John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I welcome to the meeting Mr. Andrew McDowell, vice president of the European Investment Bank, EIB, and Mr. Cormac Murphy, head of the Dublin office, and from the Strategic Banking Corporation of Ireland, SBCI, Mr. Nick Ashmore, CEO, and Ms Gillian Mahon, head of funding and strategic initiatives. This meeting arises from the committee's interest in determining the level of investment being generated across the EU and specifically in the context of promoting economic growth. This is an opportunity to receive an update from key figures involved in the promotion of investment opportunities and also to analyse Ireland's performance to date in terms of attracting investment.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Mr. Andrew McDowell:

I thank the Chairman and members for the opportunity to address the committee. Some people here may know that I spent five and a half years across the corridor as the Taoiseach's economic adviser, but this is the first time I have had the opportunity to address an Oireachtas committee, so I am thankful for the privilege.

The committee may be aware that in December we opened our first office in Dublin. The EIB has offices in most European countries. With me is Cormac Murphy, our recently appointed head of office. As vice president of the EIB since September 2016, among my responsibilities is oversight of our operations in Ireland. I was nominated by the Government to be one of the eight vice presidents of the EIB last September as part of the constituency that Ireland is involved in at the EIB, alongside Greece, Romania and Denmark.

The EIB was created in 1958 under the Treaty of Rome. The EIB is the European Union’s long term lending institution, owned directly by the 28 EU member states - although the number is an issue that might be revised - and we are often referred to as "the EU bank". Our mission is to use loans and other financial instruments, such as equity-type instruments and funds, to finance long-term investment projects that support EU policy. We are headquartered in Luxembourg. We also have a subsidiary, the European Investment Fund, which was created in 1992 to further support Europe’s small and medium-sized enterprises to access finance. We are self-financing in that we do not raise our money through government budgets or EU budgets but rather on the international capital markets. The EIB is the largest international public bank and the largest non-state borrower in the world. We are approximately twice the size of the World Bank by lending volumes each year. On average, we finance approximately 500 projects each year in over 160 countries. During 2016, we provided €83.8 billion in total financing via the EIB and the European Investment Fund, of which 90% was in the EU itself. Approximately 10% is invested outside the EU and that percentage is growing. Our financing supported a total of €280 billion in investment. This is an important principle for the EIB. Our financing of projects is intended to mobilise other financiers to also provide financing. Our success is measured not by how much we lend ourselves but by how much we catalyse in terms of total investment.

Our ability to support the European economy was significantly enhanced in 2015 when the European Council and Parliament agreed on a new joint European Commission and EIB initiative, known as the investment plan for Europe or the Juncker plan. The aim is to use €16 billion of budget guarantees from the EU budget together with €5 billion of our own capital, which forms the €21 billion European Fund for Strategic Investments. Using that capital, we can significantly expand our own lending and our own investments. The aim is to catalyse a total of €315 billion of additional investments in Europe between the middle of 2015 and the middle of 2018. The EIB is not just concerned with lending more, it is also concerned with being involved in higher-risk lending. We are seeking to move into market gaps for higher risk projects which would otherwise not be financed, particularly in areas such as transport, broadband, energy, innovation, energy efficiency and SME financing.

The EIB has been a long-term financing partner for Ireland since the country's accession and has provided nearly €15.5 billion of financing for investments since it joined the EU. Our lending activities here significantly increased during the financial crisis, with annual lending almost double the engagement before 2008. During the crisis years we significantly expanded our support to Ireland at a time when other commercial banks and private sector financing partners were pulling out of Ireland. In the past five years, EIB lending in Ireland totalled €4.2 billion, supporting among other projects the motorways programme, the Dublin Port expansion, Dublin Airport's terminal 2, the LUAS extension, university campus expansions - we have been involved with university loans for every single university in Ireland except one, which we are about to sign - schools, primary care centres and social housing, to name a few, at a time when other sources of financing for enterprise and infrastructure investment were being cut back significantly.

Before the banking crisis, the EIB lending in Ireland averaged around €400 million per year. This year we expect to provide more than €1 billion. The EIB is also diversifying its engagement, last year financing 13 initiatives across a range of sectors compared with just three in 2008. Part of the reason for the expansion in our lending is the strength of our relationships with new entities in Ireland, which is something that was absent before the crisis. In particular, our relationship with the National Development Finance Agency, which is part of the NTMA, and the SBCI, continues to strengthen. During 2014, the EIB provided a €400 million facility to the newly-established SBCI, representing 50% of the initial funding for the SBCI at low-cost conditions, all aimed at kick-starting increased lending to SMEs through the SBCI. More recently, the European Investment Fund and the SBCI signed the first EU programme for the competitiveness of enterprises and small and medium-sized enterprises, COSME, agreement in Ireland. This transaction, guaranteed by the European Fund for Strategic Investments, allows the SBCI to support €100 million of agriculture-related loans to 2,000 small and medium-sized enterprises by commercial banks in Ireland over the next three years. In fact, the facility, as Mr. Ashmore will attest, has been fully drawn down at this stage.

In addition, the European Investment Fund has supported a number of equity funds in Ireland. The EIB is primarily concerned with debt financing, but the European Investment Fund has also supported a number of equity funds for high-tech sectors. It has also supported a €20 million Business Angels co-investment instrument with Enterprise Ireland and a guarantee in favour of Microfinance Ireland issued under the EU programme for employment and social innovation to support very small businesses.

To further support Ireland’s strong economic recovery, particularly in the context of the growing infrastructure bottlenecks here, as well as out of recognition that Ireland is uniquely exposed to the economic effects of Brexit, the EIB hopes to increase its level of support for Irish projects to an even greater degree.

With this aim in mind, as well as opening a permanent office in Dublin, we established with the Irish Government last December an Ireland-EIB financing group. The group, which is chaired by the Minister for Finance, Deputy Noonan, includes senior management from the EIB, led by the president and myself, alongside the Minister the Public Expenditure and Reform, Deputy Donohoe, and other Ministers from the Irish Government, as well as senior officials from relevant Irish Government Departments and agencies, including Mr. Nick Ashmore. To support the financing group, a number of thematic working groups have been created covering financing connectivity, financing social infrastructure and financing enterprise.

Without prejudging the outcome of the detailed and constructive discussions currently taking place, areas where we have signalled the potential for greater EIB financing include increased lending to the Irish sovereign for Exchequer capital projects to be identified in the revised capital programme; increased mobilisation of private finance, under PPPs and similar structures, for infrastructure investment including in roads, public transport, social housing and other areas, consistent with the Government’s need to expand infrastructure investment while staying within the EU fiscal rules; direct lending support for the investment programmes of Irish semi-State companies; increased direct investment in mid-sized Irish corporates, including through equity-type products; credit guarantees to Irish commercial banks to increase their lending into key sectors, such as agribusiness, residential and business energy saving projects and the SME sector, consistent with the commercial banks’ own needs to preserve scarce capital while financing a growing economy and supporting those sectors particularly exposed to Brexit. To have maximum effect, such initiatives will often combine EU and national budget resources, as well as EIB and Strategic Banking Corporation of Ireland, SBCI, funding and capital; and increased project finance for the renewable energy sector in Ireland, including solar.

The Ireland-EIB financing group has committed to meet at least twice a year and the next meeting, planned for late May in Luxembourg, will review progress with the objective of producing a strong pipeline of projects across multiple sectors.

