Brexit: European Investment Bank (European Union Committee Report)

Lord Vaux of Harrowden Excerpts

Tuesday 16th July 2019 Lords Chamber

[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.