Oireachtas Joint and Select Committees
Thursday, 29 June 2017
Committee on Budgetary Oversight
Capital Investment: European Investment Bank
I welcome Mr. Andrew McDowell, vice president of the European Investment Bank, EIB, and Mr. Cormac Murphy who is head of the EIB Dublin office. We will be looking at the issue of capital investment. Before I begin, I remind members and witnesses to turn off their mobile phones. Interference from mobile phones affects sound quality and transmission.
I draw the witnesses' attention to the fact that they are protected by absolute privilege in respect of their evidence to this committee. However, if they are directed by the committee to cease giving evidence relating to a particular matter and they continue to do so, 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 the proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.
I invite Mr. McDowell to make his opening statement.
Mr. Andrew McDowell:
I thank the Chairman and members of the committee for the invitation to speak today on the subject of capital investment. As the Chairman mentioned, we opened our first EIB office in Ireland in Dublin last December. I thank the Chairman for the introduction he gave Mr. Cormac Murphy, who is the head of our office in Dublin. We have offices in most EU member states with a few remaining gaps. Opening an office in Dublin was long overdue and Mr. Murphy's presence here will be very valuable to the bank.
As vice president of the European Investment Bank since September 2016, among my responsibilities is oversight of our operations in Ireland and some other EU countries. The EIB was created under the Treaty of Rome. We are a treaty-based EU institution. We are the European Union's long-term lending institution, owned directly by the 28 EU member states. That may be an issue we can come back to. We are often known as the EU bank. We are distinguished in that from the European Bank for Reconstruction and Development, EBRD, and other international financial institutions, IFIs, by the fact that we are the only bank that is owned only by EU member states. The EBRD has shareholders in the United States, Japan and outside Europe.
Our mission is to use loans and other financial instruments, including equity investments, to finance long-term investment projects that support EU policy goals. We are headquartered in Luxembourg. As well as the bank, we are the majority owner of the European Investment Fund, EIF, which was created in 1992 to focus on financing Europe’s small and medium-sized enterprises. We are self-financing; we do not look for budget money from the EU budget every year. We finance all our projects through the capital markets. We are the largest international public bank in the world and the largest non-state borrower in the world. Last year, we raised about €65 billion on the capital markets and we loaned about €83 billion. That is about twice the size of the World Bank in terms of the overall volume of operations. On average, we finance around 500 projects each year in over 160 countries. By volume, the vast majority - about 90% - of our business is within the EU and 10% is outside of the European Union. That proportion is increasing. The activity is designed to support EU foreign policy goals.
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, to kick start long-term investment in key areas. The aim is to use guarantees of €16 billion from the EU budget and €5 billion of EIB’s own capital to form this fund called the European Fund for Strategic Investments, EFSI, which is designed to mobilise a total of €315 billion of higher risk investments in transport, broadband, energy, innovation, renewable energy, energy efficiency and SME financing. This was the mainstay initiative of the Juncker commission on the economy. We are well over half way through the goal of financing €315 billion in investment. The latest estimate is that we have financed about €180 billion of investments since the start of it. We are very confident we will reach that target. The European Council, Commission and Parliament are already negotiating the extension of this EFSI initiative from mid-2018 all the way to mid-2020.
The EIB has been a long-term financing partner for Ireland and has provided nearly €15.5 billion for investment since it joined the EU in 1973. Our lending activities here significantly increased during the financial crisis with annual lending now representing nearly double the engagement since 2008. As other banks were exiting Ireland during the financial crisis and deleveraging their Irish exposures, the EIB was significantly increasing its exposure to Ireland, consistent with the Government's policies and EU policy to support the Irish economy.
In the past five years, EIB lending in Ireland totalled €4.2 billion, supporting, among other projects, the motorway programme, Dublin Port expansion, Dublin Airport terminal 2, the Luas extension and university campus expansions. We signed loans with every university in Ireland over this period. These were the first borrowings taken up by the Irish university system. We financed schools and primary care centres through regular Exchequer financing and PPPs, and social housing, at a time when other sources of financing for enterprise and infrastructure investment were being cut back significantly.
Before the banking crisis, EIB lending in Ireland averaged around €400 million per year and this year we are in a position to provide more than €1 billion depending on the level of demand. We are subject to promoters seeking disbursement of cash. We are not in control of how much we lend each year - the promoters are - but we are in a position to lend that figure.
The EIB is also diversifying the nature of its engagement. Last year, we financed 13 initiatives across a spectrum of areas of different infrastructure classes and enterprise areas compared to just three in 2008. Our relationship with Irish State partners, particularly the National Development Finance Agency, NDFA, and the Strategic Banking Corporation of Ireland, SBCI, continues to strengthen.
During 2014, the EIB provided a €400 million facility to the newly established Strategic Banking Corporation of Ireland - representing 50% of the total initial funding - at extremely attractive conditions to kick-start increased lending to Irish SMEs. More recently, the EIF, our subsidiary, and the SBCI signed the first competitiveness of small and medium-sized enterprises, COSME, agreement in Ireland. COSME is the European programme for SMEs. This transaction, guaranteed by the EFSI initiative, has recently been extended and will allow the SBCI to support up to €330 million of agriculture-related loans to up to 10,000 SMEs, primarily farmers, by commercial banks in Ireland over the next three years. In addition, the EIF has supported a number of equity funds for high tech sectors, 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, EaSI, 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 impact of Brexit, the EIB hopes to increase its level of support for Irish projects. With this aim in mind, as well as opening a permanent office in Dublin last December, we established with the Irish Government an Ireland-EIB financing group. The group, which was chaired initially by the former Minister, Deputy Noonan, and which is now chaired by the current Minister, Deputy Donohoe, includes senior management from the EIB, led by the president and myself, as well as Government Ministers and senior officials from relevant Departments and agencies. The first meeting of the group was held last December and the second meeting was held in Luxembourg last month, with the former and current Ministers present, to discuss progress and formulate further actions that will facilitate the EIB's engagement in Ireland, notably discussions on support to negate the potential negative impacts of Brexit for Irish enterprise. To support the financing group, a number of thematic working groups have been established, covering: financing connectivity, including road, rail, air, ports, broadband and energy networks; financing social infrastructure, including housing, health and education; and financing enterprise, including venture capital, our support for the banks, agribusiness and so on.
