Brexit: European Investment Bank (European Union Committee Report)
(4 years, 9 months ago)
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Baroness Falkner of Margravine
That this House takes note of the Report from the European Union Committee Brexit: the European Investment Bank (25th Report, HL Paper 269).
Baroness Falkner of Margravine (LD)
My Lords, I am delighted to introduce this EU Committee report on Brexit and the European Investment Bank. In doing so, let me start by thanking all members of the sub-committee who participated in the inquiry, some of whom cannot be here today. As I have stood down as chairman of the sub-committee after four years, let me say a word or two about what a privilege it has been to lead this committee. Over four years, the sub-committee has had 28 Members of this House serve on it and assist it with the production of some five reports and other associated papers. Most related to issues arising for financial services due to Brexit. This has involved a considerable workload, and members have engaged with it with the wisdom and diligence that has made the EU committee and its sub-committees so well respected in the UK and beyond. I am grateful to each and every single member of them.
Let me turn to the sub-committee’s secretariat. They are among the most knowledgeable in the House and have a thorough command of the complexities of both the EU and UK financial services dossiers. I am sure committee members will agree that we have been excellently served by Matthew Manning, the clerk, Erik Tate, our policy analyst, and Hadia Garwell, our committee assistant.
Given the importance of the European Investment Bank’s lending to the UK and the lack of any detail on the UK’s future relationship with the EIB in the Government’s Chequers White Paper, the EU Financial Affairs Sub-Committee undertook an inquiry on this topic from September to November last year. We heard evidence from a range of experts, recipients of EIB funds and existing lending institutions, including the EIB itself. We are grateful to all those who contributed. Although the focus was primarily on the European Investment Bank, we also considered the European Investment Fund, which channels funds to venture capital and private equity funds and in which the EIB is the majority shareholder.
Prior to the referendum, the UK was an outsized recipient of EIB funding, supporting a range of important projects, from £525 million to support the construction of the Beatrice windfarm off the Caithness coast, £825 million for ports and harbours across the UK, to £1.5 billion for the affordable housing finance programme —and add to this the £1 billion loan for the construction of Crossrail.
Since the UK’s accession in 1973, it has borrowed more than €118 billion from the EIB. Seventy per cent of this has been in the past 20 years, 45% since the financial crisis. One significant advantage to borrowing from the EIB is that its loans are cheaper and longer term than commercial alternatives. While it may be that some sectors will find the EIB’s financing easy to replace, we were told that some projects would not be viable without EIB funding—for example, some of the large-scale infrastructure investments made by UK universities—and although borrowers may be able to secure alternative funds, this will very likely be at a higher cost.
The EIB can also play a crowding-in role. Its expertise and high-quality due diligence serve as a stamp of approval for projects, encouraging private-sector investment. This is especially important when it comes to the higher-risk, innovative infrastructure projects with the associated new technology risks—and these are exactly the projects that will prove vital to addressing some of the UK’s most pressing infrastructure needs in future.
Given these benefits to the EIB’s lending, it is slightly disconcerting that there was a precipitous decline in its lending immediately after the referendum. In 2015, the EIB lent €7.8 billion to 47 projects. In 2016 it lent €7 billion to 54 projects. But in 2017 this dropped to €1.8 billion to 12 projects, and in 2018 it was €932 million to just 10 projects. A nearly 90% fall in such a short span of time is hard to attribute to anything other than the effect of the referendum—and many of our witnesses agreed.
The withdrawal agreement states that the UK will no longer be a member of the EIB and so will lose access to its lending facilities. One might therefore expect some clarity from the Government on what will replace the EIB, and whether that will take the form of a new relationship or alternative sources of funding. Our witnesses presented us with a range of options, from establishing a UK EIB subsidiary to creating a new multilateral development bank to co-operate with the EIB.
In the light of reports that the EIB’s president, Werner Hoyer, would be “extremely sad” if the UK’s continued participation in the EIB was no longer an option, we were disappointed at the seeming lack of ambition from the Government in thinking through options for such a future relationship. The Government said nothing about the EIB in their Chequers plan, and the outline political declaration said only that,
“the Parties note the United Kingdom’s intention to explore options for a future relationship with the European Investment Bank (EIB) Group”.
I reiterate the committee’s conclusion that, at least as an interim measure and certainly as a first step, reaching a third-country agreement with the EIB should be a priority.
The Government have an array of existing tools to support infrastructure projects, such as the UK Guarantees Scheme operated by the Infrastructure and Projects Authority, although witnesses told us that it is underutilised and insufficient. We also heard evidence of a range of examples of national promotional banks in other developed economies, from the Nordic Investment Bank to the Development Bank of Japan. Indeed, the UK had its own example of such an institution in the Green Investment Bank, set up in 2012 and privatised in 2017. Although focused on green infrastructure projects, this precedent could serve as a model and shows that such a lender can be created relatively quickly.
The Infrastructure Finance Review was announced in the 2018 Autumn Budget as our inquiry was ongoing. A consultation was launched in March this year, closing in June. In our report we called on the Government to consider the establishment of a UK infrastructure bank, and we welcome the inclusion of a question on this in the consultation. We hope that the Government take the committee’s view on board, alongside responses to the consultation.
There was more positive evidence on the European Investment Fund and the Government’s support of the SME sector. The Chancellor’s commitment in the 2018 Autumn Budget to increase the funding of the British Business Bank in the event of no deal was welcome. We also heard that the British Business Bank was increasingly acting as a “cornerstone” investor, involving itself earlier in investors’ activities, thereby replicating one of the advantages of the EIF. However, the BBB recognised that this fact might need to be broadcast more widely, as some witnesses did not seem to be aware of this change in their approach to financing.
Another issue that arose was the return of the UK’s €3.5 billion of paid-in capital. This was the issue that captured the most media attention and remains unanswered. Although the withdrawal agreement sets out a schedule of payments to return the money, we asked why the UK would not receive any share of the retained earnings. Member states are liable for uncalled capital, and the EIB’s retained earnings can be used by the EIB to avoid requesting such additional funding. There is a case to answer as to why the withdrawal agreement did not factor this in in its calculation of the financial settlement. Given the UK’s 16.1% stake in the EIB, a corresponding share of the retained earnings—€47.3 billion at the end of 2017—would amount to approximately €7.6 billion, which is more than twice the paid-in capital and almost a fifth of the £35 billion to £39 billion allocated to the financial settlement. Noble Lords will therefore appreciate the importance of establishing clarity on this matter.
