Brexit: European Investment Bank (European Union Committee Report)
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Lord Young of Cookham (Con)
My Lords, I begin by thanking the noble Baroness, Lady Falkner, for selecting this important topic for debate, for her speech in introducing it, and all noble Lords who have participated in our discussion this evening. I am grateful to the noble Lord, Lord Vaux, for his good wishes on my birthday. I am not sure I wanted to spend it taking a supply and appropriation Bill through the House of Lords, then answering an Urgent Question on rendition, then listening to 90 minutes of trenchant criticism from a Select Committee—but at my age, it is nice that anyone wants to employ me.
I join other noble Lords in thanking the noble Baroness for her work as chair of the EU Financial Affairs Sub-Committee, which is a particularly important role in recent years, providing detailed, expert scrutiny of key issues. She mentioned her five reports and an excellent example of her work is the report before us this evening. I enjoyed reading it, raising, as it does, a number of important issues regarding the EIB, SME finance and infrastructure. I have also read the Government’s response to the consultation paper on infrastructure finance.
One theme running through our debate has been the uncertainty about the future, mentioned by the noble Baroness at the beginning. What is to replace the EIB? Others have been the disappointment at the outcome of negotiations on capital and concern about the drop-off of investment by the EIB, although we remain members of the European Union. There is concern about a shortfall in infrastructure investment. Finally, there are the Government’s proposals for replacement, or the suggestion that the Government should replace the EIB with a national infrastructure bank. I shall try to cover as many of those issues as I can.
I begin by saying that we recognise the role that the EIB has played in providing access to finance in the UK. That is outlined in the committee’s report. We joined the EIB in 1973. We have contributed to its capital and have maintained a callable guarantee of €36 billion. The EIB and its sister organisation—again mentioned by the noble Baroness—the EIF, have operated in two critical areas, with the EIB lending for infrastructure projects and the EIF providing finance for high-growth firms. As the noble Baroness said, the EIB has cumulatively lent approximately €118 billion to UK infrastructure projects. Noble Lords mentioned a range of those investments. Higher education was mentioned by the noble Lord, Lord Giddens, while High Speed 1 and Crossrail were mentioned by others, as was investment in hospitals and schools.
In recent years, preceding the triggering of Article 50, the EIB lent an average of €6 billion per annum to UK projects alongside private investors. Compared to those private investors, the EIB typically offers competitive rates, as the noble Baroness mentioned, as well as support to projects through technical assistance. Another theme running through the debate has been the stamp of approval—the term used, I think, by the noble Baroness —or crowding in, mentioned by the noble Baroness, Lady Liddell, as the influence of the EIB in attracting other investments. I was impressed, as were other noble Lords, by the fact that it employs 3,000 full-time staff, many of them experts, providing the reassurance that other investors might need that these are worthwhile projects to support. Looking at SME finance, the EIB has been particularly important in funding regional SME funds, such as the Midlands engine and the northern powerhouse investment funds.
As we leave the EU, our relationship with the EIB will change. The EIB was established under the treaties, which state that only member states can be members of the EIB, so when we cease to be a member of the EU, we have to leave the EIB. Without being party political, I understand that the Labour Party’s policy is to leave the EU. Therefore, it follows inevitably that we would have to leave the EIB.
Under the terms of the withdrawal agreement financial settlement, the UK has secured the return of its €3.5 billion paid-in capital in the EIB, with payments being made annually for 12 years following exit. That agreement has run into a heavy volley of criticism, led by my noble friend Lord Trenchard, but I say to all those who criticise it that the final agreement was an improvement on the original EU position, which was to return the capital at the end of the loan portfolio’s amortisation. In the final deal, the UK’s capital will now be fully returned by 2030—some 30 years earlier than originally proposed.
The Government’s view is that this represents a good deal for the UK taxpayer, particularly by ensuring that there is no disruption to existing projects as a result of the UK’s departure from the EIB. We will of course continue to be able to draw down funds agreed prior to our departure.
There has been much comment about the future relationship with the EIB once we have left. The Chancellor has made it clear that we are open to the prospect of a future relationship and that discussions on a mutually beneficial relationship with the EIB group will take place during the next phase of the negotiations. The noble Viscount, Lord Waverley, talked about some of the options. We will look at the existing precedents and more bespoke options will be considered and explored as part of the next phase of the negotiations, as the Government have made clear.
The €3.5 billion represents the return of our full paid-in capital. As was mentioned in the debate, the EIB is not a typical commercial bank in that it does not pay dividends from its reserves to EIB members, and nor does the statute provide a precedent or a clear path for anyone to leave. It is important to recognise that the statute does not give members an automatic right to recover either capital or reserves—and, as I have just explained, the negotiated position was a significant improvement on the EU’s opening position. One cannot draw parallels with shareholders in conventional companies. Shareholders in a conventional company cannot expect the company to give their money back when they exit their shareholdings. Rather, they sell their shareholding in the market. However, given the nature of the EIB, that option is not available.
