- Between 2011 and 2015 the European Investment Bank (EIB) lent over €29bn to the UK.
- Long term financing from the EIB has been key to getting many infrastructure projects off the ground.
- If the UK votes to leave the EU, new UK projects may have to look for other sources for long term financing.
The European Investment Bank (EIB) has become increasingly important as a key financier for infrastructure projects in the UK. All its lending (including the 10% outside the EU) supports EU policy aims, particularly growth and employment in the EU. If the UK leaves the EU, depending on what replacement relationship it develops with the EU, it risks losing access to this important source of finance. Save where stated, information about the EIB used in this article is sourced from the EIB website as at 30 April 2016.
The European Investment Bank (EIB) was established under the original “common market” treaty, the Treaty of Rome, which came into effect back in 1960. It has grown with the evolution of the European Union (EU). The EIB is a non-profit organisation whose lending policy is framed to advance the aims of the EU, particularly growth and employment in Europe. Its members are the member states of the EU, with the UK currently providing €39.2bn of its €243.3bn capital (figures rounded). It raises most of its funds for lending through bond issues on the capital markets, where it has the benefit of a triple A rating, which enables it to lend at attractive rates of interest.
In the UK between 2011 and 2015 the EIB lent over €29bn, with over 75% going to energy, transport, telecommunications and water/sewerage/waste projects, making the UK the fifth largest beneficiary of EIB funding in this period. In the current year the UK is running second only to Spain, having been lent another €2.5bn as at end March 2016.
Long term financing from the EIB is key to getting many projects off the ground: the EIB itself says ‘EIB support is often the key to attracting other investors’. If, in the forthcoming referendum, the UK votes to remain in the EU the EIB clearly will continue to fund the UK’s major infrastructure projects going forward and UK SMEs will continue to benefit from this source of funding. If the UK votes to leave, what would happen then?
Much of EIB lending outside the EU is to countries which have applied to join the EU or to developing countries that benefit from the EU aid budget. Borrowers in EFTA countries are eligible on similar terms as within the EU: eg Norwegian gas projects may qualify because Norway provides some 20% of the EU’s gas supplies. Therefore, unless the UK rejoins EFTA or enters into another trading relationship with the EU creating eligibility for future loans, new UK projects would have to look for other sources for long term financing, at a time when capital requirements flowing from Basel III and (in the case of insurance groups operating within the EU) the Solvency II Directive are reducing the capacity of commercial banks and financial institutions to participate in this market.
The position on current lending to UK projects and on its shareholder capital in the EIB, would form part of the UK’s leaving negotiations with the EU.
The EIB lends over 90% within the EU, with the largest slice of its funding going to infrastructure projects which are recognised as important to the policy aims of the EU. It also has a significant strand of lending to SMEs. The EIB say that they typically lend around a third of the project financing and sometimes more, which makes them the core financiers for many projects. Lending terms reflect the long term nature of these projects and are usually over 10 years and frequently very long term (in excess of 25 years). Another common feature is amortisation of principal and interest into steady payments. The EIB also has a credit enhancement programme, which has been used to support bond issues, for example the AFME Guide to Infrastructure Financing 2015 cites several projects, including 2 in the UK, which have used this facility:
- Greater Gabbard offshore transmission operators (OFTO) project with a maximum LC (subordinated letter of credit) amount of £46m, supporting €305m of bonds.
- Gwynt y Mor offshore transmission operator (OFTO project, maximum LC amount of £51m, supporting approximately £340m of bonds.
This article was originally published in Butterworths Journal of International Banking and Financial Law, June 2016