Brexit: the European Investment Bank Contents

Chapter 5: Establishing a UK infrastructure bank

Renewed calls for an independent UK infrastructure institution

92.In a recent report, The Infrastructure Forum’s EIB Working Group argued that the creation of a ‘British Investment Bank’ could in the long term deliver the ‘soft’ benefits currently provided by the EIB, notably its role as a cornerstone investor, fostering confidence for investors and facilitating projects that may not otherwise achieve sufficient funding.111

93.Several witnesses to our inquiry indicated their support for creating a new infrastructure institution (see Box 2 for examples of such institutions in other countries). The East of England European Partnership, for example, called on the Government to support “the greatest plurality of finance and funding options … possible” for local authorities, but also noted that a single domestic replacement for the EIB and EIF “would be broadly welcomed”.112 It is notable that the Scottish Government has already decided to a create a Scottish National Investment Bank in order to raise infrastructure investment.113

94.From the education sector, Universities UK noted that there were “many benefits to establishing a national-level investment bank”, in the event that the UK loses access to the EIB.114 Unite called for the creation of a state investment bank to fund an expansion of UK housebuilding.115 Energy UK noted that the Government could consider contributing towards the creation of a new multilateral infrastructure bank alongside the EIB,116 something also explored by researchers at E3G.117

95.Significantly, the idea of a creating a new infrastructure bank has also received backing from the National Infrastructure Commission (NIC). In July 2018 the NIC published its first National Infrastructure Assessment, setting out key objectives and priorities for the UK over the next 10–30 years. Referring to the funding and financing of projects, it noted that there existed “an ongoing market failure around innovation in the infrastructure sector; the risks associated with innovative technologies, techniques and financial products can be too high for the private sector without government support”.118

Box 2: National promotional banks in other developed economies

Many other countries have their own national promotional banks to encourage investment in their domestic economies. In addition to Germany’s KfW (see Box 4), the below lists some comparable institutions in other jurisdictions.

Nordic Investment Bank (Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden): The NIB’s vision is to create “a prosperous and sustainable Nordic-Baltic region”, and its mission is “to finance projects that improve competitiveness and the environment of the Nordic and Baltic countries”. Established in 1976, it is 100 percent owned by the eight Nordic and Baltic states in the NIB, with share-holdings depending on the size of the state. In 2017 it held assets of €29.9 billion. Annual lending in 2017 was €3.7 billion.

Cassa Depositi e Prestiti (Italy): In February 2017, the CDP announced a new mission to “promote Italy’s future by contributing to economic development and investing in competitiveness.” Established in 1850, it is 83 percent owned by the state (Ministry of the Interior), 16 percent institutional investors and 1 percent in Treasury shares. In 2018 it held assets of €366 billion. Annual lending by the CDP in 2018 was €13 billion.

Bpifrance (France): Bpifrance has three goals, to accompany businesses in their growth, to prepare for future competitiveness and to develop an ecosystem that favours entrepreneurship. It was established in 2012 through the merger of a number of existing public funds and organisations in France. In 2017 it held assets of €52.4 billion in 2017 and it lent €7.2 billion.

There are also a number of examples of such institutions being established outside Europe. The Development Bank of Japan was created in 1999, building on its post-war predecessors, and has a strong focus on infrastructure. More recently, the Canadian Government established a new arm’s-length public institution in 2017, the Canada Infrastructure Bank, that will seek to invest $35 billion from the federal government into domestic infrastructure projects.

96.The NIC also said that the Government should try to maintain access to the EIB. If this were not possible, it argued that a new, operationally independent, UK infrastructure finance institution should be established after Brexit. James Richardson, Chief Economist at the NIC, told us:

“That piece of work was the one that led us to the conclusion that retaining access to the EIB should be the priority, and, if that cannot be achieved, it is time now to start thinking about a plan B, and that there could be a role for a UK investment institution of some kind in filling some of the gap—not necessarily everything but some of the gap—that is currently filled by the EIB.”119

97.In supplementary written evidence, the NIC clarified that any UK infrastructure finance institution would not have to finance the same proportion of UK infrastructure investment as the EIB. Housing, for example, is not covered by the NIC’s remit. Moreover, some EIB lending—especially in transport—goes to UK public sector bodies.120

98.The NIC argued that a new institution should be established by 2021, on the basis of a consultation completed by spring 2019. A consultation would cover its functions, such as providing finance to economic infrastructure projects in cases of market and coordination failures, as well as ways to catalyse innovation and act as a ‘centre of excellence’ on infrastructure projects. The NIC says that such an institution would also need to have a clear mandate, with considerations made for its wider economic and social impact, and good governance to safeguard its operational independence.