The noble Viscount, Lord Waverley, mentioned the Commission’s original investment, which was financed by member states through the EU budget contribution. The total value of the Commission investment based on the latest EU accounts is €581 million. The UK will receive a share of that proportionate to its budget contribution which, using an estimate of 12.4%, gives an estimated UK figure of €72 million—I think that that was the figure mentioned by the noble Baroness—or €14.4 million each year for five years. The repatriated amount will form part of the overall Article 141 process, so it is likely to be netted off UK contributions for that period.
The noble Viscount also asked whether we have a contingent liability of €36 billion. The answer is that we will maintain a declining financial commitment to the bank in order continually to financially back loans, including those given to projects in the UK granted by the bank during our period of membership—that seems to be fair. However, the commitment will decrease as the existing loans run down. This means that we could be called on to contribute further amounts to the bank, but this financial support will be called on only in very exceptional circumstances, and it is a matter of public record that the bank has never made a call on its callable capital.
Considerable concern was expressed that the EIB has reduced its funding for UK projects although we are still a member. We are aware that the EIB and the EIF are undertaking extra due diligence on UK projects in relation to the UK’s exit from the EU. We have been clear that while we remain a member of the EU, we enjoy the same rights as other member states to access EIB funding. More recently, good progress has been made with several UK projects receiving broad approval over the past year. There has been a loan of €350 million for the UK windfarm project. Triton Knoll was approved in April, while a loan of €1.65 million was approved for the Trafford Park tramline extension in June. In addition, in December last year two loans of €126 million each were approved for the UK companies South West Water and Stonewater social housing. Most recently, the Luton mass transport project had €120 million approved in February.
As the Chancellor has stated, we need to be prepared for all scenarios. We have taken action already by providing additional funding to support SMEs and we have launched a comprehensive consultation process on infrastructure finance to ensure that good infrastructure projects can raise the finance they need. We are determined to make the UK one of the best places in the world to start and grow a business. This means keeping taxes low and ensuring that businesses can access the finance and support they need. We have a comprehensive programme of activity to support businesses. The British Business Bank, which was announced in 2012 and became fully operational in 2014, aims to make finance markets work better for smaller businesses in the UK. British Business Bank programmes are supporting more than £5.9 billion of finance to over 82,000 smaller businesses, as of September last year.
In recent years, as I have just mentioned, the activity of the EIF has declined. We have taken action to address the gaps left by it. At Budget 2018 the Chancellor announced that, as the UK leaves the EU,
“the government will provide the British Business Bank with the resources to enable it to make up to £200 million of additional investment in UK venture capital and growth finance in 2019-20”.
That initiative was welcomed by many noble Lords who spoke in the debate, including the noble Baroness, Lady Falkner, and my noble friend Lord Trenchard. The Government made this funding available on 17 April to ensure that smaller businesses can access the funding they need.
Since the Autumn Budget that year, the bank has been a key partner in implementing the 10-year patient capital action plan announced by the Chancellor, which will unlock over £20 billion to finance growth in innovative firms. In addition, at the 2018 Autumn Budget the Chancellor announced new measures towards ensuring that defined contribution pension schemes can invest in patient capital.
The increased support through the Patient Capital Review means that UK government support for venture capital is now at a record high. Even before the announcement of the additional £200 million of funding for this year, the British Business Bank had the capacity this year to make commitments exceeding the combined average annual commitments from the EIF and the British Business Bank in the three years preceding the referendum.
Creating high-quality infrastructure—mentioned by many noble Lords—is critical. That is why we are increasing infrastructure investment, with the national roads fund reaching £28.8 billion and the biggest investment in the railway since Victorian times. Overall public investment is set to reach levels not sustained in 40 years.
The noble Lord, Lord Giddens, was concerned that the taxpayer would have to fund this investment in infrastructure, but it is not just the public sector that has this role. The private sector has a critical role to play, with around 50% of the £600 billion infrastructure pipeline due to be met by the private sector.
Lord Bruce of Bennachie
Will the Minister comment on the committee’s recommendation that the Government consider setting up a national infrastructure bank? That is exactly the mixture of private and public funds.
Lord Young of Cookham
Yes, I will come to that. That is one of the most important themes that has run through this debate.
Many noble Lords mentioned investment in decarbonisation and in green projects. We have a suite of tools to support private investment in infrastructure. The contracts for difference scheme has made the UK a world leader in offshore wind. The world’s largest offshore wind farm, the Walney extension, opened off the coast of Cumbria in September last year. Elsewhere, the offshore transmission owner regime has brought down the cost of connecting offshore wind farms to the grid, and we have reached 96% superfast broadband coverage.
Also relevant to the debate on infrastructure is the UK Guarantees Scheme, delivered by commercial experts in the Infrastructure and Projects Authority, which has £40 billion of capacity to ensure that good projects can raise the finance they need. We have given the UKGS additional flexibility to offer construction guarantees.