We were unimpressed by the lack of any substantive response by the Government on this question. If there are good reasons for the UK not receiving a share of those earnings, whether legal or political, we would expect them to be set out explicitly so that their adequacy can be judged. The Minister failed to do so in evidence given to the committee and in the response to the report. I hope that tonight we will hear a response from this Minister as to the reasons, but I will go a little further and ask whether we can have an assurance that the return of the UK’s paid-in capital will be used for spending on projects similar to the EIB’s investments—in other words, to make up the shortfall, rather than being diverted into other areas of public spending.
The Government’s response to our report amounts to not much more than an acknowledgement of its publication. It fails to engage in any meaningful sense with the conclusions and recommendations contained in it. This falls well short of the expectations we have of how the Government should address recommendations made by a Select Committee of this House. Post Brexit, the UK will no longer be able to borrow from the EIB. This is a substantial loss. Given our green energy commitments, our housing priorities and our universities’ needs, venture and patient capital will be needed more than ever. Yet we find ourselves, with just over 100 days until the latest Brexit deadline, with no indication of how the UK will respond to the disappearance of a major lender to sectors that are central to meeting the UK’s present and future infrastructure needs. Surely we need to do better than that. I beg to move.
Viscount Trenchard (Con)
My Lords, I congratulate the noble Baroness, Lady Falkner of Margravine, on securing this much-needed debate and on having been such an excellent chairman of the EU Financial Services Sub-Committee, which I joined too late to have any input into this report. It is a privilege for me to follow her and to serve on the sub-committee.
The EIB has been a major investor in the UK since our EU accession in 1973. As the noble Baroness has already noted, the cumulative amount of EIB funding for UK projects since then is €118 billion, and it accounted for about a third of UK infrastructure investment in 2015. The European Investment Fund, 62% owned by the EIB, has also been an important investor in UK venture capital, facilitating access to finance for SMEs. The European Commission is also a significant shareholder, and 11.8% of the shares are held by private financial institutions.
Since 2015, EIB lending to the UK has declined by 88%, from €7.8 billion to €932 million in 2018. Similarly, EIF investment in the UK fell by 91% between 2016 and 2017. Such dramatic declines are obviously not based on objective assessment of the economics and quality of available investment opportunities in the UK. That will not surprise readers of yesterday’s FT article on the EIB, written by Rochelle Toplensky and Alex Barker. They quote the president of the EIB, Werner Hoyer, as saying:
“I am sometimes surprised that political leaders are not aware what kind of instrument they have in their hands”.
The EIB is,
“a political instrument. It serves a political purpose”.
The EIB’s balance sheet totals €556 billion—twice the size of the World Bank and more than 10 times the size of the EBRD. It makes a profit of about €2 billion a year and is very conservatively managed. Questions have recently been raised about the bank’s role and governance, and a,
“high-level group of wise persons”,
to use the typical nuanced EU-speak phrase, has begun to examine how it could operate independently of the EU. There is talk of splitting or relocating a part of its operations.
The shareholders, or members, of the EIB are the member states, and it is unclear whether a sensible future relationship post Brexit could be negotiated. Although the EIB can lend to third countries for development purposes—in 2017 approximately 10% of its lending was to around 150 partner countries—the political declaration stated merely that,
“the Parties note the United Kingdom’s intention to explore options for a future relationship”.
However, I tend to agree with the view expressed by Mr Tim Hames of the BVCA—that it is just not worth going through some convoluted arrangement to attempt to revise the EIB’s statutes so as to remain some kind of member and then end up putting in more money than we will get out. To do so would also require EU treaty change and it seems most unlikely that that could be quickly and smoothly negotiated.
Chapter 4 of Part 5 of the draft withdrawal agreement sets out what the Government had agreed with the EU concerning the UK’s relationship with the EIB after Brexit. Article 150 is mainly about the UK’s continuing liability for financial operations and risks entered into by the EIB up to the date of leaving. Paragraph 4 states that the EIB will return the UK’s paid-in subscribed capital, amounting to some €3.5 billion. This represents our shareholding of 16.1% of the paid-in subscribed capital, as the noble Baroness has already noted.
It seems extraordinary that we agreed to accept only the return of our paid-in capital. It is of course logical that we should also be entitled to receive our 16.1% share of the retained earnings. Adding in this amount, the net tangible assets attributable to our stake amount to €11.1 billion, more than three times what we have agreed to accept. Worse, the repayment of our paid-in capital is to take place over 12 years, until December 2030, without any payment of dividends or interest.
Furthermore, besides the marked decline in funding of UK projects since the referendum, from €7 billion in 2016 to less than €1 billion in 2018, Article 151 makes it clear that UK projects shall not be eligible for new investments from the EIB Group funding reserved for member states—which is of course the vast majority of it. To cap it all, the UK is to remain liable for its 16.1% share of the uncalled but committed capital in respect of the EIB’s financial operations as at the time of withdrawal. That could amount to a call of up to a further €35.7 billion. Given the conservative, risk-averse investment policy of the EIB, it is relatively unlikely that calls on this will be made. Nevertheless, this huge liability seems likely to survive our departure from the EU by more than 11 years.
Does my noble friend the Minister not agree that the terms of the disposal of our interest in the EIB are staggeringly poor from the UK’s point of view, and quite extraordinarily beneficial from the EU’s point of view? Why did we agree such terrible terms? The EIB may be a strange animal, and the Minister may tell me that the UK is not a shareholder because the EIB has members and not shareholders. But I learned in my first week in the corporate finance department at Kleinwort Benson that the members of a company are the shareholders: members are basically synonymous with shareholders. Why did we agree such a very slow return of our capital anyway and why did we agree that our liability for uncalled capital survives our leaving the EU and does not decline pari passu with our remaining shareholding? Why did we agree to give away our €7.6 billion share of the retained earnings? It is disappointing that the Government have not responded to the report’s request for a cogent explanation of the rationale for the position taken in the negotiations. I am hoping that the Minister will make good this omission when he winds up this debate.
It is very clear that we need to accelerate planning for a replacement for the EIB and I welcome the Government’s agreement to consider that as part of their current Infrastructure Finance Review. The National Infrastructure Forum has recommended the creation of a British investment bank and the National Infrastructure Commission is among those calling for the establishment of a new UK infrastructure bank. Germany’s KfW would perhaps be an appropriate model. Universities UK, which is also suffering from an abrupt decline in funding, also supports the report’s call for the Government to extend the UK Guarantees scheme. The report also welcomed the Government’s commitment to increase the resources of the British Business Bank when the UK loses access to the EIF. Of course, the UK in fact lost access to the EIF two years ago, de facto if not de jure. More needs to be done, and done quickly.
