Brexit: European Investment Bank (European Union Committee Report)

Viscount Waverley Excerpts

Tuesday 16th July 2019 Lords Chamber

[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.

--- Later in debate ---

[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.