66.As set out in Chapter 2, the EIB has played a significant role in the UK economy in the last 20 years and particularly over the last decade. This raises the prospect that there could be a financing gap both for infrastructure projects and SMEs once the UK loses access to the EIB after March 2019; indeed, the decline in funding since 2016 suggests that this gap may already be materialising.
67.Robert Jenrick MP, Exchequer Secretary to the Treasury, believed that some of the EIB’s activities could be replaced after Brexit by either the private sector or by existing Government schemes. He said that the UK currently had “flourishing capital markets for infrastructure, where government-backed or government-endorsed infrastructure projects in particular, or those of public utilities, do not struggle to raise finance”. But Mr Jenrick also acknowledged that the EIB was “an important contributor to financing our infrastructure”, adding that the Government “do not underestimate the fact that there will be, or might be, a gap in the market that we would want to move into”.
68.The Infrastructure Forum agreed that the private sector could play a greater role, noting that routine project finance outside of economic downturns is available from the private banking sector for “most current users of EIB loans”, albeit at “significantly higher cost”. It cited utilities markets as one example where it would be “relatively straightforward to replace EIB finance”. However, it estimated that this would increase the cost by 0.5–1.0 percentage point above the rate of interest offered on EIB loans, a cost which would ultimately be passed on to consumers.
69.James Richardson, Chief Economist at the National Infrastructure Commission, explained that some sectors borrowed substantial amounts from the EIB simply because it was cheaper. In the water and sewerage sector, for example, he noted that funding for Thames Water could be provided “perfectly well by the private finance markets”, though this might come at a cost:
“I find it hard to believe that those projects could not be financed elsewhere. It is a regulated asset base and a pretty stable income stream. These are bankable projects, but they may have to pay a slightly higher rate for that, and that will inevitably feed through to consumers depending on the way the regulator treats the cost of capital. Those would be the impacts.”
70.Witnesses from the water industry confirmed that losing access to the EIB was not a major concern. In August 2017 Anglian Water Services became the first European utility company to issue a green bond, allowing it to meet its financing needs competitively. Despite the sharp decline in EIB funding since 2017, their ability to secure affordable finance and to raise finance from international sources has not been diminished.
71.This may not be true for other sectors. Mr Richardson told us that, while in many cases organisations may be able to secure alternative sources of finance, “we are concerned about … those areas where particularly you are bringing forward new technologies, and where actually it may be rather harder to find private finance”. Peter Clutton-Brock, of E3G, told us that the ability of the EIB to take on some of the project and technology risk is “a major contributing factor” for attracting private investors.
72.Some sectors within the EIB’s broader social mandate may also struggle to raise finance in the private sector. The Infrastructure Forum noted that its members responsible for social, environmental and housing projects would find it “much more difficult” to replace EIB funding. Piers Williamson, Chief Executive of The Housing Finance Corporation, which has worked extensively with the EIB, said that certain phases of regeneration “might not happen” without the EIB’s cheaper financing.
73.Concerns were also raised by the higher education sector. Philip Harding, Director of Finance and Business Affairs at UCL, had “no doubt” that there would be a diminution in the rate of investment by universities if access to the EIB were lost. Universities UK agreed that there would be a “noticeable lack of similar funding streams” to fund investment in long-term, large-scale projects such as campus redevelopments. They added that existing domestic alternatives “cannot be used to replicate all of this added value” offered by the EIB.
74.The British Private Equity and Venture Capital Association (BVCA) focused on the EIF, but agreed that, if the EIF withdrew from the UK market, “there may be reduced access to funding for venture capital investments in SMEs, especially in companies that require long term financing”. High-growth, high-risk industries could be affected, including emerging technology firms, as well as those relying heavily on long-term research and development funding. This could in turn have an impact on the UK’s research reputation and talent pool.
75.The loss of EIB funding after March 2019 will have different effects on different sectors of the economy. Utilities such as water and sewerage may be able readily to access alternative sources of finance, albeit at an increased cost. More innovative projects, or those that fall within the EIB’s broader social mandate, may struggle to raise money in the private sector. As part of its ongoing infrastructure finance review, the Government should identify the sectors most exposed to losing EIB access as well as issues related to SMEs’ access to finance from the EIF.