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 public private partnerships, PPPs, and similar structures, for investment 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-States such as the ESB, Ervia, the DAA and so on; increased direct investment in mid-sized Irish corporates, including through equity-type products; and 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 banks’ own needs to preserve scarce capital while financing a growing economy and supporting those sectors particularly exposed to Brexit. To have maximum effect, these initiatives will often combine EU and national budget resources, as well as EIB and SBCI funding and capital; and we have an appetite to increase the amount of project finance we will provide for the renewable energy sector in Ireland, including solar energy.
The Ireland-EIB financing group has committed to meet at least twice a year and the next meeting, planned for later this year in Dublin, will follow the review of the capital programme and will provide further clarity on priority projects across multiple sectors.
On that note, I will conclude my opening remarks. Mr. Cormac Murphy and I will be happy to answer any questions members of the committee may wish to ask.
I welcome Mr. McDowell and Mr. Murphy. I have a few brief questions. I thank Mr. McDowell for the interesting overview. What level of investment does Mr. McDowell consider the Government should be pursuing? We have been concerned at meetings with different stakeholders that we have been barely meeting depreciation levels. There may be a debate later today on the Rugby World Cup due to take place in 2023. Sometimes such events have been used, certainly in transport and other areas, to roll out additional infrastructure. In terms of the level of State investment, given that we have been barely meeting depreciation levels, which is a major regressive dead hand on our economy, does Mr. McDowell consider that the plan for State investment out to 2021 is sufficient?
We have again felt the impact of the operation of the fiscal rules in terms of the constraint on capital and current spending. When a project is brought forward, be it the Cork-Limerick motorway or the Dublin metro, what is the application of the rules in terms of providing matching funds with respect how we might operate in that regard?
Mr. Andrew McDowell:
On the level of investment, these are ultimately national policy decisions but, clearly, the statistics show that Ireland is now at the bottom of the EU league table and at the very bottom of the list of 28 member states when it comes to the level of investment in infrastructure as a percentage of GDP. It may well be the case that GDP in Ireland is slightly overstated. If one used the ratio in the context of GNP, it might be a better measure of the economy's size.
Mr. Andrew McDowell:
Yes, but even if that denominator was used, it would show that Ireland is very low down on the EU league table. All EU member states are investing less in infrastructure now compared to prior to the crisis. There is strong evidence that this threatens to hold back European productivity growth and the pace of the European recovery. At the EIB , we certainly believe that at both the EU level and national level there needs to be consideration of how to increase levels of public investment in infrastructure.
Would all the members states have pipelines of infrastructural projects? We are concerned that we do not seem to have a pipeline of such projects. We have ideas for projects such as the north-west motorway or a Luas for Cork, but we have no projects in the pipeline.
Mr. Andrew McDowell:
It changes country by country but there is no doubt that the financial and sovereign debt crisis during the past ten years in Europe significantly damaged the capacity of both central government and municipal authorities across Europe to develop pipelines of infrastructural projects. Capital investment was frequently the first area to be cut, including the human resource capacity to develop the pipeline of projects. Ireland is a particularly acute case in that respect. It is not unique but it is more evident in Ireland than in most other EU countries that, at local as well as national level, the capacity within individual agencies and Departments to develop pipeline projects was damaged. It is not always just a case of fiscal resources and financing capacity. Frequently, it is a case of the human resource capacity to produce a stronger pipeline of projects when the economy needs it.
Mr. Andrew McDowell:
Yes, I was involved in those decisions in a previous capacity. I do not believe anybody would claim things were perfect in terms of the decisions that had to be taken to restore the ability of the sovereign to raise its own financing again but, by and large, as we have seen, the country is growing again and the policies have resulted in growing employment levels and quite a strong economic recovery. However, there is a huge challenge in repairing the damage that was done from the financial and fiscal crisis, of that there is no doubt, in terms of the State's capacity, in the context of both financial and human resources, to start investing heavily again.
We are eager to support this. Infrastructure projects can be financed in different ways. The traditional approach is sovereign borrowing to finance infrastructure through the public capital programme - the Exchequer finance capital programme - and we are happy to support the Government in doing this. The Irish Government can borrow on the bond markets but we believe there is an advantage in the European Investment Bank, EIB, financing the programme as opposed to doing it through the bond markets, and for the following reasons. As well as cheap financing, we bring technical capacity and advisory support, which can be of significant benefit. Our financing costs are still less than those of the Irish Government, such that we still offer a financial advantage to Ireland when it comes to financing infrastructure as compared to NTMA bond market borrowing. We are also very flexible in terms of the draw downs. When the NTMA borrows on the bond markets, it has to take out a €5 billion bond and if the State is not ready to spend the money, it has to park it in a bank account whereas we will disperse very flexibly only when the projects need the cash.
On Deputy Broughan's second question, on top of traditional Exchequer borrowing, where states are under pressure under the fiscal rules, we can look at alternative structures, particularly public private partnerships. PPPs. We would regard this as supplementary to a normal Exchequer capital programme. It is not displacing it. Public private partnerships offer an advantage in the sense that they transfer a lot of the risk for delivering construction on availability of infrastructure to the private sector, but the disadvantage is that the State has to pay the private sector for the cost of that risk such that the borrowing cost is slightly higher than it is when one borrows from the bond markets. This reflects the fact that significant risk is being transferred to the private sector. In the case of Ireland, that margin for the cost of public private partnerships over the cost of sovereign borrowing is as tight as anywhere in Europe. Ireland is regarded as a very safe, competent location for investment in public private partnerships, largely as a result of the professionalism of the National Development Finance Agency, NDFA, in developing PPP projects. This is an option for Ireland in terms of how to expand its infrastructure programme beyond what is possible under the fiscal rules.