99.However, Werner Hoyer, the current President of the EIB, has publicly said that, even in a financial centre like London, the creation of any such institution in the UK would take between five and 10 years.121 The Minister noted that, even after creating the institution, it would take “many years” for it to build up its reputation. This, he argued, could be used as an argument against establishing an infrastructure bank at all:

“Clearly, it would take some time, and one of the arguments against creating a new stand-alone institution may be that such institutions take time to develop capacity, and to mature and gain the track record of one as long-standing as the EIB. Clearly, it would take a couple of years to establish it and then many years to build up the reputation.”122

100.The Government has previous experience of establishing a state investment bank in the form of the Green Investment Bank (GIB), set up in 2012 (see Box 3). James Richardson said that a new institution might look “relatively similar to the Green Investment Bank”, with a balance sheet that is “certainly in single figure billions”. The precedent established by the GIB might make it easier to create a new, similar institution:

“You are right to say that there is an institutional lifecycle, and to develop all the expertise, culture and so on would take longer than the time it takes simply to establish the body. Equally, you can look at the Green Investment Bank experience and say that this body was set up relatively quickly and did have a material impact on the offshore wind market within a relatively short period of time. You may not get all of the benefits of a well-established body—and of course that is one of the arguments for retaining access to the EIB; you just get to keep that—but, equally, you are certainly getting capability before 10 years.”123

Box 3: The Green Investment Bank

The Green Investment Bank (GIB) was set up by the Government to increase the level of green infrastructure investment in the UK, following the recommendations of the GIB Commission in 2010. The Commission highlighted the “urgent need for a new public financial institution to unlock the investment needed for the UK to deliver a timely transition to a low carbon economy”. The GIB was subsequently set up in 2012, with £3 billion of Government funding.

The GIB’s 2016–17 Annual Report summarised progress until 31 March 2017, the last accounting year in which it was publicly owned. This included £2.9 billion of investment commitments in 93 UK green infrastructure projects, worth a total of £12 billion. The GIB reported a profit before tax of £24 million and a projected portfolio return of 10 percent per annum.

In June 2015 the UK Government announced its intention to move GIB into the private sector by selling a majority of its shares. In March 2016, the transaction was launched and in April 2017 it was announced that Macquarie Group Limited (Macquarie) would acquire 100 percent of the share capital of GIB. The sale of GIB completed in August 2017 for £2.3 billion, which now has an international rather than a strictly UK focus.

101.In its interim response to the National Infrastructure Assessment, published alongside the 2018 Autumn Budget, the Government announced it would review its existing support for infrastructure finance. The Minister told us that the review “will be launched either at the end of this year [2018] or the beginning of next year [2019], and we hope to bring it to a conclusion next year, along with the spending review”.124 The Government will then publish its own National Infrastructure Strategy, which will set out the Government’s priorities for economic infrastructure and respond in detail to the NIC’s recommendations.125

102.Several witnesses proposed establishing a UK infrastructure bank, if access to the EIB is lost. We note that the National Infrastructure Commission has called for such an institution to be established by 2021. In responding to the NIC’s recommendation as part of its infrastructure finance review, the Government should urgently identify and consult on potential market failures in the UK infrastructure market, particularly in areas where the EIB has previously operated. The Government should then explain how it intends to address any market failures, considering in this light the role that could be played by a UK infrastructure bank.