I will conclude my opening remarks and am happy to answer any questions.

Gerry Horkan (Fianna Fail)
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I ask Mr. Nick Ashmore to make his opening statement and then we can have cross-questioning of the two witnesses jointly.

Mr. Nick Ashmore:

I thank the Chairman and the committee for the invitation to provide an update on the progress made by the Strategic Banking Corporation of Ireland since we began providing loans to SMEs throughout Ireland in 2015 and specifically our contribution to improving investment opportunities in the wider economy. I am joined by my colleague Ms Jillian Mahon, head of funding and strategic initiatives.

By the end of December 2016, the SBCI has supported more than 12,500 SMEs with more than €540 million in low-cost loans and other forms of finance. Our average loan size is €43,000 but our loans have ranged in size from €1,500 to €5 million. We have been successful in achieving a portfolio that is well balanced in terms of where our borrowers are located and in terms of the sectors in which they operate. A particular feature of note is that 84% of all loans have been used for investment purposes, which means we are supporting the longer-term development of businesses. A further 11% of loans have been used to meet working capital requirements, while 5% have been used to refinance loans owed to banks exiting the Irish market. In short, we are supporting investment, working capital and refinance lending to SMEs in every part of Ireland and in a range of sectors – agriculture; wholesale-retail; accommodation and food; administration and support; manufacturing; transport; construction and more. We have achieved this by partnering with eight on-lenders – three banks and five non-bank institutions. This model has been very effective in helping us to meet our objectives.

The SBCI is the national promotional finance institution akin to similar, albeit much larger institutions in other European countries such as KfW in Germany, ICO in Spain or BPI in France. The SBCI’s initial approach has been to provide long-term large-scale liquidity on a low-cost wholesale basis. The SBCI has sourced over €1.2 billion in low-cost funding from KfW, the German promotional lender; the European Investment Bank; the Council of Europe Development Bank; and domestic sources in the NTMA and the Ireland Strategic Investment Fund. The role of SBCI on-lending partners is that of retailer using the SBCI’s liquidity as raw material for their lending products. These on-lenders are a mix of smaller, specialist lenders with a focus on specific niches, Finance Ireland, Merrion Fleet, First Citizen Finance, Bibby and Fexco, and established banks with nationwide footprints that can reach a mass market, namely, AIB, Bank of Ireland and Ulster Bank. A major benefit of this wholesale lending model is that it facilitates increased competition in the market for credit to SMEs, while giving the SBCI nationwide reach.

Through our involvement, some of the SBCI’s on-lending partners have been able to enter new market segments, providing finance or leasing products they have not provided in the past, bringing additional lending capacity, broader choice and lower interest rates to the SMEs that need the finance offered. Through these partners, the SBCI has been able to offer term loans, asset leasing, agricultural leasing, contract hire for vehicles and invoice finance – all at lower rates or more flexible terms than were previously available in the market. The SBCI is set to continue to expand its liquidity offering as it has a lot more capacity to provide finance to new on-lenders and is in active talks with several potential new on-lending partners. The SBCI expect to have more announcements in this regard in the coming months.

In addition, the SBCI recently commenced a new risk-sharing line of business. Risk-sharing offers the SBCI the opportunity to target new specific SME market segments that may have difficulty in accessing finance. In a first step, the SBCI was appointed in October 2016 as the operator and manager of the credit guarantee scheme, CGS, provided by the Minister for Jobs, Enterprise and Innovation. A new version of this scheme, CGS 2017, will be deployed in the next few months. This was closely followed by the launch of the agriculture cashflow support loan scheme, in conjunction with the Department of Agriculture, Food and the Marine, the European Commission and the European Investment Fund’s COSME programme. This is a ground-breaking policy measure in the Irish market and the first use of the COSME programme, which is also part of the Juncker plan or the European Fund for Strategic Investments. Crucially for the SBCI, it represents the first time that the SBCI itself is taking on risk-sharing with other lenders – in this case, AIB, Bank of Ireland and Ulster Bank. This initiative has enabled farmers to borrow up to €150,000 at a special rate of 2.95% over periods of up to six years to address the difficult market conditions they have faced recently. Based on the data received so far from the three participating banks, we anticipate that approximately 4,000 farmers will draw down low-cost loans under this scheme.

The SBCI is working to source other European supports and funding with a view to introducing new credit measures to address other market failures in the future, building a central conduit for European supports to the Irish market. The SBCI also recognises the need to take a counter-cyclical approach so it avoids reinforcing any prospective excessive credit deployment.

One challenge we have faced is generating awareness among SMEs of the benefits SBCI-supported finance can bring to them. The SBCI is very much open for business and is continuing to engage in an intensive SME awareness campaign based around local networking and brand-building events in every region in Ireland. The SBCI has sought to arrange these events in conjunction with local business interest groups such as chambers of commerce, third level institutions and business advisory groups or law or accounting firms. We are also aware that we do not operate in isolation but as part of a suite of government supports for SMEs and we look to collaborate with other groups such as Microfinance Ireland, the Credit Review Office, Enterprise Ireland and the local enterprise offices, especially on communication.

The SBCI results show that its efforts have been successful but it is keen to keep building awareness among SMEs of its role and what it can offer and would welcome any assistance members can provide in putting the SBCI in contact with the businesses that it is here to serve.

That concludes my opening remarks. I hope members have found them helpful and we will be happy to answer any questions they may have.

Gerry Horkan (Fianna Fail)
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I thank Mr. Ashmore and call on Deputy McGrath.

Michael McGrath (Cork South Central, Fianna Fail)
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I welcome Mr. McDowell, Mr. Murphy and Mr. Ashmore and his colleague Ms Mahon and thank Mr. McDowell and Mr. Ashmore for their opening remarks.

Mr. McDowell is welcome to his first meeting before this committee in his relatively new role as vice president of the EIB. The profile of the EIB has improved considerably in Ireland in recent months, not least through his own appointment and the opening of its office in Dublin. It is good to see its activity ramping up and it hopes to reach about €1 billion of investment into Ireland this year.

There is a general acceptance that there is a need to increase capital investment in the economy, and a key constraint is the fiscal rules. Can Mr. McDowell clarify the different platforms through which the EIB can provide funding, whether it is off-balance sheet in the form of PPPs or direct Exchequer capital expenditure which would be on-balance sheet? Can Mr. McDowell address what opportunities there are for Ireland to increase capital investment using the finance available through the EIB but in the context of the constraint imposed by the fiscal rules?

Mr. Andrew McDowell:

It is a matter for EUROSTAT but generally PPPs are off the balance sheet. They have to be judged case by case. We can also lend directly to the sovereign, which we do frequently through the NTMA.

The NTMA identified projects for us on an annual basis for which it would like EIB financing. The third area that we can support is commercial semi-State utilities, which generally are also classified by EUROSTAT and the CSO as private sector bodies from the perspective of Government statistics. Even though most of them are fully owned by the taxpayer, because most of their revenues are generated through commercial charges, their statistical classification is as private bodies so our financing for utilities is off the Government's balance sheet.