Public private partnerships, PPPs, can be a contentious issue. The devil is always in the detail and much is dependent on a project. We would never advocate PPPs purely as a way of getting around the fiscal rules. The model has to be suited to the project. The fiscal flexibility from PPPs should be regarded as a secondary benefit. The primary motivation should always be that the private sector has the capacity to manage these risks better than the public sector. On occasion, we have had promoters from some European countries coming to us suggesting PPPs in certain areas of public investment but we have refused them on the basis that it would not make any sense to do a PPP in those areas because they represented poor value for money from the private sector. In other areas where governments are financing projects through traditional Exchequer investment, we have suggested that they instead do them through PPPs because the projects were in areas the private sector could easily manage and they could get very good value for money. It depends on individual projects.
In terms of motorways, we have done a lot of the motorways in Ireland through PPPs and they have all been very successful. We have the appetite to do the remaining gaps in the motorway system through PPPs, if that is what the national authorities decide. The advantage of this for Ireland if a public private partnership is available, which means the private sector is taking the risk around construction of the infrastructure but not in regard to the volume of traffic that uses it, is that there is no upfront cash outlays by the State. All the upfront cash outlays come from the private sector, with the State paying a unitary payment over the lifetime of the asset, usually 25 or 30 years. It spreads out the cost of the asset over its lifetime as opposed to all of the pressure coming upfront. There can be other forms of PPPs where there is no impact on the State's finances because the private promoters are not only taking the availability risk, but they are also taking the traffic risk. In other words, the motorway is tolled and the private sector can generate enough revenue from the tolling to pay for the infrastructure. We can help in those projects as well by essentially making them safer for private sector investors.
I thank Mr. McDowell and Mr. Murphy for being here today. Mr. McDowell has just answered many of the questions about public private partnerships that have been floating around. Mr. McDowell mentioned in his opening remarks that following the review of the capital programme, the European Investment Bank will be meeting the Government. Would it not be in the Government's interests and in the interests of the capital programme for the EIB to meet Government before the review is finalised so that its input into projects, finance-wise, would be clear before the review is published?
Mr. Andrew McDowell:
Yes. I should have clarified that we are discussing projects with the Irish Government and we are doing as much as we can in terms of what we call a pre-appraisal process in terms of providing finance options for projects before the Government has made a formal decision to authorise those projects and make a formal financing application to the European Investment Bank, EIB, to try to accelerate the process if and when the Government decides formally to proceed with a project. That process of exchange of information is taking place.
In terms of the EIB's interaction around financing of projects, what advice or assistance can it give in regard to the off-balance sheet part of its portfolio? The biggest challenge facing us in terms of infrastructure is how to do things within the limits. On those limits, given that these projects are infrastructure projects, there is a long-term return on them. In the witnesses' view, are the current limits around funding for infrastructure restrictive?
Mr. Andrew McDowell:
In terms of the advice we can offer, we draw from our experience in financing similar projects across Europe to develop off-balance sheet structures consistent with the statistical rules from EUROSTAT to finance infrastructure projects at minimum cost to the State. We host a body called the European PPP Expertise Centre, EPEC, which is the centre of expertise within Europe for designing and implementing PPPs. It works with all of the national authorities. Last year, we jointly published with EUROSTAT a guide for national authorities on how to design PPPs in a way that is consistent with the statistical classification rules of EUROSTAT. In other words, there are certain limits to the support states can offer to PPPs before the whole structure comes back onto the government's balance sheet in terms of the types of guarantees it can offer to private investors that are funding those PPPs. We can bring advice to member states on how far they can go in supporting those projects with guarantees before they are reclassified as on-balance sheet investments. We are engaged on this issue with the Irish Government through the Department of Public Expenditure and Reform and the NDFA.
On the Deputy's question regarding the fiscal rules, the EIB is not involved, formally, in a policy review of the fiscal rules.
Mr. Andrew McDowell:
One could make the argument that some easing up on the fiscal rules to facilitate more investment would be good for business for the EIB. We would be okay with that. There is widespread recognition across Europe that there needs to be more investment in infrastructure in particular.
The concern that some countries have about any further flexibility in the fiscal rules is to what extent that flexibility will be used sensibly to finance projects that make a real economic and social impact as opposed to building bridges to nowhere. It may be that the EIB could have a role. Further flexibility for projects co-financed by the EIB would provide sufficient reassurance to all EU and eurozone member states that these were high quality projects. We do not just finance projects, we have also have to put them through a very intensive environmental, social and economic appraisal to make sure that they actually make sense. The degree of confidence that our shareholders, the 28 member states, have in the EIB appraisal process may make it easier to provide some additional flexibility to co-financed infrastructure projects. This will, however, ultimately be a matter for the Commission and the member states to decide.
There may well be further debate on the fiscal rules. The Commission introduced a particular investment clause in the Stability and Growth Pact two years ago. This allows for further investment levels but only in very tightly defined circumstances - countries have to be in recession and the project has to be of common interest at European level. This is so rigidly defined, in fact, that there has been almost no further investment. Only one single project has got through this additional flexibility introduced by the Commission. The Commission did, however, promise a review of these investment laws by the middle of next year. Now is certainly a good time to look at ideas of how to perhaps expand the flexibility of this investment clause for countries like Ireland with big investment requirements.