Lord Giddens (Lab)
My Lords, I also begin by congratulating the noble Baroness, Lady Falkner, on having chaired our committee so effectively and introduced this debate so tellingly. I also thank everyone else involved in the production of this excellent report.
I hope noble Lords will forgive me if I take a lateral approach to these issues. Today is a very notable day: the 50th anniversary of the launch of the Apollo mission to the moon. The moon landing was an evolutionary moment for the human species—more than just a giant step. After thousands of years, we were no longer earthbound. Much more recently, in January 2019, again for the first time ever, a robotic lander and rover touched down on the far side of the moon. Like Apollo, the mission was named after one of the gods, or rather goddesses, Chang’e—I hope noble Lords will forgive my Mandarin pronunciation—the moon goddess. Its objectives were largely economic. The space economy is seen by states and entrepreneurs across the world as the next big thing—the next huge thing in the case of China, which has massive plans.
In case noble Lords are wondering, the EU has by no means been left behind. The European Space Agency has 22 member states, one of which is the United Kingdom. It is an intergovernmental organisation but deeply integrated with the EU. These connections include the Galileo and Copernicus programmes and much else besides. Crucial to the success of the ESA has been the role of the European Investment Bank. Since the year 2000 it has invested €5.4 billion in the space and aerospace sector. The returns in terms of commercial applications alone have been huge. The space economy has grown five times faster than the overall EU economies since 2000.
The UK Space Agency has been allocated a central role in the Government’s industrial strategy and I would say quite rightly so. The country has in some ways been a pioneer. Yet as it leaves the EU, the UK is likely to lose access to EIB investment in this, as in all other areas. A no-deal situation, as everyone knows, is now a distinct possibility. Will the Minister confirm that, if the UK leaves the EU without a deal, British businesses will be unable to bid for any future work in the development of Galileo or other geostationary navigation systems? The Government have spoken of investing £92 million in a UK satellite navigation system, but that funding is trivial when compared to the sums the EIB is able to provide. Moreover, in July 2018 the EIB signed a new agreement—a formal arrangement—with the ESA for further large-scale funding of the space economy. In case this sounds oblique and marginal, it is in many people’s eyes the most significant future area of economic development globally.
I do not want to get lost in space. Back on dry land, as the report makes clear, the EIB and the EIF have been of core importance to a whole range of projects in the UK, especially those concerned with infrastructure, including in this category huge levels of investment in my main area of concern, higher education—many billions, in fact. As is noted in the report, EIB funding in the UK has fallen by not far short of 90% since 2016. The Government seem to have said very little about their plans for a future relationship with the EIB. Maybe the Minister will elucidate the Government’s position on this.
One main area of support where the role of the EIB has been particularly crucial is renewable energy. Green bonds have been deployed to help fund ecological development projects. Very substantial investment will be needed to radicalise some of these projects if the Government’s stated goal of reducing greenhouse gas emissions by 2050 is to be realised. What plans are in place to progress towards this goal in the likely absence of EIB support? Without them, this is just an empty commitment.
The report makes quite a few important points in its concluding summary and I hope the Minister will respond to most or all of these. I draw attention to just one or two. First, one of the great strengths of the EIB is its capacity to think long-term and provide stable funding to do so, so that, as I just said, there is no empty posturing. What mechanisms are the Government proposing to achieve such investment, which certainly cannot be funded from taxation alone but involves a massive influx of other forms of capital? Secondly, what could we learn from the example of KfW in Germany, testimony from which impressed some of us on the committee? It certainly impressed me. As the report observes, KfW has been called “the world’s safest bank”. Would the Government seek to set up some kind of analogue to this in the UK as a way forward?
Finally, will the Government acknowledge the crucial importance of an impartial Civil Service in working with financial institutions to think long-term? Bureaucracy gets itself a bad name, especially at a time when populist politicians peddle snake oil recipes for the future. Yet it is the condition of not only a stable democracy but effective forward-thinking and planning. I hope the Minister will agree.
Baroness Bowles of Berkhamsted (LD)
My Lords, I welcome this report, which explains how useful the EIB has been to the UK. It is a shame that, pre-referendum, this kind of information about the EU was not deemed interesting by most media—I know, because I tried.
In view of time, I will concentrate on chapters 4 and 5 of the report concerning the consequences of losing EIB access and how to replace it. For utilities, where there is a consumer on the hook, the private sector may well step in, at higher cost, and pass that on in the regular utility bills. Risk management and getting payment is easy and the Infrastructure Forum suggests—perhaps optimistically—that it will be an extra loan cost of 0.5% to 1%. However, there will be gaps that the private sector will not cover, such as technology, universities and regeneration, areas where there is also huge social and economic impact.
Action to plug those gaps is urgently needed, because the EIB money has already largely dried up in anticipation of Brexit. I was at international meetings where that consequence of the referendum was flagged by significant EU individuals. Steps to set up a UK investment bank should be taken as soon as possible, as well as meanwhile increasing and extending the guarantee scheme. It is no good hanging on to see if a future deal with the EIB transpires. That both loses time and fails to recognise that national investment banks are now an integrated part of delivering EIB group funding and would be an important component in any substantial EIB relationship and skill-sharing. We cannot just be supplicants.
Other member states have significant national investment banks that exist alongside the EIB. Those that have not had them are creating them. The communication from the Commission dated 22 July 2015 on the role of national promotional banks, as they are properly termed, explains quite clearly its rationale. Section 2.1 specifically lists ways that market failures happen, with R&D, infrastructure, education and environmental projects all flagged as areas of underinvestment. Section 2.2 of the Commission communication sets out the principles for setting up national promotional banks, which of course the UK did more selectively with the Green Investment Bank and the British Business Bank.
Why is the UK seemingly so reluctant about a broad investment bank? It seems there are two policy blocks. The first is aversion to state aid. Never was a truer word spoken than by Philip Duffy of the Treasury, who is quoted in paragraph 123 of the committee’s report. He says,
“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”.
This was said in the context of the British Business Bank, but it applies generally. The UK has been strongly against state aid and in favour of competition and has been a driving force behind strict competition rules, often much to the annoyance of other member states. However, that is a battle largely won, even if without the UK there might be EU slippage. It is time to set aside the mentality that it is a binary choice and the fear that if we give an inch all the other countries will take a mile. It is time to concentrate on looking after ourselves where we have market failures.
In a conference I chaired in 2016, the chief executive of Cambridge Enterprise said,
“we do have the world’s leading financial centre on our doorstep, yet we’re not able to support companies like ARM to grow bigger in the UK, because they couldn’t access the money that could be accessed by a much smaller company on Japanese markets”.