The benefits of having a UK infrastructure bank

Gaining confidence from private investors

103.The National Infrastructure Assessment noted that an independent infrastructure institution could provide policy stability in areas outside the short-term political cycle. The NIC’s James Richardson argued that it might be able to take good financial risks in areas that are politically less attractive:

“[Independence] is important in terms of the ability of the institution to put a stamp of authority on a project that private investors can then have confidence in that this is an independent institution making financially sound judgments. There is a risk, if all these decisions are being signed off by Ministers, that private investors might think, to put it at its most extreme, ‘Is it Concorde?’ Is it something that Ministers think is exciting but actually is not a sound investment? You then lose that stamp of approval and the potential benefit that has in terms of bringing other people on board.”126

104.Academics from UCL’s Institute for Innovation and Public Purpose (IIPP), which has produced comparative research on how state investment banks operate,127 argued that independence could ensure the ‘long-termism’ of such an institution. Josh Ryan-Collins, Head of Research at the IIPP, stated: “To maintain a longer-term focus it is important that it has some independence from the Government of the day, with a governance arrangement whereby people are independent of the Government.”128 Laurie Macfarlane, Public Banking Lead at the IIPP, agreed that independence could allow the institution to focus on its strategic priorities, free from “the day-to-day political mood music of the day that tends to consume the Treasury and other departments … which can often be very distracting”.129

105.Peter Clutton-Brock, who previously worked on the creation of the GIB as an official in HM Treasury, described distance from Government as “really important”, if investors are to be attracted to invest alongside such an infrastructure institution. Independence can “generate the credibility to crowd in other investors”, who are often highly concerned about the political risks of decision-making. He noted recent examples, such as the Swansea Bay tidal lagoon project and Hinkley Point C, where Government decision-making processes had been very lengthy.130

106.Piers Williamson, Chief Executive of The Housing Finance Corporation (THFC), which has worked extensively with the EIB, also underlined the importance of not being exposed to “political whims” when lending and investing in the longer term:

“The politics can change a great deal in 30 years, so having an organisation that can act independently of government is important. It does not have to be completely independent of government; there are constructs such as halfway houses and non-departmental government bodies. All those sorts of boxes can be fit for purpose, but some independence is really very important for long-term investment.”131

107.UCL’s Philip Harding, on the other hand, noted that there was “some value” to proximity to Government,132 while Giles Derrington, Head of Policy at techUK, highlighted the value of a good relationship with Government, on issues such as its Industrial Strategy.133 Laurie Macfarlane, from the IIPP, told us:

“It is about striking the right balance of political representation. On the one hand, you want some sense of democratic accountability while being able to align with government priorities, but, on the other hand, you want to make absolutely sure that it is not run or swayed by day-to-day political interests, and that it is free to make independent banking decisions based on sound financial principles. That is a really important part, and it should be considered very carefully.”134

108.When we put these points to the Exchequer Secretary to the Treasury, he noted that there could also be a “stamp of approval” for projects coming through the Infrastructure and Projects Authority (IPA) and HM Treasury.135 Philip Duffy, Director for Growth and Enterprise at HM Treasury, agreed that “just as with the EIB, there is beginning to be a halo effect” around the IPA’s due diligence. He added that the UK Guarantees Scheme “currently provides a high level of independence in credit scoring for guarantee schemes, before they come to the Treasury, so there is already a bit of independence. It is not the case that it is working wholly under the Treasury’s instructions.”136

109.There could be significant benefits to having an infrastructure institution that is independent from Government, particularly with respect to individual investment decisions, thereby generating greater confidence from investors, particularly for long-term projects, and crowding in investment from the private sector. Such an institution would need to be free from day-to-day political interests, though should be aligned with clearly defined strategic national priorities.

110.As part of its infrastructure finance review, the Government should clearly identify the areas where an independent infrastructure institution could deliver benefits, particularly given any loss of access to the EIB. Depending on the results of its review, we urge the Government to consult on the establishment of an independent UK infrastructure bank as part of its National Infrastructure Strategy.