Mr. McDowell also mentioned that the EIB gives credit guarantees to Irish commercial banks to increase their lending into key sectors. Irish banks are charging their customers far higher interest rates for that money than banks in Luxemburg or on the Continent. What is Mr. McDowell's view on that? Are these Irish banks using EIB money to enhance their balance sheets? What is most important here is that the opportunity that should be given to Irish business to rebuild through EIB money is costing far more than it would elsewhere in Europe.
Mr. Andrew McDowell:
When we provide either funding or guarantees to banks, we make it a condition of the transaction that they pass on the financial advantage to the small and medium-sized enterprises. It is true that the cost of credit is higher from Irish banks than in most other eurozone countries. Where the funding has been based, however, on an EIB group guarantee, it is significantly cheaper. Last December, for example, we did a COSME transaction where we provided with the Strategic Banking Corporation of Ireland an 18% guarantee to the banks on their lending into the agribusiness sector. We expect there to be up to 10,000 beneficiaries of that €350 million of lending. The interest rate on those loans was less than 3%, which was quite exceptional. The initial tranche of that, in fact, which came to approximately €100 million, was drawn down within about eight weeks. That was without collateral.
There is an argument that the banks are not lending and that there is not enough credit demand in the Irish economy. What we have certainly noticed with this transaction, however, is that when one gets the conditions and the interest rate right and removes the collateral requirements there is certainly a lot of credit demand in the Irish economy. This is informing our view of how to co-operate even more intensively with the Irish Government and with the SBCI in terms of looking at ways of alleviating the impact of Brexit on a wider number of sectors in the Irish economy.
My apologies for being late. The national economic dialogue is running at the same time as this committee and I would just like it put on the record that this is awkward. I was briefly there this morning but was not able to attend properly because of having this meeting here. Perhaps other Deputies cannot be here because they are there. I would just like to flag this as an issue to be looked at. I stated at the national economic dialogue that we need to reconsider how we engage with this process because they are interested in the budgetary oversight process, just as we obviously are too. I am sure that Mr. McDowell is familiar from his previous role with that whole world and how we get the partnership approach working properly.
It is very good to have Mr. McDowell's presentation and I have a few questions. With regard to flexibility in the fiscal rules, I vaguely recall that when the Juncker investment fund was set up there was a commitment that anyone investing into it could amend their fiscal rules. There was a caveat and it was difficult because there was no guarantee of being able to invest into a fund. Did that help the EIB's lending back out of it? I mention this as one interesting example.
I would also appreciate clarification on the figure of how much we have now managed to get out of Juncker fund, the EFSI. Of the €1 billion available to the EIB, Mr. McDowell must also have a rough projection of what sort of lending and what sort of take-up to expect this year. He said that the EIB had €1 billion available to lend but I imagine that that depends on the presence of private sector counter-parties to take it up. What is the projected take-up for this year?
Mr. McDowell also mentioned that the EFSI is about to be expanded up to about €500 billion. My understanding is that there are certain conditions with that. Am I right in saying that 40% of the lending has to go to low carbon energy or investments? I would be interested to know what the conditions are for additional lending. My understanding is that there are new conditions.
On the same theme, how does the EIB look at assessing different projects? Mr. McDowell mentioned, for example, that it was doing a lot of work on PPP motorways. I know that Tom Parlon was licking his lips at this yesterday and his members have done very well out of construction projects. IBEC was also out yesterday with a massive construction plan for the country involving motorways everywhere. It seems that this does very well for its members too. For the Irish public, however, how do we assess these projects? They sail through every Department of Finance cost-benefit analysis. There is to my mind an incredibly narrow set of criteria around time saved over a section of motorway and so forth and there seems to be no calculation of the environmental effects or the fact those time savings do not accrue in the end because of the M50 being so clogged. There does not seem to be any assessment of alternative investments such as public transport, for example. There are benefits from such alternatives. People could be working while sitting on the train, for example. Is Mr. McDowell satisfied with the cost-benefit economic analysis approach? I ask this particularly in light of what I said earlier on, where on the one hand the Commission is saying that it wants everything to be low carbon and on the other hand a huge amount of the lending from the EIB is for motorways and the like. That is what we build in this country. When we say infrastructure we mean motorways and we want as many of them as we can get. Is Mr. McDowell satisfied with the multi-criteria economic cost-benefit analysis we are doing on these projects? From the analysis carried out, either by the Department of Finance or whoever else is making the call, it seems we can only build motorways and cannot do anything else.
Mr. Andrew McDowell:
I thank Deputy Ryan for the questions. On the pipeline issue, I really hope that we can hit the full €1 billion euro lending target. This number does not just reflect what is available. It is actually based on a clear pipeline of projects that we are currently negotiating with promoters. At the end of the day it is up to the promoter to decide when they are ready to sign, though we obviously have our own due diligence processes.
It is also up to them to decide when they want the cash disbursed. We are very much in their hands. When it comes to projects such as the Dublin Institute of Technology, DIT, campus at Grangegorman, which is in our pipeline and in regard to which we are proposing to lend a very large amount of money to its public private partnership, PPP, structure, we are very much in the hands of the Irish authorities in terms of issues that have been holding the project back. However, it is included in the €1 billion facility that we have available for Ireland. Whether it can logistically be finished before the end of the year depends on several legal and other processes taking place in regard to the project. That is an example of the type of issue we face on several projects which may have planning or legal issues that-----
Mr. Andrew McDowell:
I will come back to planning issues. On the issue of the European Fund for Strategic Investments, EFSI, the expansion to €500 billion and the criteria involved, that is currently being negotiated. A trilogue is taking place between the European Parliament, Council and Commission on the parameters regarding the extension of EFSI and the new targets to be included therein. There is a proposal from the European Parliament to require that 40% of financing under EFSI 2.0 would go to climate action projects. There is recognition and agreement that the denominator for that would be all EFSI lending outside of SMEs. If one is lending to small and medium enterprises, it is very difficult to count how much of that goes towards climate action initiatives. One does not want a trade-off between lending to SMEs and lending to climate action. There is a consensus that 40% of financing going to climate action projects could work but only if it excludes EFSI lending to SMEs. Ultimately, that will be a matter for the negotiators. While we advise them, we will not be in the room when these issues will be finalised.