He also pointed out that,
“we can’t fund everything on a 10 year venture capital horizon, some things need 20 or 30 years”.
And we wonder why we do not grow super-large companies and why most of our universities have to sell spin-offs before they grow large, because they hit the so-called death valley of funding. My own experience leads me to agree with the witness quoted in paragraph 124 of the report that we have taken an overly cautious approach and massively underused what could be done.
Then we come to the second taboo: the statistical treatment of national investment banks in national accounts. The committee was categorically told that a UK institution similar to the EIB would feature in public sector debt on the national balance sheet. I am not convinced of the correctness of that treatment, and a witness quoted in paragraph 130 of the report also says that the UK’s calculation of public debt is “a complete outlier”. Therefore, can the Minister tell me whether the ONS is applying the European system of national and regional accounts, ESA 2010, correctly with regard to these matters?
The Minister may recall that there was a recent adjustment to the way student loans were accounted for in the national accounts. That story started when I spotted how it was being done during the Economic Affairs Committee inquiry on student loans, and we called in evidence from Eurostat. ESA 2010 makes it clear that national investment bank loans done at arm’s length, without needing government approval, are accounted for outside the general government statistics. They fall outside the EU stability and growth pact, and while that has no force on the UK, it is where the recommended debt and deficit maxima come from. This is conveniently explained in the July 2015 Commission document that I previously referenced, and it is also how I recall the ESA 2010 legislation. Does the UK wilfully depart from the international system of national accounts because that is what ESA 2010 is based on, or is the UK not prepared to set up an investment bank sufficiently independently from the Government that it is off the balance sheet? This is important in the debate between investment bank versus gilts and guarantees and squeezing the debt figures.
Lord Butler of Brockwell (CB)
My Lords, I start by saying how very much I have enjoyed serving on the EU finance sub-committee. I have now been rotated from it on to the Select Committee on the social effects of gambling. I hope one is not regarded as a qualification for the other. As has already been said, during the four years I have been a member of the sub-committee, it has been splendidly chaired by the noble Baroness, Lady Falkner, and very well served by a succession of clerks, particularly on this report.
When I was growing up, my mother used to say to me and my sister, “You will miss me when you haven’t got me”. I think the UK will say the same about the European Investment Bank. There are various statistics in our sub-committee’s report, but the most striking one has already been referred to: in the year before the referendum, the EIB financed no fewer than 40 different projects in the UK, amounting to one-third of our infrastructure investment in that year. Much of its funding has been in the energy sector, but it has also been very important in higher education. Since 2016, UK funding from the EIB has fallen precipitously by 87%.
It is important to understand that the EIB is not an aid agency; it is a bank. It examines rigorously the projects that it finances, together with the reliability of the prospect of repayment. It has substantially expanded its original capital over the years. That has been referred to and I will return to it later. Such is the reputation that it has built up over the 46 years of its existence for the quality of its scrutiny that it gives confidence to other investors. This brings in others to invest in the projects it supports.
On our departure from the EU, the UK will cease to be a member of the EIB and will become a third country. It will therefore cease to have access to EIB funding. Our committee received indications that the loss of the UK as a member will not be welcome to the EIB. For one thing, it will remove a substantial slab of the bank’s capital. But it can also be equated to a bank losing a good customer with whom it has had a long and successful relationship. The committee explored whether, following Brexit, the UK could retain its relationship with the EIB—something the Government have said they are interested in. Unfortunately, Article 308 of the Treaty on the Functioning of the European Union states that the members of the EIB,
“shall be the member states”.
Continuing full membership would require a treaty change and we had to conclude that this was an unrealistic possibility. The EIB provides some loans to non-member countries, but on a tiny scale compared with its loan to members.
In addition to loans for infrastructure investment, the EIB’s subsidiary, the European Investment Fund, supports SMEs and mid-cap companies through European venture capital and private equity funds. Loss of access to this fund can be partly replaced by the British Business Bank, whose resources were increased by the Chancellor in the last Budget in the event of the UK leaving the EU without a deal. The British Business Bank, led by the noble Lord, Lord Smith of Kelvin, is impressive, but, as the bank itself pointed out to us, it is a relatively new boy on the block and will need time to build up its reputation and clientele.
However, it is in infrastructure funding that the loss of access to the EIB will be felt most acutely by the UK. It was here that our committee felt, as the noble Baroness, Lady Falkner, said, on the basis of the evidence we received, that the Government are not regarding this problem with sufficient urgency. We also felt that, in accepting that the UK should not recover our share of the reserves that the EIB has built up on the foundation of the capital we helped to provide, our negotiators have driven a less hard bargain than the EU would have done if our roles had been reversed.
We recommend in the report that the Government should consider seriously, and indeed urgently, the National Infrastructure Commission’s recommendation for a UK infrastructure bank. Perhaps the Government are considering this, but we were given no hint of it. If the Government were to adopt the suggestion it would be important, as the noble Baroness, Lady Bowles, said, that a national infrastructure bank should operate independently of government, so as to attract the confidence of other investors, which the EIB has been so successful in building up.
As a former Treasury official, I endorse what the noble Baroness, Lady Bowles, said: it would be absurd if the Government were deterred from establishing a national infrastructure bank by the accounting convention that its capital would form part of the Government’s measure of public sector debt—a convention that does not apply to the EIB or other European countries. We cannot allow our hands to be tied behind our backs by our own accounting conventions.
Above all, our departure from the EIB will leave a hole in financing the investment in the UK’s infrastructure that all parties agree is crucial. We did not get the impression that the Government—no doubt preoccupied with other issues arising from Brexit—have addressed this matter with the urgency that it requires. Let us hope that the next Prime Minister will put a firework under the Treasury and get things moving.
Viscount Waverley (CB)
My Lords, this report can be commended for enabling negotiations with the EU to be arrived at in advance—an approach absent from Brexit negotiations thus far. I hope that the new political guard will take note of the messaging this evening.
The report recognises the worrying position we seem to be in regarding our investment in the EIB and the proposed financial compensation contained in the draft withdrawal agreement. If that was not enough, the effect of today’s news that the pound is dropping like a stone in reaction to a probable Brexit outcome makes the outlook on borrowing dismal, compounded by the generally parlous state of geopolitics and geo-trade issues, including financing. This debate is much about numbers. It would be helpful if the Government set out their proposals for their strategy on borrowing for UK infrastructure projects, given these additional challenges.
The mechanism to remove a member is not clearly defined in the constitutional documents of the EIB. The UK should not be accepting anything less than the fair value of its investment. This would equate to approximately €7 billion to €8 billion in value above the approximately €3.5 billion of paid-in capital on retained earnings alone. It appears that the UK will be liable for undrawn capital during the period in which it has been paying in capital until repaid. If this is called in, how will it be repaid? It is probable that such drawn funding is unlikely to be invested or lent back to UK organisations at all. Do the Government agree that the UK’s share of undrawn capital could be as high as €36 billion?
