Experts say UK infrastructure bank would face big hurdles

Chancellor Philip Hammond’s contingency plan to set up a UK replacement for the European Investment Bank after Brexit could take years to become fully effective and require at least £15bn of capital, according to industry experts.

Only EU member states can belong to the EIB — which has been an important source of lending for UK infrastructure projects — although that rule could in theory be changed if approved by all the bloc’s other countries.

The Treasury is keen to strike a new agreement with the development bank that would apply after Brexit in March 2019, but the European Commission’s position is that Britain will lose access to the EIB after the UK leaves the EU.

As a result officials at the Infrastructure & Projects Authority, a division of the Treasury, are drawing up alternative plans for a UK-only successor body.

Tony Meggs, head of the IPA, is understood to be overseeing efforts to model what a UK-based successor lender to the Luxembourg-based EIB could look like.

One of the biggest challenges for the Treasury is that while lending through the EIB is off the UK’s balance sheet, a new domestic lender would not be to the same extent.

This could impose fresh strain on the government’s balance sheet at a time when ministers are aiming to reduce public borrowing.

The issue would be compounded by the difficulty in establishing a British infrastructure bank from scratch, according to Werner Hoyer, EIB president. He described creating such a lender as an “enormous challenge”.

“For its size of economy, the UK should aspire to have something of the size of CDC or KfW [the British and German development banks] — it would take at least a decade to reach that stage,” he added.

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Under the EIB model, British taxpayers are on the hook for large liabilities if the bank was to fall into major difficulties, via a large amount of “callable capital”. But the UK’s actual “paid-in” capital at the EIB is relatively modest.

For a successor entity in Britain, the government would need to commit a large amount of capital to achieve similar levels of lending to infrastructure projects that it has secured in recent years via the EIB. It could be as much as £15bn to £20bn, according to one industry expert who declined to be identified.

This expert said the EIB’s unusual structure passed muster with credit rating agencies because it had “massive diversification” by spreading risk across an entire continent. A start-up lender in one country would need to provide greater comfort to investors and therefore more upfront capital, he added.

Some of that would be a contingent liability, but a significant proportion — a quarter or a third — would need to be in cash, said the expert.

He added: “The whole concept is very hard to envisage at a scale and effectiveness that would make the sort of difference which the EIB does . . . no one who understands this stuff believes there is a practical way of creating a UK infrastructure bank that comes anywhere near providing anything like the EIB.”

One former Treasury official said £15bn to £20bn estimate for the capital the UK would need to put into a British successor bank to the EIB was “a reasonable ballpark figure for the cost”.

The Treasury declined to comment. However, one Treasury official said that establishing a UK successor lender to the EIB was not official policy, and the preference was to retain a link with the Luxembourg-based bank.

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The EIB has outstanding loans in the UK worth more than £48bn, used to help finance energy, housing, transport and water projects.