I will go through each of these areas. We have done about ten PPP transactions in Ireland over the past nine years. We regard Ireland as probably one of the most sophisticated countries in terms of PPP project development in terms of the institutional capacity here. The NDFA is really at the cutting edge in terms of institutional capacity. We certainly regard Ireland as a very reliable partner, to the extent where I am happy to say we would do a lot more financing of PPPs in Ireland were they available in the capital programme. That is a message we have conveyed to the authorities here, that in the context of the revised capital programme if there was a political consensus or decision that, on top of traditional direct Exchequer financing of infrastructure, there was a willingness to do more PPPs, depending on the details, we would be happy to be the main financing partner.

Michael McGrath (Cork South Central, Fianna Fail)
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I will take Mr. McDowell up on that point. Does he have a view on the 10% rule we have here domestically, that no more than 10% of our annual capital expenditure can be accounted for by PPPs? Is that overly restrictive in the current environment and how does it compare with how other European Union member states account for and deal with PPPs in terms of their own national budgets?

Mr. Andrew McDowell:

I would say Ireland has been an extensive user of PPPs compared with EU countries over the past decade. There is no doubt that particular constraint is beginning to slow the number of PPPs coming through the project pipeline. It certainly is a political and policy matter for the Irish authorities so I would not like to comment directly on the choice of how the Irish authorities finance infrastructure. Suffice it to say there are some other European countries who would have a much more ambitious approach to financing infrastructure, particularly the Netherlands. It is probably the most ambitious country in terms of the development of PPPs to finance infrastructure projects. I do not think it is a coincidence that the Netherlands tends to come on top if one looks at surveys across Europe, in particular surveys among business, in terms of which countries have the best infrastructure for business.

Michael McGrath (Cork South Central, Fianna Fail)
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What is the key difference in its approach to PPPs compared with Ireland?

Mr. Andrew McDowell:

The most important thing for an institutional investor and PPPs is to have a continuous steady stable pipeline and not to have a stop-start approach, a bit like the 46A where a big bunch of PPPs arrive at a moment in time and then one does not see one for another three years. Having a steady consistent pipeline is important. PPPs should not be looked at as a short-term stimulus response for the economy. There needs to be a strong political consensus that they are a tool, and only one tool, because they are not appropriate for all forms of public infrastructure. They are only appropriate for some types of public infrastructure, but they should not be viewed as something one does for a few years and then stops. To maintain strong institutional interest there has to be a consistent pipeline because it is quite expensive, including for the EIB, but also for other institutional investors, simply to develop the capacity to analyse and assess the creditworthiness of the projects.

Michael McGrath (Cork South Central, Fianna Fail)
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I thank Mr. McDowell. I also thank Mr. Ashmore for his opening remarks. I commend him and his team at the Strategic Banking Corporation of Ireland, SBCI, on the work they do. The profile of the SBCI is improving all the time and I know there is a lot of engagement with business representative bodies, for example, throughout the country.

On the delivery platform, there are eight on-lenders, three banks and five non-bank institutions. Mr. Ashmore has named them in his opening remarks. Does he believe that is the most effective way of getting the products to the customers who ultimately need them? In terms of the marketing of the SBCI products, will he clarify whether it is done centrally by the SBCI or if it is done through the on-lenders as well?

Mr. Nick Ashmore:

I thank the Deputy for his kind comments. The use of the wholesale model was something we looked at and came up with based on the precedent of seeing it within a lot of other European countries especially Germany with KfW. We saw a key benefit of that being its ability to drive competition, but also it was a very effective way of using the initial raw material we were provided with, namely, long-term, low-cost liquidity. We think we are having an impact in terms of competition as a result of that in that there are now five new non-bank on-lenders providing finance that they were either doing on a smaller scale or were not doing at all. We will continue to add on-lenders and to grow the competition.

There are, however, areas in which we have not yet achieved traction. One is non-bank term lending. It is certainly a key ambition for us to try to get someone into the market in that area, but it does bring with it further complications in terms of barriers to entry such as lack of a distribution network and teams and expertise on the ground in Ireland. We continue to work our way to try to be a catalyst to see that happen.

For the terms of the liquidity we provide, the wholesale model works very well. In terms of the risk sharing, again there is an opportunity there to work with multiple parties, in particular risk-sharing schemes or perhaps bilaterally down the line, but by sharing risk we are leveraging their expertise, their teams and distribution networks to get the support out the door in an efficient manner. We can take relatively small amounts of capital and leverage them into much larger volumes of loans, as we did with the agri-scheme. We think it is a particularly effective model. However, we are a new organisation and we continue to look at other ways of doing things, and if there are better ways of doing things for specific market failures, then we will bring them forward to stakeholders and to the board for review.

The lines of business strategy we have adopted now allow us to continue with the on-lending and with the risk sharing in supporting and delivering the existing activities but also within those to explore new ways of using the resources and solving market failures that are there already or that arise in the future.

In terms of marketing we actively promote the SBCI brand. Our vision is that an SME considering an investment or action should ask whether there is an SBCI option that could support it and potentially go into an on-lender and ask for the SBCI product. We cannot guarantee, given the scale of the banks and other institutions, that the first person they meet will also be aware, so marketing is also focused on front-line bank staff for instance. The on-lenders themselves have been very active in promoting SBCI funding through their own advertising, marketing and media campaigns, so it really is a joint effort. It is individual institution by institution but also on our own.

Michael McGrath (Cork South Central, Fianna Fail)
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Is there an issue with SBCI products being in competition with the on-lenders' own products which could lead to displacement? Will Mr. Ashmore clarify the benefit to the on-lender? Is it a margin on the interest rate or what is the commercial return for the on-lender in selling SBCI products to their customers?

Mr. Nick Ashmore:

In terms of the relative benefit to the on-lender of our product versus another product, we design this to be neutral for the lenders, so it is critical for the state aid treatment that they do not financially benefit from any particular transaction. What they get out of this is enhanced competitiveness. By changing the cost of the liquidity, that is, the raw material that goes into the product, we bring the overall price down, but the on-lenders do not benefit. They get the same margin on their loans as they would on our loans. It is designed to be neutral.

Michael McGrath (Cork South Central, Fianna Fail)
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Do they get a margin on SBCI loans?

Mr. Nick Ashmore:

They get a credit margin. On the liquidity provider product they get a credit margin. When it comes to risk sharing it is a slightly different proposition because we are starting to account for some of the credit risks so we ask them to reduce their credit margin accordingly. With the risk-sharing products a small element of it is us recovering our costs and then with the agri product there is a specific set of funding for providing a subsidy to the interest rate which creates a further discount, so that is why we were able to get the price down to 2.95%.

We design it so that our products versus their other products are neutral. For them, there should not be a motivation either way. We are very careful to make sure that they are not benefiting from the state aid inherent in these products.

Michael McGrath (Cork South Central, Fianna Fail)
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Finally, with regard to the agriculture cashflow support loan scheme, which is a very good scheme, is there potential to expand that into other sectors? The scheme was introduced in conjunction with the Department of Agriculture, Food and the Marine, the European Investment Fund, EIF, and the European Commission. In the context of Brexit, however, and with SMEs in different sectors facing issues of market diversification, working capital management and foreign exchange risk, is the potential to introduce a similar type of scheme for other sectors that are particularly exposed to Brexit being explored?

