EU Financial Affairs Sub-Committee publishes report on EIB funding post-Brexit

Posted in Banking and finance Infrastructure, mining and commodities

The UK will cease to be a member of the European Investment Bank (EIB) following its departure from the European Union (EU), currently scheduled for March 2019, meaning that UK infrastructure projects will no longer be automatically eligible for financial support from the EIB. Although the draft Withdrawal Agreement confirms that pre-approved projects signed before the departure date will be unaffected and will remain eligible for EIB support, it is silent on the extent of Government funding post-Brexit for other infrastructure projects (for more information, see our blog post: The draft Withdrawal Agreement: funding for infrastructure and innovation projects).

On 31 January 2019, the EU Financial Affairs Sub-Committee published a report ‘Brexit: the European Investment Bank’, which discusses the potential consequences of the loss of EIB funding, as well as calling for the establishment of a UK infrastructure bank, ahead of the UK leaving the EU. Key takeaways from the report include:

  • cheaper, longer-term financing is one of the key benefits of EIB funding – the report highlights the benefits of EIB support for long-term investments which, if lost, will have negative consequences for the financing of UK infrastructure projects. Financing periods offered by the EIB are significantly longer than those offered by commercial lenders and help reduce the risk of refinancing before project completion. Losing access to EIB funding may mean certain projects are no longer commercially viable;
  • projects using new technologies or those which fall within the EIB’s social mandate may be adversely affected - the loss of EIB funding will have different effects on different sectors of the economy. The report notes that utilities such as water and sewerage may be able readily to access alternative sources of finance, albeit at an increased cost. However more innovative projects, or those that fall within the EIB’s broader social mandate (such as universities or regeneration projects), may struggle to raise money in the private sector;
  • independent expertise and high-level due diligence is a key benefit of access to the EIB – the EIB’s ability to conduct effective due diligence is down to its in-house experts, from finance professionals to environmental experts, responsible for reviewing projects that the EIB is involved with. This due diligence gives projects a “stamp of approval” and is essential for attracting further private investment. The report notes that the Government must ensure that means to replicate the EIB’s independent expertise and due diligence continue to be available post-Brexit;
  • the Government failed to explain its rationale for agreeing that the EIB’s profitability will not be taken into account in the calculation of the financial settlement – the Withdrawal Agreement makes clear that, over a period of 12 years, the UK will receive the EUR 3.5 billion of capital it has paid in to the EIB, but not any share of the profits, interest or dividends that the EIB accumulates over that period. Whilst the report recognises that the negotiations around the financial settlement were particularly complex, it notes that such a loss amounts to approximately 20 per cent (or EUR 7.6 billion) of the UK’s obligations under the financial settlement and that the Government should provide a clear explanation as to why this position was taken;
  • the UK Government should establish a UK infrastructure bank, an independent institution responsible for supporting the financing of UK infrastructure projects post-Brexit – the report emphasises the importance of minimising the financing gap for UK infrastructure projects as a result of the revocation of EIB member status should an ongoing relationship fail to be established post-Brexit.

The report notes that the need to finalise a contingency plan should be an immediate priority, having seen a sharp decline in EIB investment in the UK, by 87 per cent between 2016 and 2017. A temporary solution could be a third country arrangement with the EIB, which would enable EIB lending to continue. Other possibilities include extending the UK Guarantee Scheme to projects that are currently eligible for funding from the EIB and allowing it to offer different financing options. The report welcomes the Government’s commitment of additional funds to the British Business Bank, but the Bank needs to make greater efforts to show that it can fulfil the function of enhanced due diligence and acting as a cornerstone investor to attract further private investment.

Finally, the report proposes the introduction of a separate institution, a UK infrastructure bank, to support the financing of UK infrastructure projects post-Brexit. This has received backing from the Infrastructure Forum’s EIB Working Group and the National Infrastructure Commission (NIC). This institution could take on the role of conducting credible due diligence, giving confidence to private investors, much as the EIB has previously done. The committee has urged the Government to consider this issue as part of its infrastructure finance review and National Infrastructure Strategy, to be established by 2021.

 

 

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