I take Mr. McDowell's point that it depends on the particular circumstance but how much of Ireland's €400 million would go towards low-carbon projects if Ireland were to remain within the criteria ? Has Mr. McDowell a rough idea? Is the EIB anywhere near that sort of target in lending in Ireland?
Mr. Andrew McDowell:
Again, I can revert to the Deputy with exact figures on the proportion of climate action projects in Ireland. The Luas project we are financing is climate action, while the Dublin Port project has a significant climate action component. The national broadband plan that we will be financing subject to the finalisation of the tender process is 100% climate action, as is the social housing programme because of the energy efficiency requirements it includes. I can revert to the Deputy with the exact percentage but I would not be surprised if it is very close to the 40% figure. A significant proportion of our lending in Ireland is for climate action projects.
On the fiscal rules in EFSI, the Deputy is correct that there is a mention in the investment clause of the Stability and Growth Pact that national contributions to EFSI projects will be potentially disregarded. The difficulty with that in operation is that EFSI projects are high-risk projects. When we do projects under the Juncker plan they tend to be high-risk private sector projects because that was the market gap identified. Sovereign-backed infrastructure projects are not high-risk projects and therefore national co-financing of infrastructure tends not to count towards EFSI. This particular mention of EFSI in the Stability and Growth pact does not make much sense to us. It would make more sense to provide more flexible treatment of EIB finance projects more generally, rather than EFSI projects, as that would include a broader category of investments that the EIB makes, including lower-risk investments in infrastructure. That is an issue we are discussing with the European Commission in terms of the review of this clause in 2018.
I refer to the sort of energy projects in Ireland Mr. McDowell thinks the EIB could be investing in, such as large-scale offshore wind farms. In Denmark, Germany and elsewhere, they are bidding the auction process down to €5.70 per kilowatt hour and while it must be possible for us to have a similar auction process, it is still a risky project. In terms of aggregated solar power, the EIB is not going to put a panel on my roof but perhaps if there were 10,000 people who sought such investments and an aggregator to act as a counter-party to EIB lending in that regard, there would be scope for EIB lending. It would be private sector and it is not high risk but it is not a State infrastructure regulated asset. Other projects we need to do on the same basis are deep retrofit and the rolling out of heat pumps, as are the tens of thousands of charging points we will need. Might projects of that sort qualify, being aggregated, non-high risk but not regulated State infrastructure? Has the EIB done that type of lending elsewhere or has it talked to anyone about doing that type of aggregated energy or large energy lending here and might that qualify under the current rules so that it is off-balance sheet in that sense?
Mr. Andrew McDowell:
Absolutely. We are engaging in some preliminary discussions here in that regard but are further ahead with them in many other European countries and have financed many operations, particularly in the area of energy efficiency, which absolutely requires aggregators. The difficulty in regard to energy efficiency projects is they tend to be very fragmented, small-scale individual projects where individuals do not have the necessary expertise or incentive to do it themselves and it needs professional aggregators to bring projects together to a scale that can be financed by the EIB. We are doing that very successfully in several European countries and are engaging in discussions here in that regard but the process is slightly further behind.
Mr. Andrew McDowell:
Yes. We are very interested in solar energy. We have financed about 70% of all offshore wind projects in Europe and are the bank of choice for promoters in that area. We are doing huge amounts of solar energy projects now, including in some parts of northern Europe. Obviously, the biggest projects we are doing are in north Africa and southern Europe but it is making increasing economic sense, even without subvention, in northern Europe. We think solar energy will transform the energy industry over the next five to ten years and it raises all sorts of questions for other forms of power, the economics of distribution networks and so on. We are very excited about the possibilities and are one of the biggest financiers globally of solar energy projects.
In terms of Deputy Broughan's question regarding social housing, we do a significant amount of financing of social housing in Ireland. We have lent about €350 million to the Housing Finance Agency in two transactions over the past three years and that is on balance sheet and, therefore, Government borrowing. The Housing Finance Agency likes to borrow from the EIB because we are cheaper than the NTMA and very flexible on drawdowns. There is a significant energy efficiency component in that lending which makes it very attractive for us in terms of our targets. We are also doing the first social housing PPP in Europe in Ireland. This is the first time we have done a PPP for social housing and we are at a very advanced stage with the National Development Finance Agency, NDFA, in contracting for three different bundles of social housing in Dublin, Cork and another urban area yet to be decided upon. That is an interesting transaction from an Irish perspective because it allows the Government to pay for those assets over their lifetime, as opposed to having to pay for them all over the next two to three years when they have a 30-year lifespan.
The other area of social housing in which we invest heavily in other parts of Europe but is more difficult in Ireland is through funds. In France, the Netherlands, Belgium and other countries we provide debt financing to funds that build social housing.
The economics can be different in other European countries where the affordable rent can be at a level sufficient to finance the debt servicing costs. In Ireland, the social rents are lower and there is no category of affordable rents or housing in Ireland sufficient to collect enough rent to pay the debt servicing costs. As such, it is a more difficult proposition in Ireland. Nonetheless, we are having engagements with the Department of Housing, Planning, Community and Local Government and ISIF on the potential for a social housing fund in Ireland.