Mr. Nick Ashmore:

The agriculture cashflow support loan scheme represents a strong effort, working with the Department of Agriculture, Food and the Marine and capitalising on the use of the exceptional aid that was provided by the Commission, the state aid window that opened, as well as the EIF and the COSME programme, to craft a properly structured instrument that addressed the specific market failure. As we look at that and at different market failures, we look to take the same approach, which is to look at the options available for funding and market measure, to customise that measure accordingly to fit those criteria and to mix and match that support to create an instrument that works for that specific market failure. In the instance of a cashflow challenge to businesses - and some elements of Brexit may involve cashflow challenges - we could look at doing a shorter-term loan but with a risk share and potentially a small subsidy, depending on the resources available, to craft a risk-sharing product that would provide easier-to-access, more cost-effective and maybe more flexible loans for that specific issue.

On the other side of the coin, there might be an effort to support investment. As well as its COSME programme, the EIF has a programme called InnovFin. That provides an uncapped counter-guarantee to the SBCI or an uncapped guarantee directly to banks. Bank of Ireland has one of these facilities. We might use that resource, some of our own capital, State resources and, potentially, structural funds as well down the line, to create a longer-term product that might support loans for five to ten years by taking a greater share of the risk. The agriculture cashflow support loan scheme was a capped portfolio guarantee. It was only the first 15% of losses that were covered. An uncapped guarantee would see all the loans in a portfolio covered. It is about trying to take the resources available, working with the constraints they come with and mixing and matching them together to get the right combination to create a solution to the problem. We see the agriculture cashflow support loan scheme as the real precedent for us to be able to do this down the line as issues arise.

Kieran O'Donnell (Fine Gael)
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I want to welcome Mr. Andrew McDowell, who I know well, and wish him well in his new role. I welcome Mr. Ashmore, Mr. Murphy and Ms Mahon. I do not want to dwell on it but I wish to return to the issue of the investment plan for Europe, or the Juncker plan, in the Irish context. In Mr. McDowell's opinion, what percentage of GDP should an economy spend on capital investment for it to be sustainable? How would he comment on Ireland's most recent level of investment relative to GDP?

Mr. Andrew McDowell:

I do not think there is any single right answer to this. It depends on the level of development of the economy and the level of potential growth in the economy. One would expect to see higher levels of capital investment in catch-up economies than perhaps in economies at the technological frontier. In Ireland's case, with a fast-growing population and a potential output growth rate that is considered to be higher than most other European economies, mainly because of its demographics, one would certainly expect to see more public capital investment than is currently the case. I believe that over the period of the crisis, infrastructure investment has fallen in Ireland from perhaps more than 5% of GDP to somewhere between 1% and 2% of GDP. That is probably now the lowest level of public investment in infrastructure in the EU. This is why we are having these new very intensive and constructive engagements with the Irish Government and its agencies on how we can help to reverse that trend, not just through support for Exchequer capital programmes, but by trying find other mechanisms that reflect the constraints faced by the Irish Government under the EU fiscal rules.

Kieran O'Donnell (Fine Gael)
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With his previous knowledge from his role with Government as economic adviser, could Mr. McDowell put an empirical figure on the level of additional capital investment that could be made in Ireland - not off-balance sheet, but in terms of strictly Government spending - that is not breaching the EU fiscal rules? Has he an idea of the level of scope for an increase in capital spending that could take place in Ireland over the next number of years?

Mr. Andrew McDowell:

No, and a quantitative target along those lines could backfire in some ways. One might end up choosing projects that are not economically justifiable just to fulfil a quantitative target. I believe it should be done on a project-by-project basis. The key metric, under economic cost-benefit analysis, is whether the economic and social return of the project is higher than the cost of financing. In those circumstances, it makes sense to proceed with projects. That is the approach taken by the Irish Government, as we understand it. It is certainly the approach taken by the EIB. We will not finance projects, whether on or off-balance sheet, unless we see that the economic and social return is positive and justifies the cost of the financing.

Kieran O'Donnell (Fine Gael)
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I will give a specific example. I am based in Limerick city. The single biggest project on our side of the country on the western seaboard is the M20, which is the Cork to Limerick motorway. The mid-term capital review is taking place. Public consultations were accepted up to last Sunday, 30 April. I expect that many submissions have been made on the M20. The witnesses are probably aware that the project was discontinued back in November 2011 due to the state of the economy. We had a reactivation. The Minister, Deputy Ross, agreed to my request that work be done within Transport Infrastructure Ireland, formerly the National Roads Authority, to look at pre-preparatory planning on the M20. The project is estimated to cost between €800 million and €1 billion over a long number of years, including planning and building. If we get the go-ahead in September when the mid-term capital review is announced, the planning may take three to five years. It would take another three to five years to build the road.

I ask Mr. McDowell to give me the EIB's perspective on such a proposal, the type of criteria it would use and its perspective on elements such as State investment, public private partnerships and tolling of the road. I ask him to give me his sense of what percentage of funding the EIB would provide for such a proposal. It is hugely important for us as a region. At the moment, Dublin accounts for nearly 50% of economic activity in Ireland. We speak about balanced regional development. However, for it to truly happen, we need to connect the two largest cities outside of Dublin, Cork and Limerick, with a motorway. It is incredible that is has not happened before now. It needs to happen.

We are in a post-Brexit era and we must prepare for a hard Brexit. We must be competitive and one of those elements that would make us competitive, as an island, would be a proper motorway linking Cork, Limerick, Galway and along the coast to Waterford. Currently, a major piece of the jigsaw between Cork and Limerick is not linked by a motorway. Will the witness give his perspective, going as far as he feels inclined to go? It is very important for us in the Cork and Limerick region.

Mr. Andrew McDowell:

I will start by saying Mr. Cormac Murphy, our head of office, is a Corkman.

Kieran O'Donnell (Fine Gael)
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It is hands across the wall. We do it with Munster rugby so let us do it as well by bringing the EIB in as a Munster supporter. There is an open invitation to Thomond Park at the weekend, when we play Connacht.

Mr. Andrew McDowell:

The Senator would certainly have an attentive banker on my left for that. I cannot comment on an individual project as it has not yet been confirmed as being included.

Kieran O'Donnell (Fine Gael)
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I want to know the criteria of assessment for such a project.

Mr. Andrew McDowell:

We put projects through an intensive appraisal. If it is just a traditional Exchequer financing project that we are being asked to finance - a direct loan to the Irish Exchequer for the project - we will finance up to 50% of the project and no more than that. Again, that is consistent with our philosophy that we are trying to mobilise other people to invest in projects and not just ourselves.

Kieran O'Donnell (Fine Gael)
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It is a 50% limit.

Mr. Andrew McDowell:

That is the limit. There are certain exceptions but they are quite rare.

Kieran O'Donnell (Fine Gael)
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That is if it is pure State funding.

Mr. Andrew McDowell:

It would be pure State funding directly to the Exchequer. We put it through an economic appraisal, taking into account traffic forecasts, the cost of the project and time-saving estimates, with different countries having different estimates. For example, if the time saved for a journey is a half hour, how much is that worth?

Kieran O'Donnell (Fine Gael)
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It would be a half hour. One would be able to get from Cork to Limerick in an hour. At present, it could take an hour and a half or two hours. Mr. Murphy will know that.

Mr. Andrew McDowell:

It comes down to the time saving, the value of that time saving by traffic forecasts and whether it justifies, taking into account the cost of capital over time, the initial outlay on the project. It is not rocket science but we have significant internal debates in the banks. Occasionally, we must reject projects on the economic appraisal, although they may be credit-worthy. We may lend to a creditworthy borrower, such as the Irish Government, but the economic appraisal may not justify the project. That is why the EIB is trusted by its shareholders in these matters. We do not finance bridges to nowhere or infrastructure for its own sake. It will only come about where there has been a very positive appraisal.