76.The main tool currently used by the Government to support domestic infrastructure projects is the UK Guarantees Scheme. Managed by the Government’s Infrastructure and Projects Authority (IPA), it can issue up to £40 billion of guarantees to ‘nationally significant’ projects and is open until at least 2026. The Exchequer Secretary to the Treasury, Robert Jenrick MP, told us the Government had provided up to £1.8 billion in guarantees through this scheme “to a wide range of different projects of similar scope to the EIB’s”.
77.Mr Jenrick also explained that there was “significant spare capacity” within the UK Guarantees Scheme. While the projects supported need to be ‘nationally significant’, the Government had applied that rule “generously”. Philip Duffy, Director for Growth and Enterprise at HM Treasury, agreed that there were many options to “put back capacity in particular corners of the market that may be struggling”. Nonetheless, despite the reduction in funding coming from the EIB, the Scheme had “not had a significant uptake in inquiries” since the referendum.
78.Peter Clutton-Brock from E3G described the UK Guarantees Scheme as “a very useful mechanism”, which had “already started to adapt to pick up some of the slack” from the reduction in EIB funding. Its mandate was “quite broadly defined” and could cover projects in areas beyond brick-and-mortar infrastructure, such as skills or buildings for universities. It was now offering construction guarantees, and he was positive that the Scheme could “certainly help to address the vacuum in the short term”.
79.UCL’s Philip Harding also recognised the Scheme’s importance, describing it as a “valuable source of additional support for higher education”. However, he noted the potentially high threshold of ‘nationally significant’ projects; this has led some stakeholders, such as Energy UK, to call on the Government to “review the remit of the scheme and the eligibility criteria to compensate for the loss of access to similar services in the EU.”
80.The Infrastructure Forum also argued that the Government should extend the UK Guarantees Scheme, empowering it to provide more extensive guarantees during the construction phase of projects, as well as to begin to utilise its powers under the Infrastructure (Financial Assistance) Act 2012 to provide loans to infrastructure projects. This, it said, “could replace EIB lending which is no longer available”.
81.The Government could also consider changes to the Public Works Loans Board (PWLB), which provides loans to UK public bodies within a policy framework set by HM Treasury. Alex Conway, Assistant Director of Brexit and European Programmes, at the Greater London Authority, urged the Government to “augment” the PWLB by enabling it to offer loans at a discount on its standard concessionary rate. The Infrastructure Forum similarly called for “extending the mandate” of the PWLB to allow it to issue loans to domestic infrastructure projects.
82.In the short term, the Government should take urgent measures to minimise any financing gap for UK infrastructure. This could include extending the UK Guarantees Scheme to projects that may not meet the current threshold of being ‘nationally significant’ and allowing it to offer different financing options, given its low take up. The Government should consult with affected industries on how the UK Guarantees Scheme could be improved, with a view to incorporating changes to the Scheme in its forthcoming National Infrastructure Strategy.
83.The British Business Bank (BBB) was established in 2014 with the objective of supporting access to finance for SMEs. It operates under its own trading name through a number of subsidiaries. The BBB, in its 2018 Annual Report, identified the possibility of losing access to the EIF as a “strategic risk”. Not only does the EIF participate in many of the markets that the BBB operates in as a co-investor, but it also acts as a guarantor for some of the BBB’s own programmes. The BBB therefore stated that “if the EIF withdraws from the UK market this may have an impact on the delivery and the risk profile of the Bank’s programmes individually or the Bank’s portfolio in aggregate”.
84.The BVCA set out the view of several witnesses:
“The EIF has been an active investor in UK venture capital and private equity funds for a long period, and we believe that the British Business Bank (BBB) should look to replicate the EIF’s investment programme where possible, and be given the funding to fill the gap created by the withdrawal of the EIF’s investment into UK funds.”
85.In the 2017 Autumn Budget, following the Government’s Patient Capital Review, the Chancellor committed £2.5 billion for patient capital to the BBB. In the 2018 Autumn Budget he announced further new funding, including an extension of BBB funding for the Start Up Loans programme until 2021, and a commitment to make available up to £1 billion of guarantee support via specialist and high street lenders to smaller housebuilders, to be deployed through a variant of the BBB’s ENABLE Guarantee programme. The Chancellor also committed up to £200 million of additional investment in venture capital and growth finance in 2019/20 if there is no agreement with the EIF when the UK leaves the EU on 29 March 2019.