I have a last question. In his report on the European Council yesterday, the Taoiseach said there was an agreement on security co-operation at the Council to ask the EIB to consider changing its charter to allow it to lend to the armaments industry. I am summarising what was in his report yesterday. I am interpreting correctly that a change in the EIB charter is required? Is it the charter or is there another statutory change required to allow the EIB to lend to the armaments and defence industries? A related question is how much the EIB raises from ethical funds by way of bonds which might be called into question if it was seen to be a lender to defence industries. A third related question-----
This is critically important. I raised it in the Chamber yesterday but was unable to get an answer from the Minister of State, Deputy McEntee. I want to use this opportunity given that I have a vice president of the EIB here to ask the question and get a detailed response. I respect that it is slightly outside budgetary oversight, but it is related. If the EIB lends to the defence and armaments industries, would it restrict the capital that might be available for the other projects? We do not have a big defence armaments industry here. Would it have an effect on the EIB's own balance sheet in terms of what its lending capacity will be in other areas? I would appreciate it if Mr. McDowell could give me details from the EIB side on what is on the public record from the Taoiseach on the European Council decision.
Mr. Andrew McDowell:
At this point in time, eligibility criteria in the EIB's lending rules prohibit lending to the defence sector and the armaments industry unless the technology we are supporting is dual use and can be used for consumer and commercial applications. In fact, there are a lot of areas where we finance things, for example the latest developments in radar technology, with civilian and military applications. That is okay. It is consistent with our eligibility criteria and it is okay for our investors. As part of its security and defence discussion, the European Council has asked us to look at how to lend more and invest more in research and development in the defence industry generally. Our lawyers are having a good look at this and it is the subject of intense debate among our board of directors on how to interpret the particular request from the European Council and on the implications for the bank and its funding. That process is one that is still being debated in the bank between the managing committee of the bank, including the vice presidents, and our board of directors, which includes an Irish director, as to how to bring that forward.
What is clear is that we could possibly do more in the dual use sector. It is not an area we have targeted in the past. If there is a desire for the EIB to play a greater role in European security, we could lend more to dual use technologies in a way that is consistent with the ethical requirements of our investor base. We raise approximately €65 billion a year on capital markets. I cannot give the committee an exact percentage on the bonds coming from institutional investors with specific ethical rules but I would say it is a very significant proportion. We had the green bond programme. We pioneered the development of the idea of green bonds, of which we are the largest issuer in the world. The buyers of green bonds would have very clear rules that we cannot finance armaments. There are other categories of investor with other ethical codes and one would have to look through the individual codes of each institution. We are in the process of doing that because we want to have a very good understanding of any impact of a change in our eligibility criteria on our ability to raise funding.
If we cannot raise funding as cheaply as we do right now, we cannot pass on those benefits to the beneficiaries. The purpose of our bank is to raise funding at a triple A rating. We raise funding more cheaply than any other bank in the world, not for our benefit but for the benefit of the EU member states and the promoters of projects in them. If our ability to do that is damaged, it is not to our detriment, but to the detriment of promoters of projects across EU member states. Our board has a very good understanding that anything we do must pay very careful attention to the requirements of our investors.
Mr. Andrew McDowell:
The board would decide on a change of our eligibility criteria. It would have to be on the basis of a proposition from the management committee of the bank to the board. It is clear that if the board is demanding a change in the eligibility criteria to accommodate the requirements of the European Council, the management committee will be expected to make a proposition. This will be something that evolves. I expect it to be finalised one way or another before the end of the year. Last week, the European Council reiterated, or recalled, its request to the EIB from last December to come forward with a set of proposals on how to provide more investment into research and development in the defence sector. This is something to which the bank must respond in the near future.
Mr. Andrew McDowell:
Once a member of the board has been appointed, his or her obligation is to the health bank. However, board members frequently come from national governments where they are civil servants and it is politically self-evident that on issues like this, they represent the views of their member states. We expect, certainly on an issue like this, that if our board of directors approves a change in our eligibility criteria, which is a matter for it, that will reflect the views of member states themselves.
I did and I apologise for coming in and out. It is useful to have a chance to ask Mr. McDowell questions because I do not fully know about the workings of the bank. I understand the broad principles, but it is very helpful to get a clearer and more detailed picture. The EIB lends directly to a state for its own projects which are on balance sheet. It also does public private partnership lending and lending to semi-state bodies. Does it also lend to small and medium businesses or any element of the private sector?
Mr. Andrew McDowell:
Yes. On infrastructure, we can lend to a government directly. The advantage to a government is very cheap funding. We can also lend to a private promoter who is contracted with a government through a public private partnership to deliver on infrastructure or we can lend to commercial semi-state companies under their own capital programmes. These latter two are off a government's balance sheet. We also lend directly to the private sector but it has to be in eligible categories. We do not lend just for anything. It must be for new investment projects in eligible categories of investment for the bank to the private sector. We can lend directly to large companies, but we will really not do a loan directly to a company unless it is of more €7.5 million to €10 million. If it is a smaller company, we will intermediate the loan through the banking system.
We will lend to the banks, which lend to smaller companies with smaller loans.
What sort of conditionality does the EIB put on the loans? Is it primarily about the strategic nature of the investment or the ability of the particular project to be self-financing and therefore able to pay?
Mr. Andrew McDowell:
We have two basic forms of conditionality. One is the creditworthiness of the project. We have to be sure we are going to get our money back. At the end of the day, we are a bank. This is not grant aid. We have to do a very intensive credit analysis in respect of the ability of the borrower to refinance. The project itself does not necessarily have to be able to raise the cash, however.
Mr. Andrew McDowell:
For example, we finance schools across Europe, including in Ireland. The schools are not raising the cash to repay the debt. The source of the debt repayment is ultimately general taxation or a public-private partnership, PPP, structure, whereby the unitary payment that the state makes to the private promoter to make sure the schools are available repays the EIB debt. In other cases, we are financing projects in the private sector that have to wash their own faces directly. They have to generate enough cash to repay the debt. That is the credit side. While we are generally cheaper than the market, our pricing will still reflect the level of the risk we are taking. The greater the risk, the higher the pricing. It is a traditional banking philosophy; we will invest in higher risk projects but will need a higher return.
