How the EIB helps Scotland

The European Investment Bank has been of enormous help to Scotland since the UK joined the EU in 1973 but now all that is in jeopardy as we risk definitively leaving the EU without a deal at the end of the year – and will have to fall back on the nascent Scottish National Investment Bank or a UK infrastructure version to compensate (if at all). Britain’s continuing relationship with the EIB post-Brexit remains very unclear.

Scotland’s benefit from EIB funding in the past ten years:

As a result of losing access to EIB investments, the UK’s public infrastructure, including projects of great social and environmental importance, could face a multi-billion pound gap, says expert Micaela Mihov. “Leaving the EU will lead to the loss of essential EIB funding for critical British public infrastructure as well as funding for green projects, poor regions and SMEs. Short-term solutions include extending the UK Guarantees Scheme to fund large infrastructure projects. However, in the long-run, setting-up an infrastructure bank seems necessary to provide private investor confidence and support projects of high social and environmental significance. This will undoubtedly be a challenging and costly endeavour. However, leaving the EU without a solid long-term infrastructure investment strategy could have disastrous consequences for the future of British schools, social housing, transportation and other vital areas of public life.”

The EIB has invested primarily in UK energy, transport, and water projects, according to the Institute for Government. Recent projects include:

  • guaranteeing €200m loans to northern SMEs
  • a €220m loan for Merseytravel’s new trains
  • a €900m loan for the Thames Tideway Tunnel.

The EIB has invested primarily in UK energy, transport, and water projects. Recent projects include:

  • guaranteeing €200m loans to northern SMEs
  • a €220m loan for Merseytravel’s new trains
  • a €900m loan for the Thames Tideway Tunnel.

The EIB has invested €165bn in UK projects, just under 9% of its total investments between 1973 and 2017. The UK share of investment rose to 10% in 2015, after former chancellor George Osborne made increasing the share of investment the UK received a government priority.[5] It has since declined to 9% in 2016, and 4% in 2017.

What does the Withdrawal Agreement say about the European Investment Bank?

The Withdrawal Agreement states that:

  • The EIB will repay the UK’s paid-in capital in 12 annual installments, the first of which was paid in December 2019 (Article 150).
  • The UK is still liable for its callable capital – money which the UK is obliged to pay if the EIB suffered losses it was unable to cover using its accumulated reserves – for projects approved before 31 January 2020. If these liabilities are triggered, the UK will have to pay the EIB on the same terms as other member states, which will be decided by the EIB board (Article 151).
  • For projects which were approved before 31 January 2020, the existing UK–EIB relationship will stay in place. This preserves the EIB’s operating conditions to ensure that existing projects don’t face disruption because of the UK’s withdrawal from the EU (Articles 124 and 137).
  • After 31 January 2020, UK projects will not be eligible for EIB operations reserved for member states, and UK projects requesting loans or equity investments will be treated as “entities located outside the Union” (Article 151).

What has leaving the EIB meant?

As EIB finance is a cheaper source of finance than private equivalents, the UKs reduced access to EIB loans and equity investments will increase the cost of finance for projects.

If these higher costs are passed to taxpayers and consumers, then bills will increase – particularly in energy and water, where the EIB has lent extensively to UK projects. Water UK, the industry body for water companies, argues that consumers could face higher water bills[10] if regulated water companies lose access to EIB finance.

As there is some evidence that the EIB stimulated additional private investment by undertaking due diligence for and investing in novel and riskier projects (such as the Thames Tideway sewer tunnel), reduced access to EIB finance could reduce the number of UK projects in novel and risky sectors.

Some investors, however, argue that the EIB has crowded out private investment. Whether reduced access to EIB finance will affect private investment in novel and risky projects remains to be seen.

What does the Political Declaration say about the European Investment Bank?

The Political Declaration on the future UK–EU relationship, which sets the direction of the future relationship negotiations, notes the EIB as an area of shared interest for the UK and the EU, and notes “the United Kingdom’s intention to explore options for a future relationship with the European Investment Bank (EIB) Group”.

This has been a common objective across the May and Johnson governments. During the May government, various ministers repeatedly said that they wanted access to EIB finance on better terms than non-EU member states. The former chancellor, Philip Hammond, said in June 2017 that “it may be beneficial to maintain a relationship”[11] in the future. Responding to a parliamentary question in September 2017, former Brexit secretary David Davis said that the UK “will be looking to maintain an ongoing relationship”.[12] The joint UK–EU report on phase one of Brexit talks in December 2017 noted that the UK wants to explore a “continuing arrangement between the UK and the EIB”.[13]

But maintaining a relationship will be difficult. If the UK were to remain a member, it would require the EU27 unanimously agreeing[14] to amend Article 308 of the Treaty on the Functioning of the European Union which states that “members of the European Investment Bank shall be the Member States”.

Could the UK set up a domestic replacement?

Without a final deal on the EIB, several commentators have argued the UK should set up a domestic ‘Infrastructure Bank’ replacement. The National Infrastructure Commission, a non-departmental public body which advises the government on infrastructure investment, recommended that the government set up “a new, operationally independent, UK infrastructure finance institution”[15] by 2021, if the UK loses access to the EIB.

The government has not signalled it will do this. In the 2017 autumn budget, Philip Hammond promised that the government is “ready to step in to replace European Investment Fund lending if needed”,[16] though provided no details on this – and EIF lending is only part of the EIB’s overall investments.

The Johnson government ran a consultation on infrastructure finance between March and June 2019, and whether the UK needed to establish “a new, operationally independent, UK infrastructure finance institution”, but has yet to publish a response.

Any UK replacement would be resource intensive. Werner Hoyer, the president of the EIB, has said that it would take 10 years and significant upfront capital investment for the UK to set up a replacement with the equivalent capacity to make loans and equity investment.

*These figures only include regional investments. Multiregional, credit line, and global loans finance are not included. Between 2001 and 2016, region-specific investments accounted for 66% of the EIBs UK investments

Read more from these two experts:

Image: Wheatley Group gets £180m of funding to help improve and build thousands of affordable homes across Scotland via EIB