Fraught farewell to EIB funds

The UK is likely to lose access to European Investment Bank (EIB) funding after Brexit. What will the government replace it with, and what will this mean for utilities? David Blackman investigates.

Having turned its back on the EU, the UK has set its sights on the stars with the inclusion, in last month’s Queen’s Speech, of a bill to help build space ports.

Utilities’ concerns are more earthbound, though. One of the sector’s many Brexit-related worries centres on the likely cessation of access to the European Investment Bank (EIB), which has been a valuable source of finance for energy and water infrastructure for decades.

The extent of UK utilities’ reliance on EIB funding was laid bare in a recent submission by the security think-tank Chatham House to the House of Commons.

This showed that the energy sector has been the single largest recipient of loans in the UK from the EIB, netting around a quarter of the total of €8 billion (£7 billion) between 2011 and 2015, according to Chatham House.

“In terms of investment vol umes, it has been significant,” says Anthony Froggatt, senior research fellow in energy and environmental issues at Chatham House.

Since its first investment in British energy – £249.5 million in the Frigg gas field in the North Sea in July 1974 – the EIB has invested a total of £29.7 billion in UK projects. Froggatt said that while loans had initially been for North Sea and nuclear projects, recent years had seen the focus shift to renewable schemes.

And it is not just energy companies that have benefited handsomely from access to the bank, which is based in London for the time being.

Susan Davy, chief financial officer of ­Pennon Group, says the EIB has been a “vital source of funding” for water companies. South West Water’s owner has borrowed £364 million from the EIB, equating to 11 per cent of the company’s gross debt, which she says is “typical” for the sector.

“It is clear that not being part of the EIB will be a loss and it will have to be replaced.”

Anthony Froggatt, senior research fellow in energy and environmental issues at Chatham House

The EIB is not just important because of the volume of its lending, but for the nature of the funds it dishes out.

As a non-commercial lender, the EIB can issue loans at lower interest rates than those available from banks. This has proved ­especially valuable when raising finance for riskier projects, especially those using unproven technologies.

Munir Hassan, head of clean energy at CMS Cameron McKenna, says EIB funding has often been the “cornerstone” of the early wave of offshore windfarm projects.

And through its vetting of projects, the EIB has effectively performed a quasi due diligence service for other energy investors, says Froggatt: “The process of scrutiny by the EIB makes it easier then to leverage other funds. The project pipeline development can be as important as the funds themselves.”

Arup director of city economics ­Alexander Jan agrees: “If the EIB backs a project, it tends to have a reassuring effect on how the other banks look at it.”

Froggatt has little doubt that an end to EIB access will be a blow. He says: “It is clear that not being part of the EIB will be a loss and it will have to be replaced.”

In the short term, energy and water developers are keen to ensure that EIB funds continue to be dished out to the UK until Brexit actually happens.

Pennon’s Davy says: “If we, and our peers in the vital water and waste sectors, are to continue to invest, we need EIB funding to flow up until Brexit, and a UK-based equivalent beyond.”

Chancellor of the exchequer Philip Hammond used his recent Mansion House speech  to try to reassure infrastructure investors that the government is fighting to ensure the UK retains access to EIB funds on “equal terms” to other member states.

Longer term, though, the big issue will be finding a replacement for the EIB, says Davy: “We are very eager to know whether the UK government, through its industrial strategy, will create its own infrastructure lending programme to replace EIB funding post-Brexit.”

A replacement is particularly important for the UK, which lacks a homegrown version of the EIB such as institutions that exist in France and Germany, says Silke ­Goldberg, a partner at solicitors Herbert Smith Freehills.

Hammond’s long-term solution is to expand the UK Guarantee Scheme, set up in 2012 by the Treasury to underwrite infrastructure in a bid to encourage institutional investors to get involved in such projects.

Hammond has said the Treasury will now offer guarantees just for the construction phase of projects, which the likes of pension funds and insurance companies are least likely to want to get involved in.

The speech shows the Treasury is also looking at first loss payments, under which the government would stump up for the first tranche of losses in another bid to reduce risks for would-be investors.

One lawyer sees the scheme’s appeal to ministers. “It offers government more flexibility because it allows for a subtler split of risk between the public and private sectors rather than the government having to back the whole project.”

However, the scheme has proved to be a damp squib since its launch five years ago, when the Treasury made £40 billion worth of guarantees available. Since then, only around £1.8 billion of loans have been underwritten for nine projects, the most notable of which has been the Thames Tideway Tunnel.

Richard Threlfall, head of infrastructure at KPMG, questions how committed the Treasury is to the guarantee scheme, based on its track record so far. He says: “The market will be keen to understand quickly what exactly is envisaged, and whether the Chancellor’s enthusiasm translates into a significant number of projects being supported.”

With the EIB’s doors closing to UK projects, utilities will be keen to see the colour of the Treasury’s money soon.