The UK is set to lose access to European Investment Bank finance at the end of the Brexit transition period. Although the supranational bank does lend outside the EU, it is at a much reduced level. There have been calls for the government to set up an independent infrastructure institution which is free from political interests and providing similar benefits to that of the EIB. It was mooted in the House of Lords’ European Union Committee report published in January 2019.
Whilst the government could fund the infrastructure very economically at the current time thanks to the ultra-low cost of government borrowing, that debt would sit plainly on the sovereign balance sheet. Hence the attraction of creating an arms-length national infrastructure institution that finances itself on the capital markets, like the EIB does. And what could be a more opportune time than in the immediate wake of the pandemic and as the date of leaving the EU draws rapidly closer, for an institution with a distinctive development and support role to back up the Chancellor’s aim of “investing historic amounts in British innovation and world-class infrastructure”? Should it be forthcoming, an announcement in the autumn statement for the establishment of a new large public infrastructure institution would be a key step in progressing from ambition to commitment.
There are several national promotional banks encouraging investment in their domestic economies: Germany’s KfW, the Nordic Investment Bank, Bpifrance, Canada Infrastructure Bank and the Development Bank of Japan. We had our own, the Green Investment Bank set up in 2012 with £3bn of government funding but which was subsequently sold. Acquired by Macquarie Group in 2017 it now has an international rather than a strictly UK focus.
The EIB has been an important provider of funding for the UK for projects spanning the areas of energy, housing, transport and water, loaning over €118bn since 1973 including almost €83 billion in the past twenty years. Projects include London Crossrail, Aberdeen Harbour Expansion, Greater Manchester Urban Regeneration, and many in the higher education, affordable and social housing and waste management sectors.
The route to EIB funding has involved much more than a simple phone call to the lender, as is currently the case for local authority borrowing from the PWLB. However, the supranational’s ability to provide assured, long-term funding at competitive rates and with greater flexibility on drawdowns is valued by borrowers. An added benefit is the quality of the EIB’s due diligence and robust appraisal prior to lending. Its engineering, scientific and financial expertise which underlie its assessment confers a unique stamp of approval on projects which are accepted for funding and is a catalyst for attracting other lenders to also invest alongside (the EIB typically covers up to 50% of a project’s total cost) and is particularly effective for large-scale syndicated funding.
Could the UK’s new infrastructure bank be along the lines of KfW - Kreditanstalt Für Wiederaufbau (Credit Institute for Reconstruction) – the development bank owned 80% by the German sovereign and 20% by its 16 states? By funding itself from various sources including from international capital markets at very competitive rates, it has played a pivotal role in the German economy having provided more than €1 trillion in loans, of which €77bn was provided in 2019 alone.
The EIB’s and KfW’s bonds are much sought after by investors. From a credit perspective, the issuers’ sound asset quality, strong access to international debt markets, low-cost capital and guarantee frameworks are compelling.
A new public development bank serving UK public policy objectives through domestic on-lending on very attractive terms, one which has appeal for borrowers and investors - what’s not to like? Let’s hope the Chancellor delivers soon.