The negotiation of our sovereign value warrants greater focus. It seems prudent to look at alternative arrangements, either by renegotiating the current proposed terms, or by being more creative. For example, could the UK’s stake in the EIB be commuted into a direct shareholding in the EIF, given that owners of the EIF do not have to be members of the EU, as is the case currently with the EIB? Alternatively, could the UK exchange its stake for some of the UK investments or loans? This would ensure that the UK is able to remain a player in a non-obstructive and mutually beneficial way, post Brexit.
The UK has benefited from a number of key infrastructure loans from the EIB. Crossrail, for example, was a beneficiary of a £1 billion loan, with payments staggered annually. As the exit of a member state from the EU is unprecedented, will the Minister confirm whether outstanding loan payments confirmed would still be received by the UK in a no-deal scenario? Will the UK seek additional loans once we have exited, as Switzerland and Norway do? Given that the EIB’s mission is to make a difference to the future of Europe and its partners, such an arrangement would inject some much-needed confidence and positivity into the future of UK-EU relations, post Brexit.
I agree that the funding decline caused by the retraction of EIB support, be it via EIF or infrastructure-related investment and lending, must be substituted. This will have a compounding effect and get progressively worse. The British Private Equity and Venture Capital Association has remarked:
“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”,
a point raised by many in this evening’s debate. Tim Hames, the BVCA’s director-general, said:
“There is no question but that the referendum, never mind the actual date of Brexit, has already had a pretty fundamental effect. 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”.
This is a stark reminder of what is at stake.
The British Business Bank has done a good job starting to cover the shortfall. However, British Patient Capital has £2.5 billion of funding over 10 years, while the EIF provided £2 billion over five years, so clearly more needs to be done. Additionally, BPC is yet to substitute the EIF’s cornerstone function via its reputation drive, “crowding in”. It needs to transition to this role sooner and be ready to scale further, particularly if the EIF increases funding across other EU jurisdictions. The gaping hole in the numbers is the need to crowd-in UK private institutional funds, particularly pension funds, to replace the EIF. Neither the BBB nor the Government can do that in isolation.
Specifically on infrastructure investment, the EIB can provide funding for infrastructure projects and initiatives across numerous sectors—energy, education and transport are examples—at low interest rates, due to its own AAA rating and zero-profitability objectives. However, a legitimate question might be asked: what if no deal damages the EIB AAA rating and causes a downgrade? This unlocks the viability of large-scale and riskier projects, because the EIB will both cornerstone these projects and consequently unlock parallel private infrastructure funding, given the blended cost of capital of these projects as attractive. It is not clear whether the BBB would be able to replicate that. Can the Minister comment on this and previous questions, or write and place a copy in the Library?
The scope to create a new UK funding institution capable of tapping into the capital markets should be explored. It is critical that the UK develops an alternative to the EIB capital—one that not only ensures that projects can be funded, but also that we do not revert to projects that fit a prescribed risk-return profile.
The report refers to the renewable energy sector, with lower-risk return visibility of offshore, for instance. Would the substitute funding support such large and ambitious plans? The alternative must evolve in time, to ensure that it is an organisation with the capability to assess projects with the robustness of the EIB, whose reputation also drives the crowding in of private funders.
This is where a sovereign wealth fund, or one-stop shop, can contribute to creating a best-in-class organisation. There will certainly be benefits in a one-stop-shop delivering both SME ambitions and broad infrastructure programmes, which will need to be developed as the EIB scales back. There could be significant benefits to having a sovereign institution independent of government, particularly with respect to individual investment decisions, thereby generating greater confidence from investors, especially for long-term projects and crowding in investment from the private sector. Such an institution must be free from day-to-day political interests, though aligned with clearly defined strategic national priorities.
The report recognises that the skills to deliver EIF and infrastructure-type investment differ. However, any institution tasked with funding, deploying and governing these can be constructed with the flexibility to ensure that it tasks the most capable teams with delivering its overall investment objectives, working alongside appropriate stakeholders and leveraging central functions such as HR, accounting, investor relations and compliance.
In conclusion, the UK requires a new and bold sovereign wealth fund, created to fit the nation’s needs, one that can deploy its funding, no matter the source, in a commercially viable and responsible manner. There is no need to single out any specific technology innovation, given the ongoing and rapid rate of change, but it is critical that the right funding solutions are available for all sectors, now and in the future. That said, a new sovereign wealth fund, working alongside Innovate UK, will help to unlock opportunities such as blockchain technology and AI.
Baroness Liddell of Coatdyke (Lab)
My Lords, I draw attention to my entry in the register of Members’ interest. I too thank the noble Baroness, Lady Falkner of Margravine, for her time as chair of the committee. With her energy, knowledge and commitment, she will be an extremely hard act to follow. I regret that we will no longer have the wisdom of the noble Lord, Lord Butler, and I hope that someone reports to the Treasury, fastish, the idea that a firework should be put under them, because I cannot think of a greater threat from the noble Lord. If I may say, it would not have happened in his day, because it would not have been needed.
Turning to the European Investment Bank, no-one is going to put, “Leaving the EU means leaving the European Investment Bank” on the side of a bus. It sounds like an issue for pointy heads in Government, in the banks and elsewhere, but in reality it is about jobs, our quality of life and the nature of the country that we aim to be, for ourselves and our children and grandchildren. An interesting thing about the work of this committee is that it has allowed us to go deeper into the work of the EIB. I have been interested in the EIB for a long time, but not to the extent that has been possible within this committee. It is the world’s largest multi-lateral borrower and lender by volume, and it provides finance and expertise for sound and sustainable investment. Walking away from that, as we seem to have done without blinking, seems a dereliction of duty of monumental proportions.
We have heard much about this issue of retained earnings, and about the failure to engage with what is our proper return on the earnings that have been made by the European Investment Bank, and, frankly, the Minister seemed to just shrug, as if this was an aside that was not really bothering anyone. The EU Commission must be laughing all the way to the bank at the inability of Britain to engage on these issues.
We have in this country a real crisis of infrastructure. We see it with transport, but it can be seen in many other walks of life, not least housing. We jeopardise that by walking away from the EIB. We have heard distinguished academics talk this evening about the impact on the universities; that in itself is serious. My own area of interest, the mitigation of climate change, is critical in this area. If we are going to reach net zero, which is our aim, the scale of investment is going to be considerable. There is one very good example of where EIB funds changed part of the renewables industry. If your Lordships look at offshore wind, you will see that the costs have come down dramatically. The initial investment was considerable, but a break-even point comes when the costs start to go down.