So while the EIB has been active in the UK market, it has worked within a successful and road-tested framework that supports investment. There is a strong appetite from the market to lend to UK infrastructure projects. Untypically injecting a note of party-political asperity, I mention that threats of renationalisation might constitute a threat to inward investment in UK infrastructure projects. We need to be absolutely clear that we do not frighten off the private sector from investing in infrastructure.
We recognise that there are still some challenges in financing infrastructure; for example, in how we respond to new technologies that carry higher risk and how we raise finance for very large projects. That is why at the Spring Statement earlier this year the Chancellor launched the Infrastructure Finance Review. This is looking at the strengths and weaknesses of the market, the role of the EIB, the Government’s existing tools and the institutional structures needed to deliver them. The review also explores a recommendation from the National Infrastructure Commission that if the Government do not maintain a relationship with the EIB, we should consult on establishing a new, operationally independent UK infrastructure finance institution. As the noble Lord, Lord Bruce, has just said, this links to the committee’s recommendation on consulting on a new UK infrastructure bank through the Government’s national infrastructure strategy.
This was one of the themes that I heard running through the debate: that this is something that the Government should consider very seriously. It was mentioned by the noble Baroness, Lady Bowles, the noble Lords, Lord Butler and Lord Bruce, the noble Viscount, Lord Waverley, and many others. The Government should reflect seriously on the points made not just by the committee in the report but during our debate about the need to try to replicate the characteristics of the EIB in generating crowding in of other investment, creating loans at a lower rate of interest and creating the stamp of approval, which was referred to earlier.
The formal consultation period closed in June, and while it is too early for me to share with noble Lords the formal results of the consultation, I can say that we have engaged widely and heard a range of views on the EIB, which we will consider when negotiating any future relationship. The Government have set out our intention to publish a national infrastructure strategy in the autumn. The results of the Infrastructure Finance Review will form part of that strategy, and there will also be a formal response to the consultation.
The noble Lord, Lord Giddens, asked whether UK business would be able to participate in Galileo post Brexit. In a no-deal scenario, future EU programme participation, including in Galileo, will need to be determined as part of any future relationship.
I am conscious that I may not have covered all the points raised in our debate and I will write to noble Lords on those that I have not dealt with. I cannot pre-empt the Government’s spending review at this stage. Obviously, that will be important when it comes to investing in infrastructure, but the Infrastructure Finance Review consultation shows that the Government are taking this issue very seriously.
The noble Baroness, Lady Bowles, and the noble Lord, Lord Butler, asked about debt management, the ONS and definitions. That is venturing into almost theological territory as the noble Lord, Lord Butler, will remember the Ryrie rules and the unending debate about whether or not something scored as public expenditure. It says in my brief that we will leave questions on the interpretation of the guidance to the experts at the ONS, which is an independent body. It is highly likely that a UK bank would fall within the PSND measure. However, the Government will take the views that we have heard on board as we develop our policy following the Infrastructure Finance Review.
Baroness Bowles of Berkhamsted
The point that I was trying to make with regard to ESA 2010 is that it should be in our laws because it was from the EU and we have actually now transposed it into our Brexit preparation legislation. It is not a question of us running on our own version of what we think national accounts are: we should be running on the version that we are supposed to have in our law. That is why there was ultimately the change with regard to student loans. I feel the urge coming upon me now to suggest that this must be looked at formally, because it appears that we have been doing it wrong. The response that the Minister just gave appears to be wrong. I have the advantage of having been chair of the Economic and Monetary Affairs Committee at the time of ESA 2010 and, even more, I had to be the rapporteur because it was so complex that nobody else would do it. I have a reasonably good vision of this point because it was very important.
Lord Young of Cookham
I have in front of me the relevant paragraph in the Select Committee report, which states that:
“The EIB’s liabilities do not feature on the national balance sheets of EU Member States”—
which was the point that the noble Baroness was just making—
“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”.
The report went on to say:
“The measure of Government debt does not fall within the scope of this inquiry”,
and that it,
“is for the Government to choose the best way to calculate public sector debt”.
The report then continued with the point made by the noble Lord, Lord Butler, that,
“such accounting decisions should not determine economic decisions about the optimal form of support for long-term infrastructure investment in the UK”.
That is a proposition with which I broadly agree. At the end of the day, we have an independent ONS that resolves these theological decisions as to what does and does not score as public expenditure.
Baroness Bowles of Berkhamsted
I must come back very briefly. I was not saying where the EIB should or should not be; the point is that national investment banks should also not be within the public sector accounts. It is clearly made in The Role of National Promotional Banks (NPBs) in Supporting the Investment Plan for Europe, which was issued by the Commission on 22 July 2015.
Lord Young of Cookham
I hope the eloquence of the noble Baroness will be heard by the ONS, which is at the moment the arbiter of what does and does not score. I have almost overrun my time. I thank once again all those who have participated in this debate. No doubt the committee will want to pursue this subject later this year when we have announced our conclusions on the consultation and have published our national infrastructure strategy and we have the result of the spending review. I hope that on that occasion the exchange may be more cordial.