Brexit: European Investment Bank (European Union Committee Report)

Lord Butler of Brockwell Excerpts

Tuesday 16th July 2019 Lords Chamber

[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.