Another area where I have an interest is in carbon capture, use and storage—you can tell I am interested in all the glamorous things. Carbon capture is a way of us meeting our targets, but it needs investment and is not the most glamorous investment in the world. The route to the European Investment Bank would help get us to a critical stage where Britain would have the capability to be a world leader; we have walked away from that.
I am also interested to know what work has been done in the Treasury and elsewhere to identify the views of those critical industries on how they will replace that funding. There must be concern about where that kind of funding might come from. Does it mean that future projects in this country will no longer be commercially viable?
A number of noble Lords have talked about the extent to which the expertise and knowledge of the EIB is very important in encouraging crowding-in from other investors. How is that to be replaced? When looking at a risky investment, it is important to have the confidence that others who are conservative investors are prepared to take the risk of investing in that project. It is long-term and really patient finance; giving people that kind of confidence is important.
We have not said much about the European Investment Fund tonight, but the role that it plays in relation to SMEs, particularly in critical and magical sectors such as fintech and bioscience, is important. Where is the replication of investment and of that critical due diligence? Often with such investments, it is not so much the money but the rigour of examining the capabilities of the industry and getting security on your investment for the future, by knowing that it will have the kind of rate of return that you anticipate. I would love to know who is working out how we replicate the expertise and experience. You cannot buy that off the shelf; it has built up over time. Although our involvement in the EIB and the EIF has really been only since we joined the EEC, the bank has been around since 1958. It is a substantial and long-term entity.
I would also be quite interested to know what work is being done not just with industries that may lose investments in the future but on blue-sky thinking about where, for example, a national infrastructure bank will identify that kind of innovative projects for the future. In that area both the EIB and the EIF, because of the eligibility for their funding, had a particular expertise.
I make no bones about it: I am extremely concerned about the impact of no deal on many of our industries, not least some of those vulnerable industries. In April, the Financial Times talked about the British Government going AWOL about what will be the scale and nature of finance for SMEs—innovative SMEs—in the event of no deal. If you balance that with the loss of EIB and EIF funding, quite a critical time is developing in our more innovative sectors and it is highly important that action is taken on that.
I do not want to be too overtly political, but sometimes I wake up in the middle of the night and wonder about the extent of some of the risks that we are taking, particularly by playing games with the concept of a no-deal Brexit. Could it be that the reason the Government have not been prepared to take a more aggressive stand on maintaining our involvement with the European Investment Bank—I appreciate that is almost impossible, given the need for treaty change—is that there are those within government who are frightened to admit how much we have benefited from those years of access to EIB and EIF funding? There is little logic in the situation we find ourselves in now concerning that kind of investment, and I have to confess that I am worried.
Lord Vaux of Harrowden (CB)
My Lords, this is the first committee report that I have been involved in since I joined this House. I add my tribute to the noble Baroness, Lady Falkner, for her excellent chairmanship of the sub-committee during this inquiry and more generally. I do not think that our new chairman has officially been appointed yet, but they have big boots to fill. I also thank our excellent clerk and policy analyst, Matthew Manning and Erik Tate, for the extremely hard work they have done on this report. Perhaps I may also take the opportunity to wish the Minister a happy birthday; it is very good of the noble Lord, Lord Young, to choose to celebrate it with us tonight.
The European Investment Bank is not a subject that creates many headlines, and before we started this inquiry, probably like many noble Lords, I had not fully appreciated just how important it has been to the UK in financing critical infrastructure and, through its subsidiary the European Investment Fund, investing in SMEs. Since it began, more than €118 billion has been lent in the UK, with the amount peaking in 2015 when €7.8 billion went to 47 projects. This financing has covered a range of areas, including notably renewable energy, transport, higher education, social housing and water.
Just as important as directly providing finance, as we have heard, a key benefit of the EIB is its ability to de-risk projects and thereby encourage and enable private sector investment—crowding in. A good example of this is offshore wind, where witnesses told us that private sector investment would not have been there without the EIB taking on some of the project risk and technology risk. Many witnesses cited, as a particular advantage, the EIB’s independent expertise and due diligence, and its team of 3,000 full-time staff, which underpin its ability to “crowd in” other private sector investments. If the EIB lends to a project, that gives a strong stamp of approval to other lenders who can then piggy-back on the EIB’s work and expertise. Despite not being required to make a profit, the EIB has been consistently profitable, making a surplus in every year of its existence. This has enabled it to grow its capital base substantially, without further recourse to its owners.
This leads to the most headline-grabbing element of our report, which a number of noble Lords have already mentioned. On withdrawal, we will receive only the €3.5 billion that we have paid in, with no share of the increase in capital that has accumulated during our membership. It is worth noting that this repayment is being paid out over 12 years, so it is effectively an interest-free loan for that 12-year period. When describing this outcome, the Government conveniently ignore the concept of the time value of money—the well-recognised idea that £1 today is worth more than £1 in a year’s time. Doing a back-of-the-envelope calculation, it looks as though the present value of the repayment is actually only about €2.8 billion, so we are not even getting the value of our money back, let alone any share of the additional value that has been created during our membership.
What is the reason for such a poor deal? The explanations we were given during the inquiry were, frankly, weak and simply seemed to be that there were no statutes governing withdrawal, so this was the best we could do. While it is debatable that our share of the accumulated profits, approximately €7.6 billion, is the correct figure, it is extraordinary that we do not even seem to have tried to obtain some share of the increase in the capital that has accumulated during our membership, nor any compensation for the 12-year payback period. I note that the Government’s response to our report completely ignores this point. It will be interesting to hear what the Minister has to say about this. Does he really believe this was a good deal?
Much more important than this one-off piece of apparently poor negotiation is the future for the financing of infrastructure investment. Since 2016, the level of financing by the EIB into the UK has fallen off a cliff, dropping by almost 90%, and this is while we are still a full member. One of the more depressing aspects of our inquiry was the apparent lack of ambition of the Government to seek any future relationship with the EIB. The EIB itself has stated that it would like such a relationship but, because of the separation of the withdrawal agreement from the future relationship, there seems to have been no meaningful discussion about how we might work with the EIB going forward. This is despite the EIB continuing to benefit from our paid-in capital for the next 12 years, and our leaving our share of increased value on the table. One might think that this could have given us some leverage to find a way to continue to benefit from EIB financing after Brexit. However, when pressed on the ambitions for a future relationship, David Lunn, the director for EU exit at the Treasury, said:
“We would go into it with an open mind and try to deliver a mutually beneficial relationship on the scale that made sense for it to be on”.