Attracting expertise

111.We have discussed the importance of the EIB’s expertise and due diligence, particularly in crowding in additional investment from the private sector. Attracting comparable expertise would be key for any UK infrastructure bank. Phil Graham, Chief Executive of the NIC, told us that, alongside independence, this need for expertise “led us to the conclusion that there is a case for a targeted investment institution”.137 James Richardson explained this further:

“The other thing that you get with an independent institution is it is probably easier to attract expertise. Inevitably, it is hard to pay civil servants in the Treasury or wherever the kinds of salaries you would for really top people in financial services. It is a little easier, if you create an independent institution, to get around some of those constraints that you probably need to get around if you are hiring people to run a major financial institution with a large balance sheet.”138

112.Peter Clutton-Brock from E3G explained that the GIB’s ‘value added’, and one of the key arguments that led the Government of the day to establish it, was its ability to provide expertise and analysis to help mainstream investors better understand the technological risks involved in different projects.139

113.Laurie Macfarlane also advocated building an institutional hub of expertise “that is independent and distinct, with its own identity, from, for example, government departments”. Having an independent institution meant “you can develop specific expertise in the areas where these institutions invest, and employ not just finance people but people who understand and work in the area, whether it is a scientific area, engineering or whatever”.140

114.The Minister recognised the importance of expertise in crowding in private investment. The Government was already taking measures to address this, and “investing in more expertise in areas such as technology”, and there was “significantly more capacity today than there was a few years ago”. However, the Minister recognised that expertise remained “an important question that will need to be considered … something we will have to look at in the review”.141

115.Witnesses underlined the importance of having sufficient expertise within any national infrastructure institution, enabling it to conduct credible due diligence and be able to give a clear ‘stamp of approval’ for infrastructure projects. This would give confidence to private investors in the market and thereby crowd in additional investment. Attracting such expertise may be easier for an independent institution than for the Government itself. We urge the Government to take this issue into account as part of its infrastructure finance review and National Infrastructure Strategy.

Playing a countercyclical role

116.Another area where a UK infrastructure bank independent from Government could add value could be its ability to continue investing in projects through the economic cycle, including during economic downturns, when public budgets may be under pressure. The Infrastructure Forum, for example, told us: “During times of market contraction, the EIB is able to continue to lend when commercial loans dry up. This acts as a stabilising force for markets and keeps financing streams open.”142 Laurie Macfarlane from the IIPP noted that after the financial crisis the EIB stepped up its activities, to offset the downturn in lending across Europe.143

117.Eva Witt, Director of Federal and European Affairs at KfW, Germany’s state investment bank, cited the KfW’s countercyclical role during the financial crisis. Germany used KfW as an “economic stimulus programme”, and its success soon generated interest from other governments. In particular, KfW facilitated the provision of long-term finance: “Especially after the financial crisis in 2008–09 there was a lack of long tenors. All the banks could access our programmes and give longer tenors to their clients, which at that point they were no longer able to do.”144

118.James Richardson of the NIC agreed that it helped to have independent institutions in place when unexpected events occur, such as financial crises, because they provided the capacity to act quickly: the UK would have “depth and capability if you had a freestanding institution that would put you in a better position if you were hit by a shock”.145

119.One argument for an independent institution is its potential to play a countercyclical role in the event of an economic downturn, during which it could continue to support long-term infrastructure finance and contribute towards the UK’s economic recovery. This potential benefit should be recognised as part of the Government’s ongoing work in this area.

Considerations for creating a UK infrastructure bank

Possible barriers

Existing State aid rules

120.The possible creation of a UK infrastructure bank may have to comply with EU State aid rules.146 While the Commission and the EIB have clarified that financing from the EIB does not constitute State aid, this may not be true for national initiatives.147 Speaking about the GIB, and whether it could have expanded into other areas of infrastructure, James Richardson from the NIC told us:

“In retrospect, the ambition was to be broader than offshore wind [but] it needed to fit within State aid and that kind of constraint in what it could do … If it had had a slightly wider remit across all of infrastructure, it might have been able to move on to something like fibre that was outside its green remit but would have met State aid.”148

121.Although the European Commission approved the GIB under EU State aid rules in 2012, it did so with a number of restrictions. For example, projects applying for funding from the GIB had to prove they had first attempted to obtain funds from the private sector. The Commission also strongly discouraged the inclusion of nuclear energy, as this would have delayed its State aid approval, and stipulated that at least 80 percent of the value of the GIB’s investments would have to be deployed through the three ‘priority sectors’ of offshore wind, waste and non-domestic energy efficiency.149

