Brexit: European Investment Bank (European Union Committee Report) — House of Lords, 2019-07-16
Topic: International Affairs
John Anderson (Crossbench, Unknown): 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.