The big difference between ourselves and other banks is that, under our statutes and rules of governance, we have to do an economic, social and environmental appraisal of the projects as well. Most commercial banks do not particularly care but we do. We have to make sure that the projects make sense and have a real impact, not just economically but socially and environmentally. That is why we have about 500 engineers back in Luxembourg, as well as bankers - Mr. Cormac Murphy comes from a banking background. We have 500 engineers whose job it is to go through the details of the projects, whether they be bridges, roads or schools, to make sure they are being built in a cost-efficient way, and that the technologies and the environmental impact are right. That is what makes us different.
It is sometimes more difficult to apply for EIB financing as promoters have to jump through these additional hoops. On the other hand, a lot of promoters see this as an opportunity to learn from the EIB about the best ways of delivering infrastructure and other forms of investment, as we will have examined similar projects all over Europe.
I thank Mr. McDowell. Given that the level of capital investment has fallen way down since the crash and all that, a big debate we are having here - and I apologise if this has already been raised - is about the constraints of the fiscal rules as applied to capital investment. We are trying to make a case for capital investment to be treated differently from current spending. Has the EIB any view on this or any influence on the EU in this debate?
Mr. Andrew McDowell:
The EIB has no formal institutional view on this issue because we are not part of the European Commission-Council-Parliament trilogue on these issues. I will express a personal view, however. We see the levels of infrastructure investment in Europe as being at an all-time low, certainly well below pre-crisis levels and, in our view, they are at a level that is not sustainable if we want to reinforce the recovery that is taking place in the European economy. They are at levels that will potentially severely hamper productivity growth within Europe, and regional economic development across the regions of Europe, unless they are increased significantly. We certainly think there is a need at both national and EU levels to look at the constraints that are holding back levels of public investment in infrastructure.
As to whether there is going to be another debate on the fiscal rules, frankly I do not know. One issue that could be considered, though, if there were to be a relaxation of the fiscal rules to facilitate more investment, is whether the flexibility would be used on good projects. That is a debate and a concern that member states have. Will it be used on projects that really have a very strong economic, environmental and social impact or on more politically driven projects, such as bridges to nowhere? There is a history of that, to be frank. One possibility is to provide more flexibility in the fiscal rules for projects that are co-financed by the EIB.
Mr. Andrew McDowell:
There could be more flexibility in the fiscal rules for projects that are co-financed by the European Investment Bank. Because of our obligation to run these projects through a very intensive due diligence process in terms of their economic, environmental and social impact, there may be a degree of openness to the EU saying that if it is financed by the EIB it has to be a reasonably good project, and therefore it might provide some degree of enhanced flexibility. Ultimately, that is going to be a matter for the Commission and the member states.
As a matter of interest, if something is co-financed by the EIB, if it thinks it is a good thing and our State, for example, thinks so too, would that be on balance sheet at the moment?
Mr. Andrew McDowell:
We jointly finance the projects with the states. If the state is building a motorway and looks for EIB financing, we do not manage the development of the motorway but we provide the financing. The state has a choice about how to do that financing. It can either borrow from us directly, in which case that borrowing is on the government's balance sheet and is part of the national debt, or it can establish or ask private promoters to establish a particular structure that builds the motorway. The private sector then has to pay for the motorway and the government only pays for it over a long period, for example 30 years. That is a classical PPP structure.
Mr. Andrew McDowell:
We do take equity stakes in infrastructure projects, but only indirectly through funds. I now understand the nature of the Deputy's question. He is asking if we would actually take equity ownership of a project as opposed to just providing the debt financing. The answer is "Not directly". We will not take equity ownership of an infrastructure project, jointly with a state, directly.
What we do extensively is provide very large amounts of equity funding to private infrastructure funds in Europe. They in turn take ownership stakes in things like PPP projects and other infrastructure projects, jointly with the government. We do not do it directly because we would then face a conflict of interest in terms of our management of an equity stake in a project and our debt financing to it. One cannot be on both sides of the table at the same time. One cannot be the equity holder negotiating the debt finance when one is both the equity holder and the debt financier. There are too many conflicts of interest. We do not do that.
On the housing front, I am very worried about the PPPs. Mr. McDowell sounds quite enthusiastic about them.
Can Mr. McDowell elaborate on the nature of the PPPs? Apart from anything else, they seem to be opaque and because they involve the private sector, we get all this stuff about commercial secrecy. We never quite know the details of a PPP. There are a variety of PPPs but my concern is that they are a vehicle for the privatisation of public land. Previously social housing developments on public land would have been 100% provided by the State with the State owning the asset at the end and generating all the revenue. Under these PPPs, my fear is that the private sector will end up with significant portions of the developments and deriving much of the benefit from them with the State not having an asset at the end of the process.
Mr. Andrew McDowell:
There is a history of bad PPP projects but there have also been traditionally bad Exchequer-financed projects and, therefore, it is not like there is a best way of doing these. Every project needs to be looked at on its own merits. We host the European PPP Expertise Centre but that does not make us a proponent of PPPs. Promoters from governments across Europe come to us saying, "We think it is a great idea to do a big investment in our IT systems as a PPP because that gets it off the balance sheet". We say they are nuts and that is a bad idea because the technology will change in two years' time. They will have to ask the private promoter to change the specification of the PPP and consequently will face a significant escalation in the cost they cannot manage. We tell them not to do it through a PPP but through traditional Exchequer investment because they will be able to control it much better.