122.The establishment of the British Business Bank also required State aid approval from the Commission. While this was granted in 2014, the Commission set a £6 billion limit on the amount of funding the BBB could receive from the Government on a non-commercial basis, and set an expiration date of the end of the 2019.150 Keith Morgan, Chief Executive of the BBB, did not think that this renewal would be an issue and noted the BBB’s “responsibility, passed to it by the Government, to ensure that we observe State aid rules”.151

123.Philip Duffy, Director for Growth and Enterprise at HM Treasury, said that the Government “remain a strong supporter of State aid control”, and “do not want public authorities favouring a particular company over another”. He added that “some of the desire to be bound by State aid may come from us as much as it comes from our interlocutors in the negotiations”.152

124.Some witnesses, however, believed that the Government was not sufficiently utilising the flexibility that exists in EU State aid rules.153 Laurie Macfarlane identified general block exemptions related to the EU’s strategic priorities or known market failures, which were roughly the areas where a UK infrastructure bank would operate.154 He told us that the UK had often “massively underused” the existing allowances:

“Our State aid expenditure is hardly anything compared with the Scandinavians and Germans. We have taken an overly cautious approach, which again we have imposed on ourselves; we have decided just not to do things, even though we could. There is quite a lot more that we could be doing, even within the current rules. It is an important consideration, but it cannot be used as an excuse for inaction.”155

125.Germany’s national promotional bank, KfW, which has been approved under EU State aid rules, is described in Box 4. Measured by its total assets (€472  billion),156 it is the country’s third largest bank, demonstrating that State aid rules would not prevent the UK from establishing an infrastructure bank. They would, however, have to be borne in mind when designing the institution, and Eva Witt told us that if KfW designed a new programme with the German government, “we would conceive it in such a way that it is State aid free”.157

126.If the Government decided to establish a UK infrastructure bank, our future relationship with the EU may require us to respect EU State aid rules when considering its design. This was the case for the Green Investment Bank and continues to set the limits of the British Business Bank’s activities. However, the example of some Member States, notably Germany, shows that these rules allow sufficient flexibility to enable the creation of such a national infrastructure institution.

Measurements of public debt

127.Another possible constraint in creating a UK infrastructure bank would be its impact upon the Government’s measure of public sector net debt.158 James Richardson told us that a new institution would “almost certainly” score in the official public debt estimates, and that “in practice it would be very difficult to take it off public sector net debt as a measure”. The definition of public sector net debt used by the Government “makes it pretty hard to escape for an institution of this sort”.159

128.This contrasts with how national public debt is currently calculated in respect of the EIB. As the EIB’s shareholders, EU Member States are legally liable for over €243 billion of liabilities, but these do not score in national balance sheets. James Richardson described it as a “little bit of fiscal magic”.160 Piers Williamson from The Housing Finance Corporation (THFC) went further:

“One of the benefits of the EIB is that, until recently, it was classified as a remote contingent liability. Effectively, it is off the Government’s balance sheet, so it is a fantastic money-printing device for every nation in the European Union. I do not mean that cynically; it genuinely is that. It is about all of those devices if we bring guarantees into the UK public domain.”161

129.Researchers at E3G argued that this kind of statistical calculation could “jeopardise” the Government’s fiscal target of reducing public sector net debt as a proportion of GDP, and reduce funding for other Government departments. They also argued that it was this kind of impact on the Government’s balance sheet that resulted in its decision to sell off the Green Investment Bank. This could have serious implications for a new UK infrastructure bank:

“Whilst it is possible to envisage the government collating existing funding into a single institution, it is hard to imagine such an institution being allowed to substantially increase infrastructure funding because of the effect on the government’s fiscal targets. It is also likely that the Treasury would require stringent governance controls and financial restrictions (such as limiting borrowing) to control the impact on the PSND. It may also seek to sell the institution in the future, thereby nullifying its ability to address market failures.”162

130.In contrast, Laurie Macfarlane argued that the UK’s calculation of public debt was “a complete outlier internationally”, and something we have “imposed on ourselves”, noting that other European countries use the measure of general government gross debt, which does not include the liabilities of public corporations. He also noted that such institutions have assets as well as liabilities. Josh Ryan-Collins explained this point further:

“A state investment bank could provide equity and require a return on it. A lot of state investment banks clean their backs; they never get into debt and they are very profitable. The EIB has been extremely profitable. It should not be seen as another cost for the Government; it should be seen as an institution that will create assets, which themselves provide a flow of income to UK plc.”163

131.James Richardson agreed that a UK infrastructure bank would be expected to make a sufficient return to pay the cost of the interest on the capital paid in, meaning that it would not add to the aggregate debt interest in total. The ONS was currently looking at how assets could be included within the public debt statistics:

“There is also a measure that this Government have asked the ONS to introduce, public sector net financial liabilities, which would capture both the liabilities but also the assets. You would expect those essentially to balance, so in that sense it would be on the balance sheet but would wash out, and the effect on the balance sheet would therefore be neutralised. If the Government chose to move to that at some point in the future, that would have a different impact. At the moment, it is an experimental ONS statistic, but as it gets traction, it is something the Government may wish to look at.”164

132.The Minister made it clear that the Government did not intend to remove the liabilities of public corporations from its official measure of public debt. The UK’s public sector net debt rules were “well regarded internationally. The IMF and other institutions believe that they are very transparent, and that is a good thing.” He also said that this has not previously inhibited public investment, noting that “finding accounting tricks to enable us to invest more in infrastructure but which do not fundamentally change the amount of debt we are taking on as a country is not the way forward”.165

133.The EIB’s liabilities do not feature on the national balance sheets of EU Member States, but we were told that a similar UK institution would almost certainly feature within the Government’s measure of public sector net debt. While such an institution would also have assets and would probably be able to fund the interest on its paid-in capital, this could have significant implications for the Government’s commitment to reduce public debt as a proportion of GDP.

134.The measure of Government debt does not fall within the scope of this inquiry. While we acknowledge that it is for the Government to choose the best way to calculate public sector debt, such accounting decisions should not determine economic decisions about the optimal form of support for long-term infrastructure investment in the UK.

Design considerations

Funding options

135.The EIB has the ability to borrow on the capital markets, on the basis of a public sector guarantee provided by the capital subscribed by EU Member States. This can be contrasted with the BBB and the GIB.166 As Laurie Macfarlane told us, “Although they are called banks, they are not banks; they are just funds that are allocated money that they are then allowed to lend and spend.”167 He argued that allowing such institutions to issue their own bonds would enable them to leverage their public guarantee and “get more bang for your buck”.168

136.Eva Witt from KfW, which has been issuing its own bonds since 1949, explained that this ‘on-lending model’ reduced the borrowing costs for projects: “Being an AAA institution, we fund ourselves on the capital market with a huge volume, so we have cheap funding costs, or cheaper compared with the German banking sector”. This cheaper funding was then passed on to commercial banks, subject to certain conditions: “To the degree that it is State aid free and acceptable, we have some sort of subsidy.”169

137.James Richardson from the NIC, however, noted that any bonds issued an independent institution would be less liquid than UK Government bonds and would probably trade at a premium, making its borrowing more expensive. Indeed, KfW trades at a small premium to the federal Government in Germany. There would therefore have to be a clear reason for allowing such an institution to borrow on the capital markets:

“There is a cost to it doing that. Is there a commensurate benefit in terms of the kinds of discipline that brings? You would have to be confident that there was for there to be a case for it to issue its own finance. It is not a crazy idea—KfW does it and Transport for London has done it—but there is a cost to it, so you would have to be clear that the benefit was there.”170

138.Mr Richardson added that any borrowing by an independent institution would feature on the Government’s measure of public sector net debt: “Whether it raises its money in the private capital markets or it gets it from the debt management office, as it were, it is all going to score in public sector net debt exactly the same.”171

139.Keith Morgan, Chief Executive of the BBB, agreed that an independent institution funding itself on the capital markets would cost more than if the Government raised the money through the sale of gilts, and that this borrowing would be consolidated within public sector net debt. Although there could be some “further freedoms” for such an institution, the BBB’s business plan would require approval from the Government and therefore “the source of funding will not deliver a different BBB”.172

140.The increased cost of borrowing for an independent institution issuing its own bonds was also noted by Philip Duffy, of HM Treasury: “The gilt market is deep; it is tradable in a way that is not the case for project bonds, and may not be the case for a smaller lender.” The Government’s answer for many years had been to move utilities into the private sector with a regulator, which “has enabled them to borrow against their infrastructure needs in a regulated way that is off-balance sheet. That remains a very important answer to that particular predicament.”173

141.The EIB finances itself on the capital markets, on the basis of a guarantee by EU Member States. This could serve as a possible model for a UK infrastructure bank. While it would almost certainly have higher borrowing costs than the Government itself, there may be compensating benefits. We therefore invite the Government, in considering a UK infrastructure bank, to take into account the advantages and disadvantages of such an institution funding itself on the capital markets.

