What supranational bank has the largest investment balance sheet in the world? If you said the World Bank or the IMF, you’d be wrong. Outside of the Brussels bubble and tucked away in the tiny country of Luxembourg lies the European Union’s own investment bank, suitably named the European Investment Bank (EIB). At the EIB, nearly 70 billion euros pass through the hands of a mere 30 loan officers every year. What the World Bank does with about 10,000 staff, the EIB group manages with about 3,000.
What exactly is it they do?
As a branch of the EU, the bank is policy driven, aligning its operations with mandates from the European Commission. EU member states are all shareholders, but they do not receive dividends as the bank is not-for-profit. Ultimately, the bank invests in projects where there has been a market failure. For example, wind farms, as a project with relatively small returns on investment, rarely get fully funded by private enterprises. Here, the EIB could step in to provide partial funding to a green initiative and infrastructure building. The EIB target investment areas include projects in infrastructure, sustainability, gender equity, small and medium enterprises, and European integration. However, like all European institutions, the EIB faces a questionable future as the uncertainties that BREXIT bring rapidly approach.
Why should we care?
Are you currently living in the UK and have access to clean, running water? Chances are, you have the EIB to thank for that. The EIB has invested over £15 billion in the UK water sector since privatisation in 1989. Have you ever taken the tube in London? The EIB has lent over £900 million to upgrade London’s underground network.
Beyond these large-scale infrastructure projects, the EIB has helped the European economy in much quieter ways. During the financial crisis, venture capitalists nearly disappeared and obtaining funding for large projects became nearly impossible. It was during these times that the EIB actually increased their lending while other banks shrank away. Injecting this capital by funding enterprises eased the pains of shrinking economic growth.
As the Financial Times reports that investment in the EU has finally returned to pre-crisis levels, the EIB still carries a warning for the future. The EU still considerably lags behind the US and China in terms of IT and machinery investment. Without this investment, the EU risks being left behind in the dust of US and Chinese innovation, competitiveness, and productivity growth. The EIB plays a key role in keeping the EU competitive by not only putting capital into these projects, but also by encouraging other investors into the sector through the weight of their AAA reputation.
With such an extended reach, some argue that the invisibility of the bank does not lend itself well to transparency. With EIB projects both within the borders of the EU and extending into the Eastern and Southern Neighbouring countries, local groups are often unaware of where project funding comes from. This is key in assuring their rights in knowing who to appeal to if issues arise as well as who to hold accountable for maintaining environmental, labour, and other standards. The CEE Bank Watch recommends the EIB take a page from the World Bank and regularly publishing online updates on project implementation statues, including projecting monitoring reports.
An Inside Look
During our two weeks in Luxembourg, we attended a series of lectures held by the staff of the EIB itself. The EIB walked us through their process of project finance by hosting lectures from the perspectives of each of their departments including: Projects, Operations and Strategy, Funding and Sustainable Finance, Legal Risk Evaluation and Management as well as the work of the European Investment Fund (EIF). Students were tasked to present a project before a panel of EIB employees. The project hit close to home for the LSE students, as it involved the construction of a high-speed rail service from London to Edinburgh under BREXIT and Non-BREXIT conditions.
It is no secret that BREXIT presents a vast series of challenges to the EU, and the EIB faces an uncertain future ahead with the loss of a stakeholder. However, we learned that with the divorce bills all but settled, the UK appears to be the greater hit party in the split. The EIB is refunding the UK’s initial capital injection into the bank, but the UK retains responsibility for projects invested in pre-BREXIT.
The biggest potential risk for the bank was the loss on the callable capital from one of their largest shareholders. Callable capital, the funding that the bank could potentially demand from its shareholders should a defaulting scenario of catastrophic proportions occur, provides the bank with leverage in funding. Meaning, as the bank can lend 2.5x their capital, the 39 million of callable capital promised by the UK allowed them to lend nearly 100 million euros. As other shareholders have agreed to replace the UK’s share of callable capital, the last question remaining involves EIB activity in the UK. Will the UK be treated as Canada and the US, with a lack of mandate and therefore no EIB involvement? Will they be treated as an EFTA country like Norway or Switzerland? One thing is clear, however, UK infrastructure, entrepreneurs, and sustainability measures have all benefitted from EIB investment, and the EIB is likely so slow or halt UK lending post-BREXIT.
Before this experience, the EU’s investment arm was largely uncharted territory for us. The EIB is clearly making an effort to be known, and for good reason. There is immense power in their ability to finance projects in climate protection, medicine, gender equity, information technology, etc. Calculations of BREXIT’s impact cannot exclude the loss of this source of investment. The EIB can provide critically needed funding where market gaps occur, but maintaining high standards in accountability requires the shedding of its relative invisibility.
Note: This article gives the views of the authors, and not the position of the Social Policy Blog, nor of the London School of Economics.