On the other hand, there are areas, which are much more standardised in infrastructure investment. Road projects are a reasonably good example of a standardised, commoditised project and the specification, parameters and technologies are clear from the outset and are unlikely to change. In those situations-----
Can I press Mr. McDowell on housing? I take the point that PPPs are diverse and so on. Setting aside other types of housing, which we can debate another day, I do not see the case from the State's point of view for using PPPs for social housing because under the old-fashioned model, it was a win-win for the State. While there was upfront capital investment, there was a constant revenue stream coming back. Any alternative requires that much of the revenue does not come back to the State and, in some cases, the State will continue for a long time to spend in the private sector as part of the deal. If we do it ourselves, we can reduce current spending because if the State does not provide council housing, for example, money is given to private landlords to provide social housing and, therefore, it becomes an ongoing current expenditure, the cost of which goes up and up as rents increase and as the private sector charges the State more to provide this housing. With the traditional 100% funded public model, it is a win-win on every front for the State and the people who need social housing.
Mr. Andrew McDowell:
I would be reluctant to be interpreted as speaking on behalf of the Government. That is not my job anymore. If we have lots of fiscal space and we are seeking to choose between providing social housing through traditional Exchequer capital investment and PPPs, there are pros and cons to each approach. The interest costs of PPPs are higher but risk is transferred to the private sector and, therefore, that is inevitable. The legal costs are much higher and it is expensive. It, therefore, might be simpler to do it through traditional Exchequer investment. It may be, though, that the choice facing the Government is not that it has lots of fiscal space and can do it either way. The Government may be maxed out in terms of the amount of investment it is engaged in under the fiscal rules and the choice it faces is whether to supplement that with a PPP programme on top of increasing Exchequer capital investment. The decision is then whether the cost of the PPP, which will be higher than the cost of Government borrowing, is still low enough that it is justifiable on the basis of the economic and social return to the country for having additional social housing.
Mr. Andrew McDowell:
Only if the revenues that the commercial semi-State body collected were sufficient to cover the cost of debt servicing and in the Irish case, that may be problematic because the level of social rents, unlike in many other European countries which have such models, is simply not sufficient to cover the debt servicing costs. In other European countries, there are social rents, the private sector and a middle ground of affordable rents and tenure, which may be between 50% and 80% of market rents, and that would probably be sufficient to cover the debt financing necessary for the construction of the houses. In Ireland, social rents are well below the 50% to 80% range. It is probably a policy issue for the country as to whether it wants to develop a new middle tenure form-----
If the semi-State body had an affordable housing element as well as a social housing element, there would be nothing to stop the State getting money from the EIB and doing it off-balance sheet.
I acknowledge Mr. McDowell is pressed for time but I have one question, which relates to something we have not discussed. In his opening remarks, he specifically made reference to Brexit and the ownership of the EIB. We are losing a major member state in terms of the ability of the bank to finance the excellent project work he has outlined. Will Brexit mean the UK will leave the EIB structure? If so, what will be the impact of it withdrawing in respect of the bank's ability to provide finance? There have been stark warnings regarding different areas of the EU budget following the loss of the UK's membership in the context of the ability to fund on an ongoing basis. What will be the impact further down the road on the EIB and its ability to fund projects in the remaining 27 member states?
Mr. Andrew McDowell:
This issue is obviously taking up a great deal of management time in the bank. At the end of the day, the post-Brexit relationship between the EIB and the UK will not be a matter for the bank; it will be a matter for the Barnier team and the European Council to agree as part of the UK withdrawal agreement. Our working assumption is that the United Kingdom will exit as a shareholder in March 2019.
Under the treaties currently, it states that the shareholders of the European Investment Bank, EIB, shall be the members of the European Union. By corollary we are working to the assumption that the UK will exit. That will have a significant impact on the bank. The UK has 16% of the share capital of the bank and it has paid in share capital of €3.6 billion. The position of the European Union as expressed in the Commission's negotiating guidelines is that the UK will be repaid its paid-in share capital but only over the lifetime of the obligations that the bank has incurred using that share capital. Basically, the bank uses the share capital of every member state to underpin its borrowings and we have outstanding bond liabilities of approximately €480 billion, which will mature over 30 to 35 years. Every country's share capital underpins that. It is the position of the European that the UK will be entitled to get that money back but only as those obligations of the bank expire over a long period. The UK also has guarantees to the EIB that will also diminish over time as our obligations expire. That is the negotiating position of the European Union.
Once the UK is no longer a member, its share capital in the bank would cease to be share capital in the bank and its callable capital in the bank would no longer be callable. The bank will have an issue to deal with in terms of the statutory limits imposed on the bank regarding how much it can lend as against the amount of capital it has. We are in discussions with the 27 remaining shareholders about ensuring that Britain's exit does not damage the bank's ability to do its job in those 27 member states. As the members can imagine, we will start getting more questions from rating agencies on our AAA rating and institutional investors about the extent to which Brexit is going to affect the bank's capital strength. We certainly feel it would be a good idea for the other 27 member states, even before agreeing the details of how they ensure the bank's capital structure remains strong, to articulate a statement of support for the EIB that Brexit will not be allowed to damage the bank's ability to do its job in the other 27 member states.
The key matter is the capitalisation. Ultimately, the only thing that guarantees the security of everything, from the AAA rating to the ability of the bank to perform at its optimum level, is for the remaining 27 to effectively guarantee to replace that capital from their own resources. More than anything else, that will have a direct impact on the ability of the bank to finance future lending.
Mr. Andrew McDowell:
At this point, the bank and board of directors are not asking member states to consider additional cash contributions to the bank. It may be there will be other ways to replace UK share capital. The bank has reserves that may be reclassified as paid-in capital. There are a number of other mechanisms that we are considering. The Acting Chairman is correct in the sense that ultimately it is going to require a decision of the board of governors of the bank on the bank's capital structure to ensure it can continue to do its job in the 27 member states after Brexit. We certainly feel it would be good to indicate sooner rather than later to the financial markets there is a political will to take those decisions.