A ‘one-stop shop’

142.Rather than being solely focused on infrastructure, an independent institution could be merged with other public institutions that are involved in the public provision of finance, such as the BBB and the Public Works Loan Board. It could also cover institutions beyond the scope of this inquiry, such UK Export Finance, which operates as the country’s export credit agency.

143.In Germany, for instance, KfW provides an umbrella for a number of subsidiaries split between commercial bank financing, its Mittelstandsbank (SME bank), KfW IPEX-Bank for export finance, and KfW Development Bank and the German Investment Corporation (DEG), which focus on economic development in other countries. In 2017, it created KfW Capital, with the objective of promoting innovation and growth through German and European venture capital and venture debt funds.

144.Eva Witt from KfW identified the benefits of this approach. It created “one point of entry for the client”, which made it easier to navigate the different financing options, and also delivered administrative savings:

“There are joint administration departments. KfW is a regulated bank, so there is a certain cost to that, but being a bigger bank the cost is absorbed more easily than if different institutions were being regulated. You would need a compliance department, an HR department, accountants and so on.”174

Box 4: An overview of KfW, Germany’s state investment bank

KfW is Germany’s state investment bank, and is 80 percent owned by the Federal Republic of Germany and 20 percent by the Länder. It was established in 1948 as Kreditanstalt für Wiederaufbau (‘Reconstruction Credit Institute’), as part of the Marshall Plan to support post-war reconstruction. Today it focuses on the four areas of climate change and environment, globalisation, innovation and SMEs.

KfW plays an important role in the Germany economy and has provided more than €1 trillion in loans since its creation. Measured by its current total assets of €472 billion, KfW is the country’s third largest bank after Deutsche Bank and DZ Bank. It funds its promotional business almost entirely via the international capital markets, and in 2017 raised €78.2 billion for this purpose. Not only has it been granted AAA rating by all major credit rating agencies, but in 2017 Global Finance Magazine declared KfW ‘The World’s Safest Bank’ for the ninth year in a row.

145.Laurie Macfarlane from the IIPP told us that—unlike separate entities—a single financing institution could “take advantage of staff and expertise synergies, creating a more coherent landscape for businesses”. He saw benefits in having a single entity and a single brand, with specialised departments and arms, and noted that other countries have been moving in this direction:

“It is interesting to note that, among other countries, moves have been made to consolidate the export credit arm within a wider state investment bank to provide a kind of one-stop shop and get synergies for providing services for businesses. We have seen that happen in France and Italy, bringing things in-house, with the state investment bank thinking more generally about how to help businesses and exports. That is another area where the UK could be doing a lot better, by bringing in UK export finance and wrapping it in a wider approach to public support.”175

146.Others questioned the synergies that would result from having a single public financing institution. While James Richardson acknowledged the clear benefits of having a single institution for raising money on capital markets, he saw a distinction between facilitating access to finance for SMEs and lending for large infrastructure projects:

“In a sense, you can always establish institutions in a number of different ways, but the direct overlap between the activities of the British Business Bank and those we would anticipate here is quite limited … The overlap in terms of the kinds of skills and activities is pretty limited.”176

147.Robert Jenrick MP explained that the Government’s existing system of providing financing support focused on “bespoke interventions” in different areas of the economy. However, he noted that there “may be an argument” for bringing all of these together into a single institution that would operate as a ‘one-stop shop’, thereby bringing increased simplicity. He added that “the review we are conducting will look at both options”.177

148.Some witnesses identified potential benefits in having a single institution that would operate as a ‘one-stop shop’ for public financing, as is currently the case in some EU Member States. More evidence is needed about the synergies that could be gained from this approach, and we therefore welcome the Government’s commitment to look at this issue as part of its ongoing review. As part of this, it should also consider ways in which such an institution could reflect the interests of the regions and the devolved administrations in its governance structure.


