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.
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,
My Lords, I, too, 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.
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.
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,
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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.
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 it, 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.
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.
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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.
“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.
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.
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.
“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.
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.
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 project 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.
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 have 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.