If, for example, the Irish Government indicated it would be interested in this project with off-balance sheet financing for public private partnership structures, we would then go through a further process, working out whether it is just availability risk that we are being asked to finance - in other words, the construction - or would it be availability and traffic risk under a tolling scenario. In those circumstances, we would want to understand what the tolling would be and if it justifies the risk if we accept part of the risk? What we have indicated to the Irish Government is that before making final decisions on the best financing approach and the choices it must make for the mid-term review of the capital programme, there should be a preliminary exchange of information with the EIB. It may be that we can look at a project, find it interesting and potentially finance it through some novel, off-balance sheet mechanism, whether it is through availability public private partnership with a unitary payment or through a full demand-risk public private partnership financed by tolling, where we guarantee private investors against some of the downside traffic forecasts.

Kieran O'Donnell (Fine Gael)
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The bank would underwrite an element of the project.

Mr. Andrew McDowell:

Essentially, we would underwrite an element of the project. We could go back to the Irish Government and say that with a particular project, there is a very good chance it could be financed with an off-balance sheet mechanism. In terms of the available fiscal space over the next five to ten years, the project may not have to push out another project and it could be done on top of what would be done through traditional Exchequer financing.

Kieran O'Donnell (Fine Gael)
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It could be financed off-balance sheet.

Mr. Andrew McDowell:

We do not have a view-----

Kieran O'Donnell (Fine Gael)
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The witness is saying the capacity may be there.

Mr. Andrew McDowell:

Yes. It is important because before a final decision is made by the Irish Government, there could be an exchange of information so we could present some further options that may be relevant when the final decision is made by the Irish Government and this Parliament.

Kieran O'Donnell (Fine Gael)
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At this time, have preliminary exchanges of views taken place between the Irish Government and the European Investment Bank on the M20?

Mr. Andrew McDowell:

If the Deputy does not mind, I will not comment on an individual project as the process relies on a certain degree of confidentiality. Suffice it to say that since we set up the EIB Ireland financing group in December, there has been a strengthened degree of co-operation and information flows between the EIB and the Government. That process on our side is led by Mr. Murphy.

Kieran O'Donnell (Fine Gael)
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There are two further issues. If an exchange of views takes place and if it is worth exploring the various options for the M20 Cork to Limerick motorway, for example, what would be the timeframe for appraisal and assessment at the EIB level? At what stage would the EIB indicate its support of this project?

Mr. Andrew McDowell:

It depends on the structure from the time of a formal application. Public private partnerships can certainly take a little longer be fully appraised and get formal approval through our decision-making processes than traditional Exchequer financing projects. It can range between three and six months from the formal point of the application. The more there has been flow of information before the formal application, the quicker the process from the EIB's perspective.

Kieran O'Donnell (Fine Gael)
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It is pre-planning.

Mr. Andrew McDowell:

Exactly.

Kieran O'Donnell (Fine Gael)
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The witness spoke about discount rates but does the EIB use a specific discount rate? What metrics are used to assess future cash flows in terms of discounting rates?

Mr. Andrew McDowell:

We use different discounting rates depending on the level of risk. The discount rate on any capital project is risk-dependent. The discount rate for a public private partnership is higher than for an Exchequer-financed capital project. We do not publish those numbers.

Kieran O'Donnell (Fine Gael)
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In appraising a project and cash flows, what is the longest period for repaid costs? Would it be 20 or 30 years? There is a window now. The mid-term capital review is under way and public consultation has been in train since 30 September. The Government has stated it is looking to appraise this project over a number of months. We expect something in the early autumn. I cannot overstate how important the M20 is for the region as it will be the catalyst for the area. Limerick and the western seaboard will not compete with Dublin but Dublin will bring back sustainable growth in Ireland Inc. The interaction with the Government is ongoing on a range of capital proposals as part of the mid-term capital review. Is that correct?

Mr. Andrew McDowell:

Yes. It is being done by the Irish Government.

Kieran O'Donnell (Fine Gael)
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There is engagement with the EIB on a range of matters.

Mr. Andrew McDowell:

Yes.

Kieran O'Donnell (Fine Gael)
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I very much appreciate how open the witness has been about how the bank will assess projects. I will communicate with the Government and I hope we get to the point where we can finance the project in a number of ways, with the EIB as a serious partner. Over how many years would it be financed? Does the bank think this must be self-financing over a period?

Could Mr. McDowell expand on that?

Mr. Andrew McDowell:

Again, it depends on the nature of the asset.

Kieran O'Donnell (Fine Gael)
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A roadway that is 80 km in length.

Mr. Andrew McDowell:

I can check with my colleague but it is the economic life. Generally, in terms of the cost-benefit analysis, it would probably be 30 to 35 years on a road project. Our financing of the project is a matter of negotiation between us and the promoter of the project. Suffice it to say the EIB is the provider of the longest-term financing for infrastructure in Europe. We do finance certain infrastructure projects with financing terms that stretch as far as 30 years and in some cases, even longer. That can obviously make some projects financially much more feasible than would be the case if financing was only available for five, ten or even 15 years.

Pearse Doherty (Donegal, Sinn Fein)
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Ba mhaith liom fáilte a chur roimh na finnéithe go dtí an coiste. Tá cúpla ceist agam i dtús báire. B'fhéidir go gcuirfidh mé ceist ar an tUasal Ashmore ar an gcéad dul síos. Could I ask Mr. Ashmore about the role of the Strategic Banking Corporation of Ireland, SBCI? I have met with it a number of times. The work it does is valuable. I understand that it is done with quite a limited number of staff. Could Mr. Ashmore address the committee in terms of the resources the SBCI has in terms of administering the fund? My next questions concerns agricultural loans by commercial banks that come from the SBCI. I have heard from farmers, including at a recent meeting with the IFA, that Ulster Bank has far more stringent criteria in terms of making these loans available when compared with other lenders. Does the SBCI oversee how the application process evolves? My understanding is that different criteria are used by different lenders. Some require nearly every single piece of documentation that could have passed through a farmer's hands over the past number of months while others are less invasive when it comes to documentation required. Is this something the SBCI oversees or does it just make the funding available and look at the results on the other side?

Mr. Nick Ashmore:

In terms of the resources, the SBCI runs with a team of 16 people dedicated to the organisation. We also run with the support of the NTMA's broader centralised functions such as human resources, legal, finance, technology and some risk functions. We estimate that the number of equivalent full-time employees represented by that support is between ten and 12 people. That is the total team working on the SBCI.

In respect of agricultural loans, we provide a common set of terms to each bank. We provide the guarantee and ask for significant amounts of management information back around the individual loans, which we use to ensure those loans are eligible for the financial support we provide. As we support the loans being provided on an unsecured basis, that removes the need for farmers to apply and provide their land or other assets as security for the loans, which often results in an increased amount of paperwork and can result in significant legal fees, so it is one of the major positives of the loan. We are certainly not aware of a different approach being taken by the different banks and we do not get into the detailed aspects of the credit evaluation because that is something we have delegated to the banks. They are still on the hook for 20% of the initial losses and, ultimately, if losses go beyond 15% of the portfolio, they are on the hook for the entire loss so their credit rules and conditions still apply. There will always be different approaches between banks in the market in terms of how they go about documentation and what information they require from SMEs but this is the first we have heard of that issue. We will certainly raise the question with Ulster Bank and see what is has to say.

