Brexit adds to UK infrastructure gap
UK likely to lose European Investment Bank funding
by Brian Unwin in London
Tue 30 Aug 2016
The Remain side may have overdone some of its warnings ahead of the UK’s referendum on European Union membership, not least the spuriously precise forecasts of George Osborne, then chancellor of the exchequer, of the effects on average household incomes. But most of the predictions by the ‘experts’ of Brexit's effects on sterling, confidence, investment and future growth are manifesting themselves, and the government clearly has only scanty ideas on what Brexit will look like.
Another potentially serious consequence of leaving the EU – the cessation of substantial low-cost long-term European Investment Bank lending in Britain – was barely mentioned during the referendum campaign.
The EIB, the EU’s ‘house bank’ and the largest multilateral lender in the world, specialises in lending for economically and financially viable infrastructure projects. As an EU member and EIB shareholder (like other large members, the UK has a 16.1% shareholding), the UK automatically qualifies to receive EIB loans.
In the past eight years the EIB has committed around €42bn to projects in the UK in sectors such as transport, energy, environment, housing, health and education. This year it will provide £107m for a new ‘super hospital’ in Birmingham; £580m for housing associations around the country; and another £1bn for the UK water industry, for which it is the main source of investment funding. The water industry has already expressed concern about where it will find alternative funding if EIB loans cease to be available.
There is no precedent for an EIB shareholder leaving the EU. But unless exceptional arrangements are agreed unanimously by the other member states and shareholders, the presumption must be that, if Brexit takes place, the UK as a non-EU member will cease to be a shareholder of the EIB and no longer qualify for EIB lending.
It is true that around 10% of total EIB lending has historically gone to non-EU members. But this has largely been channelled to developing countries (such as former dependencies of Britain and France) or to countries aspiring to EU membership (as in central and eastern Europe). It cannot be assumed that the other member states, which are suffering themselves from the uncertainties created by the outcome of the UK referendum, will wish to make a favourable exception for the UK.
At a time when Britain desperately needs to retain the confidence of external investors to promote economic growth and employment, and to help finance its alarming current account deficit, the loss of substantial EIB funding will be a serious blow to the government’s aspirations to steady the post-Brexit economic ship.
No obvious replacement for EIB funding is in sight. Unlike Germany, with its state-owned development bank KfW, the government does not have a ready-made UK development bank to step into the breach, and its own recent record on investment in infrastructure hardly inspires confidence – it is even relying on France and China to finance the proposed Hinkley Point nuclear power plant. Nor are any of the other multilateral financial institutions qualified to lend for specific projects in the UK. Resort to the International Monetary Fund, as in 1976, would only be made in a crisis.
The possibility remains of establishing a new UK infrastructure bank. But despite various proposals in the recent past, little has come of this to date. In any event, it would be very difficult and take time to establish any institution that could match the EIB’s reputation and market standing, as well as the bank’s unique practical expertise and experience in financing and promoting large infrastructure projects.
Sir Brian Unwin is a former President of the European Investment Bank (1993-99).
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