Brexit: the European Investment Bank Contents

Summary of conclusions and recommendations

The EIB and its activities in the UK

1.The EIB has been an important provider of funding for the UK, including almost €50 billion over the last decade. This has included the financing of key projects in areas such as energy and the environment, transport, water and sewerage, education and housing. The EIF has also been an important investor in UK venture capital, growth and mid-market funds, facilitating access to finance for SMEs. As the UK will lose access to these important sources of finance, there will be negative consequences for future projects in these areas unless alternative sources are established. (Paragraph 23)

2.The availability of cheaper, long-term financing from the EIB is one of its key benefits. Losing access to the EIB would almost certainly increase the cost of capital in different sectors of the UK economy and could mean that some future projects would no longer be commercially viable. Similarly, if the EIF withdraws from the UK market, small businesses may find it more difficult to access affordable finance. If access to the EIB and EIF is lost as a result of Brexit, the Government will need to ensure that comparable funding continues to be available. (Paragraph 33)

3.The independent expertise and high-quality due diligence of the EIB and EIF are essential for crowding in private investment. Their participation in specific projects provides a stamp of approval and a positive signal to the market, thereby encouraging additional investment from the private sector. If these institutions stop supporting projects in the UK after Brexit, the Government must ensure that means to replicate their independent expertise and due diligence continue to be available. (Paragraph 41)

The impact of Brexit on the UK’s relationship with the EIB

4.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. (Paragraph 51)

5.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. (Paragraph 52)

6.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. (Paragraph 56)

7.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. (Paragraph 64)

8.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. (Paragraph 65)

The consequences of losing access to the EIB

9.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. (Paragraph 75)

10.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. (Paragraph 82)

11.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. (Paragraph 91)

Establishing a UK infrastructure bank

12.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. (Paragraph 102)

13.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. (Paragraph 109)

14.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. (Paragraph 110)

15.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. (Paragraph 115)

16.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. (Paragraph 119)

17.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. (Paragraph 126)

18.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. (Paragraph 133)

19.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. (Paragraph 134)

20.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. (Paragraph 141)

21.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. (Paragraph 148)

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