86.Keith Morgan, Chief Executive of the BBB, noted that there had been a threefold increase in the BBB’s lending capacity since the referendum, from £300 million to £930 million. He told us that, in comparison, the BBB’s “estimation of [the EIF’s] activities on average over the last five years in similar areas is £460 million in this country.”
87.As noted above (see paragraphs 38–39), the benefits of the EIF are not just a matter of the money invested; there is also the crowding in effect, deriving both from the robustness of its due diligence and from its involvement early in the financing process. Tim Hames, Director General of the BVCA, told us that “because [the BBB] is three years old and not 24 years old” it does not replicate these benefits. And as techUK’s Giles Derrington told us: “the British Business Bank has a tendency to work as an investor of last resort, saying, ‘You go away and get the rest of the money, and then come to us if you have a gap and we will fill it’, which means you need to try to fill it 100% effectively.”
88.Catherine Lewis La Torre, Chief Executive of BBB Patient Capital Holdings, believed that such criticism “probably reflects how we were operating two years ago … it does not reflect what we do today”. She explained that the BBB was increasingly playing the role of a cornerstone investor, engaging early with the general partner and fund manager, “and making sure that we do detailed due diligence that other investors may rely on to come in alongside us”. At the same time, she acknowledged that this “may not be widely known in external markets”. David Lunn, Director of EU Exit, HM Treasury, made similar points.
89.Although witnesses broadly welcomed additional financial commitments from the Government and the move towards earlier involvement in the investment process, Mr Hames noted that these benefits would not be immediately realised:
“First, there is a challenge for the BBB in scaling itself up fast enough to deal with the challenge. The BBB has been around for only three years. The Chancellor makes an announcement, such as the one in the last Budget, that there is a patient capital fund of £2.5 billion to be deployed over a decade. Understandably, if you are a fund manager, you say, ‘That’s good news. Where’s the queue?’ Then you see that there is not yet a structure, or that there is now a structure but not a leadership team; or that there is a structure and a leadership team, but they are not quite sure they have nailed down the mandate and the mission precisely.”
Moreover, some recipients of EIF funding may not have experience of interacting with the BBB: “The challenge for the BBB is to make the process of navigation less complicated rather than more complicated.”
90.Finally, the BBB also manages regional development funds—the Northern Powerhouse Investment Fund (£400 million), the Midlands Engine Investment Fund (£250 million) and the Cornwall and Isles of Scilly Investment Fund (£40 million)—supported in part by a loan from the EIB and a grant from the European Regional Development Fund. Mr Morgan outlined the steps taken to ensure that these arrangements would remain in place post-Brexit:
“We were very careful to explore any vulnerability around that at the time the funds were created. We got assurance in the following ways. The first is that the EIB loan is a contract, so that loan will withstand any change in the relationship between the UK and the EU. The second relates to the European Regional Development Fund. HM Treasury explained at the time that it would be prepared to underwrite that funding until 2020 in the event that it was not forthcoming, so in that respect the current structure of these funds is secure.”
91.We welcome the fact that the Government has already announced changes to the resources of the British Business Bank (BBB) as well as its commitment to providing it with additional funding when the UK loses access to the EIF. The BBB told us that it is increasingly acting as a cornerstone investor that crowds in private investment, but this view did not appear to be shared by some industry stakeholders. Greater efforts to demonstrate that it is available to fulfil the functions of enhanced due diligence and acting as a cornerstone investor may be required and the BBB should make clear how it measures success in this regard.
80 Written evidence from The Infrastructure Forum ()
82 Written evidence from Anglian Water Services ()
85 Written evidence from The Infrastructure Forum ()
88 Written evidence from Universities UK ()
89 Written evidence from the British Private Equity and Venture Capital Association ()
95 Written evidence from Energy UK ()
96 Written evidence from The Infrastructure Forum ()
98 Written evidence from The Infrastructure Forum ()
99 British Business Bank, Annual Report and Accounts 2018: delivering more for smaller businesses across the UK (19 July 2018): [accessed 10 December 2018]
100 Written evidence from the British Private Equity and Venture Capital Association ()
101 : Catherine Lewis La Torre, Chief Executive of BBB Patient Capital Holdings, told us that patient capital refers to “long-term, primarily equity, investment [where] you have to be patient to have a return on your capital.”
102 The ENABLE Guarantees programme is designed to encourage lending to smaller businesses through a Government-backed portfolio guarantee to cover a portion of banks’ net credit losses in excess of an agreed ‘first loss’ threshold.