This article follows on from the last article and covers two institutions, the Nordic Investment Bank, (NIB) and the European Investment Bank, (EIB) that operate in all of the Nordic countries (and elsewhere) as financiers.
This article proposes a rethink of the mandates of NIB and EIB, two state controlled international financial institutions. Their current mandates, as described below, are in part unnecessary because their clients already have access to long-term finance directly from the financial markets.
Taxpayers should not be guaranteeing what does not need to be guaranteed. Better and faster results are achieved through regulation matters relating to sustainability and climate change than by asking these two banks to lend money to green solutions. The whole financial market is far more efficient to do this with the new guide on climate-related and environmental risks from the European Central Bank (ECB) that was published in November 2020 following a public consultation. The guide explains how the ECB expects banks to prudently manage and transparently disclose such risks under current prudential rules.
Furthermore, it is perhaps time to have governance lodged formally with a high level part of central government that is not responsible for the activities of these two entities and other like them.
Mandates need reform
The Nordic Investment Bank (NIB) says on its latest website that: “… it addresses the needs of the region and the challenges it is facing – sustainable growth, technological innovation, climate change, the development of circular economy and the protection of marine environments. NIB provides sustainable, long-term financing to customers in both the private and public sectors on competitive market terms to complement commercial lending. Our products include corporate and sovereign loans, loans to municipalities, loans to public-private partnerships, loan programmes, investments in green bonds, project & structure finance and lending outside the member countries.”
When you examine the individual loans that have been made over the past decade, you will see that NIB is a secondary lenders to publicly owned projects and public authorities, as well as to large private companies and banks.
In the first category there is plenty of long-term low-cost funding from the municipal banks in all four Nordic countries and from the government budget. Private banks, large and small, are also actively pursuing the same publicly owned projects so one wonders why NIB is needed here.
The large private companies are also the clients of the private banks which are their house banks and borrowing from NIB means that they have just one more lender with some longer dated loans. The impact is marginal and one may ask the question of why taxpayers are being asked to carry the credit risks of companies that already have easy access to finance? There is certainly no lack of financing opportunities either from banks or from the bond markets where most of these borrowers have access. If their is no market gap then there is no reason for taxpayers to be involved in this business indirectly through NIB.
Readers should also be clear that the all major banks are already actively addressing projects for innovation and for factors that reduce climate change risks. NIB’s policies are in no sense exclusive or ahead of market practices.
The EIB is also involved in similar businesses as NIB – here is their own description – it is almost identical to NiB’s: “… our activities focus on the following priority areas: climate and environment, development, innovation and skills, small and medium-sized businesses, infrastructure and cohesion…
… The majority of EIB lending is attributed to projects in EU Member States (about 90% of the total volume) supporting the continued development and integration of the Union…
… As the EU bank, about 90% of our funding is directed towards promoting sustainable growth and job creation in the Member States. This includes support of regional policies such as those in the Baltic Sea and Danube areas.”
It is equally justified to ask what is the added value of plain vanilla financing deals by the EIB to large companies, the public sector and to banks. As mentioned above these borrowers all have easy access to their own banks and investors.
However, when one examines the huge size of Europe and the fact that many nations have weak infrastructure and weak banks, one can understand and support that there is a need for a big jointly owned institution like the EIB. The same argument can be put forward for having the EIB as an important financier to ultra-large pan-European projects and infrastructure and here they have a role to play in bringing together member states in a disciplined manner. The levels of skills and the occasional lack of resources in a number of countries is a clear impediment to good projects being launched and access to groups of well-trained bankers and project managers can facilitate such projects.
Some banks have expressed the view that the presence of EIB and NIB as a lender in big projects gives them some extra confidence about the feasibility of such deals. However, this is another poor argument since neither the EIB nor the NIB is guaranteeing the credit or the ultimate feasibility of a deal. Your correspondent recalls many a transaction where long delays, cost overruns and poor project management have plagued such projects where these two banks were part of the financing!
Governance of the EIB is clearly weak
Complaints by the media and by NGO’s and other responsible activists have been lodged against the EIB relating to the following cases which is by no means exclusive:
- Disregarding anti-money laundering rules,
- Undermining the protection and promotion of Human Rights
- Downplaying climate risk in granting record loans to mega fossil fuel project
- Alleged corruption in EIB-backed investments
All the above are taken from verified references which are easily seen on the websites or responsible NGO’s and other bodies.
The problem with EIB’s huge organisation is one of control and governance. As an EU entity created under EU legislation, it is not subjected to the normal ownership controls and strict governance laws, rules and regulations that to which a government-owned limited liability companies are subjected.
Whistle-blowing, disputes and legal action can take years and prove to be horrendously expensive.
The case of Finland is a typical example the way a government can manage its relationships with these two entities. The Ministry of Finance is the responsible ministry, and their senior staff are appointed on a regular basis to senior and staff positions at EIB. Revolving doors have the potential for governance risk.
Although there is no reason to doubt the integrity of Finnish civil servants, the same cannot be said about some southern European countries. There is reason to believe that there is little incentive to become a whistle-blower or move for an investigation into matters related to the above by such individuals.
It is important to remove any doubt about such conflicts of interest. This can be done by subjecting the “ownership” of any such body, irrespective of its constitution, to the Prime Minister’s office or other high level and independent part of a country’s central government.
In Finland, the PM’s office is the current centre for overseeing ownership control of all limited liability companies held by the state, while other ministries remain as the responsible ministry. Such an action could easily be replicated in all other member states and would guarantee more stringent control over governance.
Naturally the same system of governance by the shareholders should also apply to the NIB.