This lack of ambition is depressing. If you go into a negotiation with no clear goal for what you want to achieve, you are guaranteed to fail.
It seems likely that we will lose any meaningful access to the EIB, losing both the financing it provides and the crowding-in benefits from its expertise and credibility which has been referred to. Although the Government have taken action to replace the SME financing provided by the EIF by putting extra money into the British Business Bank, the position on wider infrastructure financing is much less clear, and the one-and-a-half page response to the report was, to be diplomatic, disappointing. It read a bit like the thank-you letters I used to write when I was 12, repeating the final paragraph and so on.
The Government have been running a consultation on the infrastructure finance review, which ended on 5 June. It would be interesting to hear if the Minister is able to give any initial feedback on this. However, it is not good enough for the Government simply to hide behind this consultation and twiddle their thumbs in the meantime. We effectively lost access to EIB infrastructure financing three years ago. Ensuring that the financing gap is filled is critical, as is replacing the expertise and credibility that the EIB brings. I hope that the Minister can tell the House what the Government’s current thinking is, and what their views are on our recommendation that they should consider the establishment of a UK infrastructure bank to support the future financing of key infrastructure after Brexit.
Lord Bruce of Bennachie (LD)
My Lords, I join all the other members of the committee in thanking my noble friend Lady Falkner for introducing this debate and for her chairmanship of the committee over the last four years. She has done it with considerable application, skill and expertise, and will be sadly missed. The staff who supported the committee were a class act, supporting the committee expertly, promptly and without complaint, in spite of the extreme pressures put on them from time to time.
It is shocking, but not surprising, that this debate is taking place in an empty Chamber. This is a monumental scandal of mismanagement by the Government and a failure of communication to the wider public of one of the serious consequences of leaving the European Union. Members of the committee, and all noble Lords who have spoken, have highlighted the benefits that this institution has provided to the UK—the billions that have been invested across a range of sectors. These benefits are not just financial but nuanced in other ways. The reputation and the AAA credit rating of the bank have unlocked substantial private and public finance, some of which would simply not have happened without the existence of the bank, which is about to not exist for the United Kingdom in the very near future, unless things change very sharply. Of course, we continue to contribute while the investment has almost disappeared. I find it extraordinary that we have allowed a situation in which the UK is not financed, when we are a full member, despite our still providing the resources for that investment.
The Government’s determination to deliver Brexit and, as a number of speakers have said, their ideological indifference—if not hostility—to the public-private partnership that the bank represents, mean that the impact of losing it has been very undervalued. This has been brought out in our report. All we asked for, and all we are getting, is our capital over a long period and without interest—indeed, as the noble Lord, Lord Vaux, said, not even the value of the capital. The retained earnings that our capital has helped generate will stay just that: retained.
I draw the House’s attention to the fact that during the coalition, the Liberal Democrats introduced innovative measures in this area. It was the Liberal Democrats who called for the establishment of the Green Investment Bank. It was Vince Cable who, out of the wreckage of the financial crash, secured the establishment of the British Business Bank. If the Government had thought ahead about the implications of Brexit, I suspect that they might not have privatised the Green Investment Bank. My instincts are that they would have privatised the business bank, had Brexit not happened, but they realised that this was a vehicle they needed to strengthen, rather than let wither away or sell off.
We need to look at how we can replace the EIB. The noble Viscount, Lord Waverley, made some interesting suggestions, which I am not sure would be welcomed by the EU, about how we might find a way of effectively locking ourselves back in through a shareholding of the EIF. It is an interesting idea. Again, if we were in the right kind of negotiating framework and relationship, it might just be possible.
Viscount Waverley
Does the noble Lord agree that the UK does in fact have a lot of experience, through the Asian Infrastructure Investment Bank, which is funding the one belt, one road initiative from China all the way through central Asia and beyond? Maybe there is a lot we could learn from that process.
Lord Bruce of Bennachie
That is indeed true, and of course, Danny Alexander is one of the directors of that bank.
The point, which has been drawn out by all the speakers, is that infrastructure banks—promotional banks, as my noble friend Lady Bowles described them—are well established in many countries. You could argue that the EIB was, in effect, Britain’s answer to that, but as we leave the EU, we do not have an answer to that. I think it fair to say that all the speakers have suggested that now is the time for the Government to think about a promotional bank of this kind, because it is very difficult to see how we are going to fund massive infrastructure projects and the kind of innovative financing for small and medium-sized enterprises that has been provided, and which we do not have any mechanisms in place to deliver.
The evidence we had from KfW, established in 1948 partly to deal with the Marshall plan, demonstrated how a bank of this kind can become a major national asset. Yet, somehow or other, the UK has tended to sniff at these ideas, and we do not have anything to compare to it. When I was chair of the International Development Committee, I argued the case for a British development bank—something that France, Japan and a number of other countries have an equivalent of. We have in the CDC perhaps the nucleus of an organisation that could become a development bank, but on reflection, on the evidence that this committee received, I am of the view that we should not set up a series of banks; we should consider having one national bank which has sectoral commitments. Infrastructure is absolutely necessary—small and medium-sized enterprise finance—but so are development and external activities. I ask the Minister to take away from this debate the fact that we would like the Government to give serious and considered thought to setting up a bank of this kind—and if not, why not? In other words, I ask them to explain their thinking and what the alternative might be, because it is not at all clear from anything the committee has heard.
It is worth noting that, even within the United Kingdom, Scotland is setting up its own bank. I suggest that it will find that difficult in the consequences of a Brexit, and certainly a no-deal Brexit, but at least it is a recognition of something. It would be a bit ironic if Scotland could do something that the United Kingdom feels incapable of doing. What is abundantly clear is that, once we are left to our own resources outside the EIB, the UK’s credit rating is unlikely to soar. It is already downgraded. It is likely to be further degraded. One of the consequences is that we will have difficulty borrowing money and it will be expensive to do so.
It is difficult to see how the UK can possibly replicate the advantages currently available through the EIB. As we have learned, the EIB has the advantage, first, of borrowing at the lowest possible rate and being able to pass that on, and secondly, because of its established expertise, of effectively crowdfunding other sources of investment. There is no institution in the UK that has the capacity to do that, and the UK’s credit rating will be such that, in the short to medium term, we will be unable to do it. The consequence of that—especially if we have no deal, the economy and revenues are shrinking, yet the infrastructure needs and the other investment needs are growing—is that the Government are going to face a huge black hole of astronomical proportions.