Pearse Doherty (Donegal, Sinn Fein)
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I might write to the SBCI and ask the IFA, whose representatives raised it with me, to bring it to the SBCI's attention as well. In respect of the ambition of the organisation, where does Mr. Ashmore see it going? We see the figures here. The agricultural long lending is very impressive and has been hugely welcomed by farmers but we see other areas relating to SMEs. When one puts it in the context of financing in Ireland, it is not even a drop in the ocean. Is there potential to grow the SBCI? If this potential exists, what do we need to unlock to allow it to grow, flourish and be more of a player in providing cheaper, easier and accessible credit to SMEs?

Mr. Nick Ashmore:

In terms of the vision we have for the SBCI, it is to be a strong promotional financial institution within the Irish market that will have a major impact over the long term, a very effective conduit and support for channelling European resources, for example, the EIB banking group, into the market here and a real contributor. With the added impetus, engagement and presence of the EIB in the market here, combined with SBCI's enabling platform and construction of infrastructure - in terms of channels to market and systems to deal with those channels to market - there is a lot more that we can do over time as we grow this. The market failures we are addressing will evolve over time. For example, quantitative easing has had a relative impact on how attractive our liquidity is - certainly to banks, which can fund more cheaply. The EIB has been known to lend directly into banks in a similar way and that, again, is not happening at the moment because the markets are flooded with liquidity. We will see different things come and go. In essence, the SBCI needs to be counter-cyclical. It needs to not ramp up its activity at a time when things are really taking off in terms of credit because we could reinforce a bubble if we were not careful. It is not something we see as a risk at the moment but it is something we are very cognisant of. We see significant potential to grow but at the same time, we do not want to be the market. We have seen how in other countries, the promotional institution has become the market for SMEs and almost the entire market is effectively state supported. That is at the extreme end of the spectrum and happened over a long time but it is not somewhere we want to get to. We really want to support a strongly functioning market.

In terms of what we need to unlock to let it grow, the SBCI is fortunate in that all the legislation we need to be able to do what we do going down the line has been passed. A key factor for us is to identify the right things to do and get the strong stakeholder support both in terms of the explicit authority from the Departments and any resources they provide, to source support from the EIB, which has been another provider of funding and support, and to deliver a mechanism that works in the market. Those things take time. We were able to get the agriculture cashflow support loan scheme into the market very quickly but that is only because the team and stakeholders put in about 18 months of work in advance to prepare for that situation. We did not know what measure would come down the line that would be the first case but we were ready for it. We had built a lot of capability. We are certainly building our capability within the organisation without taking on too many resources and creating too excessive a cost base.

In a similar way to the EIB, we are looking for cases. We are looking for the right places to deploy the support we can provide. We are also doing a lot of research around what the art of the possible is. We are members of two main networks within Europe - the Network of European Financial Institutions for SMEs, NEFI, and the European Long Term Investors Association. They are networks of peer national promotional institutions. We learn a huge amount of them as to how they operate in their countries - be they Bank Gospodarstwa Krajowego, BGK, in Poland, Instituto de Crédito Oficial, ICO, in Spain or Cassa Depositi e Prestiti, CDP, in Italy, which are really ramping up their activities at present. We are hosting the next NEFI working group in Dublin this month. They are very valuable sources of information and expertise. There is no clear answer.

Pearse Doherty (Donegal, Sinn Fein)
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Is there any vision or ambition for the SBCI to apply for a banking licence in the medium to longer term, for example?

Mr. Nick Ashmore:

It was certainly discussed when we set up the SBCI. We decided not to go down that route because it would have taken a long time and caused a significant delay. The main reason for going for a banking licence would be to attract customer deposits. That brings with it a whole raft of regulation, cost and so forth. We are not constrained at the moment with regard to the availability of low-cost liquidity, so the main commercial, economic rationale for going for a banking licence is not there right now but it may well be in the future.

Pearse Doherty (Donegal, Sinn Fein)
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On the support that SBCI provided to individuals and SMEs, what proportion of those loans, to Mr. Ashmore's knowledge, are in default or are non-performing?

Mr. Nick Ashmore:

We have not gathered that specific information at the moment. Our concern is with the recoverability of loans from the lenders that we provide support to and that that funding is being used in the way that we need it to be.

Pearse Doherty (Donegal, Sinn Fein)
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Not with the recoverability of any of the loans?

Mr. Nick Ashmore:

Not with the loans that we have given to the financiers.

Pearse Doherty (Donegal, Sinn Fein)
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It is early days yet.

Mr. Nick Ashmore:

It is early days.

Pearse Doherty (Donegal, Sinn Fein)
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I thank Mr. Ashmore. We welcome the work that he and his team are doing in that area.

I welcome the establishment of an EIB office here in December. Mr. Andrew McDowell said last year that if he was giving Ireland a report card, it would read "could do better". Last year, the EIB group invested €950 million in the country through the European Investment Bank and the European Investment Fund. The target this year is to exceed €1 billion. Ultimately, there is not a big difference between €950 million and €1 billion. What would Mr. McDowell assess our position as being at this point? Is it still "could do better", would it be "doing a little bit better" or where does he see us with regard to being able to access funding? It is clear, from his words, that we have underperformed. We are below the European average for accessing money from these supports despite the fact that we have the lowest capital investment in the European Union.

Mr. Andrew McDowell:

There are two main areas and two main reasons why our exposures to Ireland have been less than in other countries. The first was that prior to the crisis and even during the crisis, up until 2014, there was a lack of an institutional partner in Ireland to channel EIB funding into the economy. The establishment of the SBCI and the establishment of the Ireland Strategic Investment Fund, with which we also hope to partner on some equity investment-type projects, have helped to address that institutional gap that existed in Ireland. We are beginning to see the fruits of that already. Our exposure to Ireland is approximately 2.5% of GDP, which is less than the EU average of about 3.5%, but if we keep lending at the pace we have been lending over the past six to nine months - and the €1 billion this year is based on that flow translating and being maintained over the course of the year - we will gradually build up our stock of exposures in Ireland towards the EU average over the course of four to five years.

Pearse Doherty (Donegal, Sinn Fein)
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I am not criticising Mr. McDowell for that, because there is an issue with Ireland. It is not just the State. These are private corporations that apply for funding from the EIB. To come up to the European average, we should be at approximately €1.4 billion per annum, yet we have the worst percentage of public investment in the European Union. The European average is made up of countries which have large drawdowns from the EIB but which also have large public investment programmes. Should there not be a specific policy within the EIB in light of the fact that we have gone through a private investment famine and a public investment drought over the past decade? Is it not the case that the EIB needs to be much more ambitious in reaching that target? Four or five years is still only to get to where the European average stands. Many European countries do not have the problems which we have and which Mr. McDowell identified with regard to water, transport and housing. These are all crises that have either arrived or are about to present themselves in a very acute way.

