The European Investment Bank and the UK’s missing £7.6 billion

by Shaun Richards

The European Investment Bank is a major part of the European Union’s and also the Euro area’s infrastructure. Yet so many have not heard of it which I plan to begin to correct today. But there are also big issues and a possible expensive error on the way as the UK’s relationship with it gets set to change assuming that the UK does carry out some form of Brexit. As we stand the UK is one of the four largest shareholders ( along with France,Germany and Italy) with a shareholding of 16.1% or 39.2 billions Euros according to the EIB.

What is the EIB?

The first impression is that it is very large as we look at the scale of its operations.

Since its establishment in 1958 the EU bank has invested over a trillion euros.

Even in these inflated times that is quite a lot and it is expanding fast.

Lending: From ECU 10bn in 1988, our annual lending neared EUR 45bn in the mid-2000s before jumping to EUR 79bn in 2009 as a temporary response to the crisis. It was EUR 55.63bn in 2018.

In terms of its own operations it has been a win for Luxembourg. Quite a win really when you note its very small shareholding in the venture.

Our HQ: Founded in Brussels in 1958 as the Treaty of Rome comes into force, we moved to Luxembourg in 1968. We relocated to our current site in 1980 with a major new building extension completed in 2008.

As to its lending this is described here.

We support projects that make a significant contribution to sustainable growth and employment in Europe and beyond. Our activities focus on four priority areas:

 

Innovation and skills are key ingredients for ensuring sustainable growth and creating high-value jobs.

 

Small and medium-sized enterprises (SMEs) are important drivers of growth, innovation and employment in Europe…..Supporting access to finance for SMEs and mid-caps is a top priority for the EIB Group.

 

Infrastructure is an essential pillar that interconnects internal markets and economies.

 

As the EU bank, we have made climate action one of our top priorities and today we are the largest multilateral provider of climate finance worldwide.

We commit to climate change adaptation and mitigationmore than 25% of our total financing.

One way of looking at the EIB is that it’s role involves some regional policy which is of course an apposite issue both across the region and within the Euro area. Although it comes with buzzwords and phrases like “smart,sustainable and inclusive growth” which mean what exactly?

As the EU bank, promoting economic and social cohesion is one of the principles that guide us throughout our activities. Our investments support the delivery of the Europe 2020 strategy for smart, sustainable and inclusive growth.

Also it operates a financial version of foreign policy.

Outside the EU, the EIB’s activities reflect EU external policy. The EIB is active mainly in the pre-accession countries and eastern and southern neighbours.
The EIB also operates in African, Caribbean and Pacific countries, Asia and Latin America, financing local private sector development, social and economic infrastructure and climate action projects.

Where does the money come from?

You may have spotted that the capital quoted is less than the lending with a ratio of one to a bit over four.

Building on its financial merits, the EIB is able to borrow at attractive rates, and the benefits of EIB’s borrowing conditions are passed on to project promoters.

It also specialises in what it calls green finance.

The Bank plays a leading role in the Green Bond market. The EIB issued the world’s first Green Bond in 2007, called Climate Awareness Bonds (CABs). Since then, the Bank has expanded CAB issuance across a number of currencies, providing benchmark size transactions in the core currencies EUR, USD and GBP.

It borrows very cheaply as last week it issue a three-year US Dollar bond at only 0.114% over what the US Treasury can borrow at. In January it borrowed for ten-years in Euros at a mere 0.742%. So we see that especially in these times of ultra-low interest-rates and bond yields the EIB is a vehicle that can provide lending for a very low annual cost. In that sense it has been quite a triumph as I do not believe it is picked up on national balance sheets and when I checked with the UK Office for National Statistics only realised numbers are picked up which matters as pretty much all of it is notional.

The UK and the EIB

The House of Lords reported on its role in the UK at the end of January.

The European Investment Bank (EIB) has been active in the UK since 1973,during which time it has lent more than €118 billion to key infrastructure projects…… In 2015 alone, the EIB provided £5.6 billion for 40 different projects, amounting to approximately one-third of total investment in UK infrastructure.

This provokes an immediate thought about another bank namely the Bank of England. The Funding for Lending Scheme which began in the summer of 2012 was supposed to push small and medium-sized business lending higher but did not, That looks even more of a failure as we note that until recently the EIB has been expanding its support of lending.

Next although the House of Lords do not put it this way we have a clear driver of the fall in business investment in the UK which was picked up in last week’s economic growth (GDP) data.

This is all the more worrying given the 87 percent fall in EIB funding since 2016 and the fact that new UK projects will no longer have access to the EIB after 29 March 2019, until and unless a future relationship is agreed.

So I can only support this conclusion 100%.

It is therefore seriously concerning that, with Brexit and the associated loss of access to EIB financing a matter of
weeks away, the Government has said nothing publicly about its ambitions for a future relationship with the EIB.

With the problems in the UK infrastructure arena with the failure of Carillion and the more recent problems at Interserve already providing flashing warning lights this echoes too.

Losing access to the EIB will have negative consequences for the financing of UK infrastructure. Not only does the EIB offer cheaper and longer-term loans than commercial lenders, but the quality of its independent expertise and due
diligence also provides projects with a stamp of approval that crowds in additional private investment.

Comment

There is a lot to consider here as we mull what is an organisation with many successes but also issues as we note it has come under more political control. For example the way it has a role in the financial version of foreign policy and being used as a type of Euro area fiscal policy under the ( Jean-Claude) Juncker Plan. Those are political rather than financial choices.

Next comes the issue of how the UK might Brexit from this and looking at the House of Lords report it is quite a scandal.

Under the Withdrawal Agreement, the UK will, over a period of 12 years, receive the €3.5 billion of capital it has paid in to the EIB. However, the UK will not receive any share of the profits that the EIB has accumulated, nor any
interest or dividends. Given that this could amount to €7.6 billion, almost 20 percent of the UK’s obligations under the £35–39 billion financial settlement, we regret that the Government has failed to provide an adequate explanation of the position taken in the negotiations.

Whoever is responsible for this on the UK side should be named and shamed.

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