Lords call on government to establish UK infrastructure bank

Out-Law News | 04 Feb 2019 | 12:30 pm | 2 min. read

A House of Lords committee has suggested that the UK government should establish a UK infrastructure bank to plug the gap left by loss of access to the European Investment Bank (EIB) after Brexit.

The EU Financial Affairs Sub-Committee said in a report that losing access to the EIB could lead to a significant funding gap in the UK, particularly for large infrastructure projects. The committee found there had already been an 87% drop in EIB funding for UK projects since the referendum on leaving the EU in June 2016, and a 91% decline in funding from the European Investment Fund (EIF).

The Lords said unless a withdrawal agreement with the EU is negotiated before the exit day on 29 March, UK projects would have no further access to EIB funding. The report said it was "seriously concerning" that the government had not issued any public statements about the future relationship with the EIB.

It said the government should explore the possibility of establishing a UK infrastructure bank within its infrastructure finance review, and launch a consultation on "the possible design features" of such a bank in the upcoming National Infrastructure Strategy.

Infrastructure expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com, said replacing the EIB with a UK infrastructure bank would not be a "panacea".

"More needs to be done to regain international investors' confidence too," Hart said. "The UK’s political risk is now a major issue for investors and making long-term investment decisions is increasingly challenging - however, a fact which is often forgotten is that the UK set the gold standard for private financing structures."

Hart said the government should use the opportunity to "de-toxify the use of private finance in government infrastructure", following the abolition of the private finance initiative (PFI) and its successor PF2 by chancellor of the exchequer Philip Hammond in last year’s Autumn Statement.

"Devolved governments in Wales and Scotland demonstrate there is still a place for public-private partnership models alongside other forms of procurement and funding for projects,"Hart said.

"The successful financing for the Thames Tideway super-tunnel was also seen as a major step forward for allowing private investment into specific projects, but the industry may need to prepare for an unduly politicised approach and closer regulatory scrutiny in the wake of Brexit," Hart said.

Witnesses to the Lords' inquiry said infrastructure funding could be provided by the private sector, but at a higher cost than EIB funding received so far.

However the report noted that some sectors within the EIB's "broader social mandate" could struggle to raise private finance, with social, environmental and housing projects particularly hard-hit. There could also be an impact on universities' infrastructure investment if access to the EIB was lost, the report said.

The Lords said the government should take urgent measures to minimise the financing gap for UK infrastructure. One way could be to extend the UK Guarantees Scheme, which guarantees funding for "nationally significant" projects.

It said a national infrastructure bank which was independent from government would generate greater investor confidence and could play a counter-cyclical role in the event of an economic downturn.

The report said the government should consider the advantages and disadvantages of a UK infrastructure bank financing itself through the capital markets, as the EIB does.

The Lords said while the starting point for a future relationship with the EIB would be as a third country after Brexit, the government should explore options for a deeper bilateral relationship. A third-country agreement would enable some EIB lending to continue at a reduced level as a temporary measure.