We heard the noble Lord, Lord Butler. My mother’s expression was, “You’ll be sorry when I’m gone”. It is the same thing. We are going to be very sorry when the EIB is gone because, as we have established, we can see no future relationship with the EIB; certainly not if we do not negotiate in a constructive way. Without that, we will be left with no viable alternative. We will effectively be in a situation where we do not have a fallback and we have a gap. The noble Viscount, Lord Trenchard, made the point that it was a terrible deal. I am a passionate remainer, but I cannot understand why, if we are going to leave the EU, we do not negotiate the best future relationship that recognises the contribution we have made. Whatever side of the argument you are on, simply to throw up our hands and hand it over was quite extraordinary. We were led to believe that when this was discussed with the board of the bank, the British representative did not even contribute to the discussion, which I find utterly appalling—an abdication of responsibility, if you like.
To conclude, I suggest that the Government have some very hard thinking to do and some very serious questions to answer. I hope the Minister will be able to answer some of these, but I respect him enough to know that those he cannot, he will take away and bring back: I ask him to do that if that is the case. If I may say so, in a very partisan way, this debate and this report tell me exactly why we should stop Brexit.
Lord Davies of Oldham (Lab)
My Lords, I too congratulate the noble Baroness, Lady Falkner, both on her conduct of an excellent committee and a splendid report and on the speech in which she presented the issues. All other contributions really just reinforced the main points she made, which covered an excellent report that presents to the Government a series of very acute challenges. The Minister is of course adept at dealing with such things, but we expect some fairly clear answers to several of the issues that have been established on all sides this evening.
It is not often that I agree with the noble Viscount, Lord Trenchard, on economic issues, but I certainly agreed with him this evening when he indicated that we have to be careful about allowing the accountancy to dictate our whole strategy to meet the economic challenges we face. There have been many calls from all sides of the House that the Government really must not fall behind the old blocks of their defensive position on the problems of government debt, when significant levels of investment are obviously necessary. Of course, it is clear from the report that we have lost a very substantial part of our investment. For investment to drop by nearly 90% is a significant tragedy. This, after all, is one of the most significant investors in our infrastructure and it covers a wide range of areas. Noble Lords identified the environment, higher education and a range of other issues which will lose the investment that this bank provided. We all want to know what steps the Government are taking to repair the damage and provide the investment.
At the same time, the Minister has to address the fact that none of us in this House can understand how we reached an agreement in which we get the repayment of the capital that has not been utilised thus far but make no gains at all from our years of investing in the bank. Some government negotiation arrived at that judicious position. We all worry about the broader issues of negotiation with Europe, but this stands out as a pretty clear indication of how weak the Government’s position was at times.
We also recognise that infrastructure is a crucial aspect of the development of any economy, particularly an advanced economy such as ours. We have not had a good record in the past; the Government have to face up to the fact that their record is pretty dismal. The two areas on which they are making some progress were inherited from the previous Labour Government—HS2 and Crossrail, the latter of which is of course subject to fairly significant delays at present. Most of the other rail initiatives—the cross-Pennine route and the opening up of the London to Sheffield route—have been put into cold storage for the time being. It is not as if we have a surfeit of funds for infrastructure, yet we are discussing this evening how we have cut ourselves off from a crucial supplier.
We must also recognise how noticeable it is that regional issues are coming more to the fore. We all know why London has been pre-eminent for so long. We all know the significance of the City of London, but that does not mean that you do not have proper respect for regional development. There is absolutely nothing in the Government’s current position which gives us any encouragement on that, yet resources that we were getting from the investment fund from Europe offered some possibilities on that front. This is another crucial area which we lose.
My noble friend Lord Giddens asked us to consider a rather wider agenda: a future which related to the space industries, on which we have a past record of investment and in which we are well placed to play a leadership role. However, he identified that here, again, was a necessity for government action. Can any noble Lord recall, apart from my noble friend’s contribution today, the last time we had a debate on the space programme and the role that Britain might play in it? Of course, the anniversary of the moon landing was a pretty predictable date—there is bound to be colossal public interest at this time—yet I cannot recall the Government making any significant contribution on it.
Of course, the Government are not in a position to think about spending too much, because after a decade of running the economy they are still stuck with their hugely significant debt and the real problem of how they distribute it. It is true that a future Prime Minister can easily produce a massive tax cut for the very wealthy in our society, or certainly those earning over £80,000—but is that not the same individual whose bus suggested that enormous millions would accrue to the British economy from Brexit? Well, we are defining the reality of Brexit this evening, and we are not talking about hundreds of millions of pounds accruing to the British economy.
It is quite clear that the Minister must give some response to the gap which has opened up. After all, he knows that it is a product of the withdrawal agreement that we reached and the negotiation which took place at that time, and noble Lords have identified just what the cost is for us. Because the investment bank covers a wide range of British economic activities, the cost will be and is being borne across the board.
We on our side of the House enjoy a certain degree of criticism of the Government but we also have enormous respect for a disaffected electorate who want to see success from political leadership. That is why we are quite clear that, if we came to power, we would launch a national investment bank, address regional disparities, and set out to ensure that resources were directed towards improving our productivity as well as our wage levels, which have been so depressed over this last decade. We would also seek to ensure, through a rather more imaginative immigration policy than the Government pursue, that we have the necessary high-level skills to ensure that we get the levels that the financial services sector will demand. We should be wary of restrictive blocks on skilled people who are essential to our economy.
These are possible developments. They of course require a degree of commitment by the Government to a clear policy. But what the Government committed themselves to and are still largely saddled with is in fact clearing debt—not investment in the creative part of the economy at all, but seeking to ensure that their credit rating holds to a certain level. No one will decry that in its entirety, but one can overload that dimension of financial and economic life to the extent that the economy suffers constant low levels of growth and constant problems with our productivity.
There are solutions. I was grateful to the noble Viscount, Lord Trenchard, for mentioning the German bank and the role which it plays in the German economy. It is not as if we do not have a model of the way in which we can create productive resources which can be independent of government yet act as a reaction to any downturn in the economy. He made that point clearly. As I said, it is not often that the House is in total agreement, but if he and I can agree on a strategy this evening, we hope the Government can too.
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.
Baroness Falkner of Margravine
My Lords, it remains for me to thank all Members who have spoken tonight. There were some excellent speeches that will merit rereading in Hansard tomorrow.
The Minister shone a little light on the negotiations with regard to our retained earnings—a very little light—but perhaps he shone slightly more light on the success of having got our money back a little earlier than originally envisaged when the negotiations started. However, given the late hour, and given that he has had an extremely long working day on his birthday, I think the whole House will wish for him now to be rewarded with a little light refreshment. I thank all noble Lords.