB financing in the UK post-Brexit, stating that “entities established in the United Kingdom shall be treated as entities located outside the Union”.63
58.Several witnesses considered options for a future relationship with the EIB. The most ambitious would involve amending the EIB’s statute to allow the UK to be a member of the EIB despite not being a Member State. This, however, runs contrary to Article 308 TFEU, which states that “the members of the European Investment Bank shall be the Member States”.64 So while Energy UK believed that “the option of attempting to secure a change to the EIB’s statute to allow UK membership will be part of the wider negotiations on the future EU-UK relationship”,65 this seems a remote prospect as it would require EU Treaty change.
59.An alternative would be a third country agreement. Under such an agreement, the EIB would be able to lend to UK borrowers, despite the UK no longer being a Member State. For example, the EIB funds projects in the European Free Trade Association (EFTA) countries through the EFTA Loan Facility, providing €4.2 billion of lending since its creation in 1994. The EIB also provides lending to developing countries, and the Infrastructure Forum noted that “the Cotonou Agreement between the European Commission and the 79 African, Caribbean and Pacific countries provides a model which the UK could replicate”.66 However, it was accepted that the EIB’s lending to third countries was far lower than to Member States. As E3G, the energy consultancy, told us: “Although the EIB does lend to non-EU and non-EFTA countries, this makes up only approximately 10% of total lending”—in 2016 this totalled €8 billion.67
60.Another option, considered by E3G, was that of establishing a UK EIB subsidiary. The EIB has been reported as considering the establishment of a subsidiary, to focus on non-EU development projects generally, and to lend approximately €7–8 billion a year.68 However, Mr Clutton-Brock acknowledged that a focus on development would make it “quite hard for the UK to make a strong pitch that it would be a natural home for receiving such finance”.69 For the Government, Mr Lunn told us:
“It is a thought we are aware of, but it is not something we have done huge amounts of active work on to date. It would be part of the conversation with the EIB, but, as I say, it would depend in part on what the wider relationship looks like. In a world where there was a closer relationship, there could be more imaginative solutions such as that, but we have not progressed far on it as yet.”70
61.There have also been suggestions that the UK should push to create a new multilateral development bank, which could cooperate with the EIB on cross-border European projects.71 E3G told us that the UK could seek to attract geographically close, non-EU states—such as Iceland, Norway and Switzerland—as potential shareholders, as well as EU Member States that receive proportionally less funding from the EIB than others. In the energy sector, such a bank could support collaboration on projects like the North Sea Offshore Grid and the proposed Iceland-UK interconnector, as well as provide financing to new low-carbon infrastructure within the shareholder countries. Energy UK agreed that a new infrastructure bank supported by the UK, EEA countries and willing EU countries “could become a strong partner to the EIB in transforming Europe’s infrastructure and economy”.72
62.The EIF’s mandate requires that 80 percent of funding must be spent within the EU, leaving 20 percent (approximately £460 million) which could potentially be accessed by the UK post Brexit. However, techUK’s Giles Derrington told us that the UK would be “competing with the US, Japan and elsewhere”,73 while the BVCA noted that it is “unlikely that the EIF will be able to continue to invest in funds that have a primary investment focus in the UK even if some form of future relationship is maintained”.74 The BVCA’s Tim Hames concluded:
“To be blunt, can I conceive of a world in which the UK, in those sorts of circumstances, would be a 35% recipient of the overall fund? No; it just will not happen. Is it worth going through convoluted arrangements in which we are going to end up putting in more money than we will probably get out? Probably not.”75
63.The President of the EIB, Werner Hoyer, has been reported as saying that “he would be ‘extremely sad’ if the idea of continued UK participation in the [EIB] was dead in future”, adding that “the portfolio in the UK is excellent”.76 Yet the Government has to date proposed nothing of substance on its preferred relationship: the Government’s Chequers plan contained nothing on the EIB and the Political Declaration on the framework for future UK-EU relations, published on 22 November 2018, says only that “the Parties note the United Kingdom’s intention to explore options for a future relationship with the European Investment Bank (EIB) Group”.77
64.Article 308 TFEU clearly states that only EU Member States can be members of the EIB. Continued UK membership of the EIB would therefore require a change to the EU Treaties, making it highly unlikely. Our figures show that the EIB’s activity in the UK has already fallen by 87 percent since 2016, and by 91 percent for the EIF. At this late stage in the process of the UK’s withdrawal from the EU, we are concerned that the Government has said so little about the UK’s future relationship with the EIB and disappointed by its lack of ambition in this regard.
65.The starting point of any future relationship is that the UK will be a third country. While existing EIB agreements with third countries—notably the states of the European Free Trade Association (EFTA)—provide precedents, the Government should also urgently explore options for a deeper bilateral relationship. Concluding a third country agreement should be an immediate priority, to enable some EIB lending to continue, albeit at a reduced level, as a temporary measure.
44 European Investment Bank, ‘Financed projects: multi-criteria list’: http://www.eib.org/en/projects/loan/list/index.htm [accessed 18 December 2018]
53 Ibid.
57 These privileges and immunities are those in Article 21 of Protocol (No 7) on the Privileges and Immunities of the European Union, Treaty on the Functioning of the European Union, which provides that: “The European Investment Bank shall in addition be exempt from any form of taxation or imposition of a like nature on the occasion of any increase in its capital and from the various formalities which may be connected therewith in the State where the Bank has its seat. Similarly, its dissolution or liquidation shall not give rise to any imposition. Finally, the activities of the Bank and of its organs carried on in accordance with its Statute shall not be subject to any turnover tax.”
58 Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community as endorsed by leaders at a special meeting of the European Council on 25 November 2018 (25 November 2018): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/759019/25_November_Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_the_European_Union_and_the_European_Atomic_Energy_Community.pdf [accessed 4 January 2019]
60 HM Government, ‘Guidance: European Investment Bank Group financing if there’s no Brexit deal’, 10 January 2019: https://www.gov.uk/government/publications/european-investment-bank-group-financing-if-theres-no-brexit-deal [accessed 22 January 2019]
62 Ibid.
63 Withdrawal Agreement, 25 November 2018, Article 151
64 Article 308, Treaty on the Functioning of the European Union
68 Marc Jones and Francesco Guarascio, ‘European Investment Bank plans internationally-focussed offshoot’, Reuters (6 December 2017): https://uk.reuters.com/article/uk-eu-eib-exclusive/exclusive-european-investment-bank-plans-internationally-focussed-offshoot-idUKKBN1E02XE [accessed 19 December 2018]
76 Chris Giles and Jim Pickard, ‘European Investment Bank wants UK to remain a member’, Financial Times (11 July 2018): https://www.ft.com/content/24a5c5c0-8441–11e8-96dd-fa565ec55929 [accessed 5 December 2018]
77 HM Government, Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom (22 November 2018): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/758556/22_November_Draft_Political_Declaration_setting_out_the_framework_for_the_future_relationship_between_the_EU_and_the_UK__agreed_at_negotiators__level_and_agreed_in_principle_at_political_level__subject_to_endorsement_by_Leaders.pdf [accessed 19 December 2018]