111 The Infrastructure Forum, The Future of the European Investment Bank in the UK: report by The Infrastructure Forum’s EIB Working Group (2017): https://docs.wixstatic.com/ugd/d9a995_9e8ae46e9a6f44f89e1b0d23d0c271ee.pdf [accessed 4 January 2019]

112 Written evidence from the East of England European Partnership (EIB0006)

113 Written evidence from the Scottish Government (EIB0010)

114 Written evidence from Universities UK (EIB0008)

115 Written evidence from Unite the Union (EIB0012)

116 Written evidence from Energy UK (EIB0011)

117 Written evidence from E3G (EIB0013)

118 National Infrastructure Commission, National Infrastructure Assessment (10 July 2018): https://www.nic.org.uk/wp-content/uploads/CCS001_CCS0618917350–001_NIC-NIA_Accessible.pdf [accessed 4 January 2019]

120 Written evidence from the National Infrastructure Commission (EIB0014)

121 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]

125 HM Treasury, Budget 2018: Interim Response to the National Infrastructure Assessment (29 October 2018): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752340/NIA_Interim_Response_pdf.pdf [accessed 4 January 2019]

127 Laurie Macfarlane and Mariana Mazzucato, State investment banks and patient finance: An international comparison (2018): https://www.ucl.ac.uk/bartlett/public-purpose/sites/public-purpose/files/iipp_wp_2018–01.pdf [accessed on 17 January 2019]

131 Ibid.

132 Ibid.

136 Ibid.

142 Written evidence from The Infrastructure Forum (EIB0007)

146 The UK would have to fully apply EU State aid rules during the transition period and if the backstop were to be activated. The political declaration on the future relationship between the EU and UK, published on 22 November 2018, also states that the parties “must ensure open and fair competition” with regard to State aid, “building on the level playing field arrangements provided for in the Withdrawal Agreement and commensurate with the overall economic relationship”.

147 European Investment Bank, Joint Statement by Joaquin Almunia, European Union Commissioner for Competition, and Werner Hoyer, President of the European Investment Bank (EIB), on State aid matters in relation to the activities of the EIB Group, http://ec.europa.eu/competition/state_aid/modernisation/joint_statement_en.pdf [accessed 4 January 2019]

149 House of Commons Library, Green Investment Bank: proposed sale, Briefing Paper Number 5977, 24 January 2017

150 European Commission State Aid Case SA.36061 UK Business Bank (OJ C 460/3, 19 December 2014)

153 See also European Union Committee, Brexit: competition and State aid (12th Report, Session 2017–19, HL Paper 67), para 214

154 cf. European Union Committee, Brexit: competition and State aid (12th Report, Session 2017–19, HL Paper 67), paras 58–61. This report concluded that “the majority of new State aid measures are now covered by the General Block Exemption Regulation (GBER) and Member States are not required to notify them to the Commission for prior authorisation.”

158 Public sector net debt is the official definition used by the Office for National Statistics (ONS) when measuring the Government’s outstanding debt obligations. The is often referred to by commentators as ‘national debt’.

162 Written evidence from E3G (EIB0013)

166 In 2014, the GIB’s CEO Shaun Kingsbury publicly called for the GIB’s borrowing restrictions to be lifted so that it could borrow on the capital markets. Terry Macalister, ‘Green Investment Bank boss calls for his borrowing restrictions to be lifted’, The Guardian (19 June 2014): https://www.theguardian.com/environment/2014/jun/19/green-investment-bank-borrowing-restrictions-60bn-capital-markets [accessed 5 December 2018]

169 A 2015 Communication from the European Commission on the role of national promotional banks commented positively on such institutions intervening indirectly via financial intermediaries. This, it noted, reduces the risks of crowding out and discrimination against private finance providers. Communication from the Commission to the European Parliament and the Council, Working together for jobs and growth: The role of National Promotional Banks (NPBs) in supporting the Investment Plan for Europe COM(2015) 361 final

171 Ibid.




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