Mr. Andrew McDowell:

The best way I can answer that question is to say that there is no upper limit on the amount which we are willing to finance in Ireland. Unlike EU budgetary funds and the Commission, there is no quota for EIB lending country by country. We finance projects wherever they come from as long as they are consistent with our eligibility criteria and they are bankable projects. As the Irish economy grows and the recovery continues, we would hope to see many more projects coming out of Ireland, but we are ultimately dependent on promoters making financing applications to us. We have indicated our ambition to do much more here. There are obviously two concrete steps that we have taken. We have opened the office here in Dublin and appointed Mr. Cormac Murphy as its head. At our own instigation, we have established this Ireland-EIB financing group to improve the flow of information between the Irish public sector and Government on capital projects. I hope that those two steps in particular will pay dividends in the coming years with regard to the volumes.

There is a big opportunity for Ireland in the dark clouds of Brexit when it comes to the issue of EIB financing. The EIB is inevitably going to do much less in the UK. Many of our teams - including our infrastructure teams - that would have spent much time in the UK are now essentially looking for other jurisdictions and markets in which to finance projects. The bottleneck within the EIB regarding how we can do business is rarely about money. We have much capital and funding. The bottleneck is often simply about available skilled human resources within the bank to appraise and assess projects. That bottleneck has opened up in that there is a window of opportunity as a large number of people in the EIB are now looking for a place to do more business. Ireland is very similar to the UK in some ways with regard to the legal situation, how the financial sector works in Ireland and how the Government authorities work in Ireland. There is an opportunity for us now to get much more EIB attention from our skilled lending officers back in Luxembourg.

Pearse Doherty (Donegal, Sinn Fein)
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On Mr. McDowell's comment on Brexit - and the British Government's role in and part ownership of the EIB will still have to be worked out - his view that the EIB will do less lending in the UK is natural, although it lends outside the European Union. Can he address concerns about the EIB's involvement in the North of Ireland? As we know, the population in the North voted to stay within the European Union. There is concern that access to funding such as from the EIB will further damage the economy, and it is an economy that is isolated and could possibly have border controls and so on. Has there been a discussion at EIB level about recognising the special status of the North, the peace process and so on? Is there a willingness to continue to engage in financing programmes and, indeed, to ramp up focus on the North of Ireland in the context of infrastructure projects and other investment in potential projects?

Mr. Andrew McDowell:

There is recognition of Northern Ireland's and Ireland's unique exposure. I think much of this will depend on the negotiations. We need to see what the outcome of that is with regard to eligibility of projects in Northern Ireland for further EIB financing. Within the EIB itself, there is a strong recognition of Northern Ireland's unique vulnerability. As long as the UK remains a shareholder in the bank for the next two years, Northern Ireland, like the rest of the UK, will remain eligible for EIB financing. What happens after that, after the UK exits the European Union, will be a matter for the negotiators between the 27 and the UK. We, as a bank, will obviously be bound by the outcome of those negotiations. Particularly now that Ireland has a vice president in the bank, which we have every 12 years, it can be taken that I will see it as my role to work closely with my British colleague - who remains a vice president of the bank and who formally looks after our operations in Northern Ireland - and other colleagues on the management committee to pay special attention to the situation in Northern Ireland.

Pearse Doherty (Donegal, Sinn Fein)
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Regarding social housing, there was a recent announcement of a €200 million investment by the EIB, forming part of an overall €405 million social housing package, to construct 1,400 new houses. What is Mr. McDowell's understanding of the timeframe for those house completions? Why are we not seeing a more ambitious programme? While we welcome what is the EIB's second round of investment in the past three years, why are we not seeing more ambition from the State and the EIB, given that we have such a housing crisis? Some €200 million is welcome, but we all know how much it costs to build a house, and 1,400 will not reach anywhere near where we need to be. Is there more potential for the EIB to invest in social housing, given the current model? If there are no upper limits to what the EIB can invest, why are we not replicating it in various sites across Dublin and other areas where there are social housing problems?

Mr. Andrew McDowell:

To my recollection, the financing agreement with the Housing Finance Agency, HFA, which is the transaction that the Deputy is referring to, required the disbursement of the funds within five years. However, I will revert to the Deputy and confirm the details.

We indicated to the HFA that we were happy to engage in a further transaction. This was the second transaction, and we regard the HFA as a well-established, reputable and professional partner. The constraint that the HFA faces in this type of transaction is that it must be budgeted for. This was a loan to the HFA that was guaranteed by the Minister for Finance, with such a guarantee moving the financing onto the Government's balance sheet. Therefore, it must be consistent with the overall expenditure ceilings under the fiscal rules. That is a natural constraint for the HFA in that it cannot by itself approach us and say that it would like more financing. That financing must be consistent with the overall budget agreed by the Government.

We are exploring other mechanisms with the Irish authorities in terms of off-balance sheet financing of social housing. I hope to see within the near future in Ireland the first public private partnership, PPP, on social housing that we have ever done in Europe. It would allow us to invest more in the social housing sector without adding to the expenditure and fiscal rule pressures on the Government in the near term.

There are mechanisms in other European countries, such as funds whereby a government would establish a fund with some private sector participation that would invest in a mix of private, affordable and social housing. Between the three forms of tenure, it would generate enough cashflow to repay the debt that we would provide. France is an active developer in this regard, with municipal authorities partnering with private sector developers to develop funds and with us providing cheap long-term debt. We have showcased these types of transaction to the Irish authorities. Most recently, we held a housing seminar with the Government approximately three weeks ago. We brought six or seven experienced housing lending officers from across Europe to meet the Department of Housing, Planning, Community and Local Government, the HFA and some of the local authorities to show what we could do. Through that process, we hope to see more transactions in this regard.

Pearse Doherty (Donegal, Sinn Fein)
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We have discussed this matter and the French model and, without knowing the details, I am encouraged to hear that there will be an announcement on social housing investment involving the EIB.

Mr. McDowell mentioned structure funds. We have a fund, namely, the old pensions reserve fund. We have €8 billion in a discretionary portfolio. Some of it is used in the Irish Strategic Investment Fund, ISIF. There is also the upcoming sale of AIB, the money for which originally came from the fund and could be returned to it. Could that fund not partner with the EIB to create the type of investment in social housing that is required? Given that the fund invests to make a return, is that type of structure possible for a mixed social housing unit involving rental, possibly some sales and social housing?

Mr. Andrew McDowell:

Yes. We have been exploring possibilities in that space. Those discussions are at a relatively early stage. At the end of the day, we need to see what the structure looks like before we can appraise it formally. For a fund, the key is that the tenure mix is such that the cashflows generated are sufficient to repay the debt and the equity that would be provided by, for example, the ISIF at a commercial rate. As the Deputy knows, the ISIF is required to seek a commercial rate of return under state aid rules. Regarding the fund's structure, the devil is in the detail in terms of ensuring that particular box is ticked.

Pearse Doherty (Donegal, Sinn Fein)
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My final question is on capital investment in general. We know the serious problems that Ireland is facing as we enter into a number of decades of demographic pressures. Those problems will present acutely in terms of our infrastructure, for example, the road network. There is a view that investment from the EIB has allowed member states to reduce public investment. For instance, building primary care centres is moved to the EIB and off the balance sheet, PPPs are undertaken, etc. That allows countries to keep public investment low, and Ireland is already at so dangerously low a level of public investment that the Irish Fiscal Advisory Council has claimed that we are only maintaining our investment stock and not making new investments.

Has Mr. McDowell a view on the fiscal rules? I am clear on this matter. Hearing the various parties that campaigned and were cheerleaders for these rules now claim that they want them changed because they do not work for Ireland is interesting. However, there are flexibilities within the rules that have never been used, for example, the structural reform clause, which allows us not to break the rules, given that it is built into them, but to move away from our current path and make a serious public investment if we believe that it would make a return for the economy. In Mr. McDowell's role as vice president of the EIB, which examines these issues, does he believe that this option is something the State should be considering?

Mr. Andrew McDowell:

It is probably something that Europe as a whole needs to be considering. The Commission has committed to reviewing the impact of these flexibility clauses by the middle of 2018. We will make our views known. That process has to take place formally within the bank but, from our perspective, we do not see the investment clause flexibility as having had a significant impact on investment levels in Europe, which is consistent with the Deputy's understanding. There have only been two cases in which the investment clause has been used by member states to justify enhanced investment. The restrictions are tight. Due to the fast growth in Ireland's economy, we understand that Ireland is not eligible for flexibility under the investment clause at this time.

Pearse Doherty (Donegal, Sinn Fein)
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We might not be eligible to apply for the investment clause, but there is a strong argument that we would be eligible to apply under the structural clause, which would allow us to deviate from the mid-term budgetary objective, MTO, by up to 0.5% of GDP, which is a significant level and represents more than €1 billion in public investment, if we can show that the structural reforms to be carried out would result in long-term benefits to the State. I would argue that, in the middle of a housing crisis, this is a way for the EIB to be more ambitious.

The State could, using this clause, allow more money to the Housing Finance Agency to co-finance these types of proposals. It is not just about housing. We have other bottlenecks, as I have said. Has the European Investment Bank looked at the structural clause? I am aware of the review, which is too far down the line. It is a year away. This country has never even applied under the structural clause. I am not sure why it has not, or whether we are assessing it.

Mr. Andrew McDowell:

We input into the policy debate at European level on the operation of these clauses. When it comes to Ireland, we are happy to finance more investment by Ireland, whether through a traditional Exchequer capital programme or alternative off-balance-sheet mechanisms, and an expansion of both is probably appropriate in the Irish case. Ultimately it is a matter for the national authorities, with the European Commission, to work out how those investments are consistent with the fiscal rules. We do not mediate between the European Commission and the national authorities on the interpretation of the fiscal rules. Certainly when it comes to European level debate on the future of European economic governance, we will make our views known on where we think perhaps the rules can be tweaked to promote and provide governments with more incentives to use whatever fiscal space they have to invest more for the future. Ultimately, high quality investments are good for fiscal and economic sustainability, and this is certainly the philosophy we will bring to the debate.

Gerry Horkan (Fianna Fail)
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I know Mr. McDowell is under a little bit of time pressure but I hope he is available for a couple of more questions. A number of the bank's projects tend to be cross-Border inter-country projects, such as motorways and bridges. In Ireland's case we are not able to tap into this potential in the same way as other countries because we are an island. Pre-Brexit or without Brexit we might have argued there is potential for projects with the North of Ireland. Is there any way we can harness or tap into this? Geographically we are where we are, but is there scope for us getting involved?

Mr. Andrew McDowell:

There are special funds in the EU budget for cross-border projects. There used to be TEN-T and now there is the Connecting Europe Facility, CEF. We co-operate very closely with the Commission in using these funds, where perhaps the Commission provides grant aid to a project and we provide debt on top of the grant aid. We liaise very closely with the Commission in the deployment of these funds. To my recollection, but this is a matter to be confirmed by the European Commission, there was special recognition for Ireland in the CEF to recognise the fact it has less potential for cross-border projects because of having fewer land borders. There was a special allocation for Ireland, whereby projects could be part financed with grant aid from the European Commission if it could be justified, for example, as a road that led to a port that led to another European country. I believe there were some special recognition of this but I can come back and confirm it.

Gerry Horkan (Fianna Fail)
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If such funding was allocated, was ever used to finance regional airports, Dublin airport or ports? Particularly in the context of Brexit, we need to strengthen our connections with the continent of Europe. With customs and various barriers, potentially using the land bridge to continental Europe that is the UK may be more difficult. I hope not. We may need better capacity to go directly to the continent.

Mr. Andrew McDowell:

Certainly we are happy to talk to the Commission and come back to the committee with the full list. I do know the CEF, which is a fund for cross-border projects is financing the economic appraisal of the potential electricity interconnector between Ireland and France. This is one example of a project being funded at a very early stage. If this project were ever to move forward into a deployment or financing phase we will certainly be the likely financing of choice for its French and Irish promoters. I understand the Port of Cork has received funding under the CEF also.

Gerry Horkan (Fianna Fail)
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In terms of the impact of Brexit, Mr. McDowell referenced that 90% of lending is to the EU and that 160 countries in total have received money from the EIB. Obviously the relationship the EIB may have in future with the United Kingdom as a country depends on how Brexit pans out. How does it work out that it is 90%? What is the barrier to lending more or not lending? Is it that EU countries get priority and if there is a bit left over the bank will lend to others based on criteria? Is there anything to stop the UK from benefitting from the European Investment Bank? Is there a clause that states countries that leave the EU can no longer benefit? Are the criteria more difficult? How does it work?

Mr. Andrew McDowell:

The annual allocations in terms of lending between EU and non-EU countries are decided by our board of directors each year in our corporate operational plan. It also depends on the degree to which we can secure guarantees from the European Commission for some of our lending to the most highest risk countries. For example, it is difficult for us to lend to non-investment grade countries outside of Europe in a way that is consistent with our own triple A rating unless we receive some type of credit guarantees from the European Union budget consistent with past foreign policy objectives. This is probably the biggest constraint. Lending in Europe tends to be quite safe in general. Lending outside of Europe is less safe and there are limits to the amount we can do. To lend outside of Europe to any particular country requires-----

Gerry Horkan (Fianna Fail)
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By Europe does Mr. McDowell mean the EU?

Mr. Andrew McDowell:

The EU, excuse me. When we lend outside of the EU it requires a decision of our board of governors, which is the Finance Ministers from each member state, to give the bank a mandate to lend outside of the EU. All of this is hypothetical, but at present the statutes state a shareholder of the EIB must be an EU member state. We take it as a given that once the UK ceases being an EU member state, unless the treaties are changed it will no longer be a shareholder of the EIB. In these circumstances our board of governors would have to agree to give the bank a new mandate to lend into the United Kingdom.

Gerry Horkan (Fianna Fail)
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As a shareholder is it entitled to any refund? Is there a mechanism in terms of money it has invested in the EIB?

Mr. Andrew McDowell:

I will stick to the factual situation. Unlike many other multilateral lending banks, such as the World Bank and other multilateral lending institutions, there is no provision in our statutes for a country to exit and to withdraw its shareholding. The legal situation, to say the least, is not clear. There is no automatic right to recover upon exit the share capital paid in. It is simply was not envisaged in the statutes establishing the European Investment Bank.

Gerry Horkan (Fianna Fail)
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The factual legal position is it is accepted the UK is leaving but there is no mechanism for it to leave. Is that correct?

Mr. Andrew McDowell:

It is accepted it is leaving. Because the legal situation was not envisaged in the statutes of the bank for a country to exit, no provision was made in the statutes for what happens to the share capital paid in. Ultimately, it will be a matter for the negotiations between the 27 and the UK.

Gerry Horkan (Fianna Fail)
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On that interesting note I thank the witnesses for their attendance this morning.