How the tide has turned. As chief economic adviser to Enda Kenny for much of his time as Taoiseach, Andrew McDowell was central to a government forced to implement austere tax increases and spending cuts. Now, as vice president of the European Investment Bank (EIB), McDowell advances €1 billion a year to the Irish economy through low interest loans, money that finances everything from large scale infrastructure projects to ambitious young companies.

McDowell was appointed one of the organisations eight vice president in 2016, becoming the first Irish member of the bank’s management committee in 12 years. His brief is wide-ranging: McDowell is responsible for a number of countries such as Ireland, and also sectors such as energy and the bioeconomy.

An economist, he had spent much of the previous decade with Fine Gael. In opposition, he was the party’s director of policy. From 2011, he was the Taoiseach’s point man, serving as both chief economic adviser and head of policy. His four-year term ends next year, and as the role is generally rotated between a number of countries, it remains unclear if it will be renewed.

The EIB, based in Luxembourg and owned by the EU member states, is the world’s largest multilateral lender, advancing €55.6 billion last year. Highly profitable and with an AAA rating, it accesses cheap finance on the market, before lending it on to projects and businesses that support its policy goals of innovation, infrastructure development and, increasingly, climate action.

In Ireland, it has banked public infrastructure projects such as road networks, universities and the power network. Most recently, it provided €350 million in a 20-year loan to the DAA for improvements at Dublin Airport. Increasingly, however, it is financing domestic Irish businesses – both through local partners and also directly. Nuritas, an Irish biotech darling, has received EIB funding, as has animal nutrition firm Devenish.

In a wide-ranging interview, McDowell spoke about the EIB’s lending strategy, Brexit, the Irish housing crisis and why banks don’t understand business risk.

We begin by talking about the role of the EIB in financing businesses, and the opportunities for Irish firms to avail of EIB supports.

Ian Kehoe (IK): The EIB has been known for backing large infrastructure projects. But this is changing. The bank is now financing businesses, and putting money into corporates and private equity. What is behind the strategy shift?

Andrew McDowell (AMcD): Most people still associate the EIB with large sovereign backed infrastructure projects. That is still the bread and butter of our business.  That has been the main focus of the EIB for the last 60 years. But, increasingly in the last four to five years, we are making a big foray into corporate financing. Corporate financing was regarded by the bank traditionally as being too risky. It is more risky than infrastructure.

IK: Well, it is harder to secure a corporate business against an asset.

AMcD: It is nowadays when most of the assets that corporates are creating are intangible assets. They are not the traditional plant and machinery that you can finance with operating or capital leases or secured loans. Often it is research or innovation or patents or brands. It can be data or even algorithms. These are not the type of things that were traditionally easy to bank. We are an AAA bank, so it is absolutely essential that we retain our low cost of funding. That is the whole purpose of the institution; to be able to borrow cheaply and pass on cheap long-term finance for good projects that support EU policy goals.

“Often, the only route in Europe is to sell out; sell out to the Chinese or sell out to the Americans. ”

The reason we have been able to do this for the past four to five years is because of the investment plans for Europe, this European fund for strategic investments. The Junker plan as it is known. It is effectively a €26 billion guarantee from the EU budget to the EIB for riskier transactions.

IK: So you can do the deal without risking your AAA rating?

AMcD: It is underwritten in different forms depending on the type of transaction. We risk-share. We always have to have skin in the game ourselves because our mandator wants to make sure we are still doing the proper due diligence and appraisal of the projects. But risk-sharing relieves the bank of an awful lot of the capital costs of these types of transactions. We are able to do a lot more smaller deals, with first-time clients, particularly those who are investing in intangible assets.

In Ireland, you see the likes of Amryt Pharma, Cubic, Vivasure. These are all kind of mid-sized Irish corporates who have probably been through two to three rounds of VC funding. We do on occasion do a corporate financing deal with a startup from scratch, but rarely. Normally, we want to see two to three rounds of VC funding.

IK: Why at the point of two or three funding rounds?

AMcD: Well, these companies are getting to a stage, and this is a huge dilemma for Europe, they get to a stage where they have done two to three rounds of VC and they still need to grow. They are trying to globalize a product or a service. Often, the only route in Europe is to sell out; sell out to the Chinese or sell out to the Americans. Particularly the Americans, where they can access the very deep venture capital markets of California in particular.

What we want to try and do is give them a longer runway where they can continue to grow and expand and potentially get them to a stage when they could even get to the IPO markets in Europe without having to sell out, without having to sell all of the most valuable intellectual property, the managerial and finance functions all going elsewhere. That is why we are doing this under this plan.

IK: How long does it take from engagement to get the funds drawn down?

AMcD: For example, with Nuritas, it took about six months, seven months. It is not as good as VC bankers. They will do a deal in two or three months. They will do it quickly because it is a fast-moving industry. We are conscious of that. With these types of companies, things change every month in terms of valuations and deals. When you are negotiating a corporate finance deal that is debt but may include warranties or equity kickers or royalties on licensing revenues, every month is changing the valuation a little bit. You need to do these deals reasonably quickly.

IK: But there is also the endorsement and validation of getting EIB funds.

AMcD: It really does crowd in other financiers. It gives them a calling card around the world, to say we are a company that is backed by the European Investment Bank. It shows they are really well aligned with national and EU policies. It is a halo effect.

Skills gap in the banking sector

IK: You spoke earlier this year about banks not understanding risk and this pump acting businesses. An awful lot of corporate banking skill was decimated in the build up to the crisis and during it.

AMcD: Cash flow lending, lending against a pro forma P&L for ten years is a much more difficult business than lending against secured collateral and lending against property assets. These are the skills that all banks, not just Irish banks, lost effectively during the early part of this century when there was cheap money and they were lending against collateral. It did not work out well for most commercial banks. Most are now trying to relearn the skill of how to lend against business propositions. It is a difficult challenge for banks because the riskier the proposition the more capital you have to put against these types of loans and the less profitable it can be.

IK: A lot of that is down to regulation.

AMcD: It is about convincing regulators as well that they understand these businesses and these sectors so well that they don’t have to allocate as much capital as regulators might think. In some ways, the structure of European finance is not ripe for supporting innovation. In Europe, we depend on two-thirds of total corporate finance from banks, and one third from the capital markets — equity and debt in the capital markets. In the United States, it is the complete opposite. That is a financial system that really can support innovation, that can take that type of risk. For commercial banks, it is much more difficult. It is something Europe is working on under the capital markets union, and it is something that the EIB is trying to help fill the gap during the transition.

McDowell on housing

IK: Is there a role for the EIB in Irish housing?

AMcD: we will continue to work with the Housing Finance Agency. We channel a lot of debt through the agency to the Irish social housing sector. Increasingly, they are passing it on to affordable housing agencies. What they are doing is basically the housing agencies, with our funding, use new financial structures where they are investing in social housing and actually taking on debt themselves and they are basically making sure they have a sustainable business model.

What is missing in the Irish system is an affordable housing system. We have social housing, we have private housing. Most European countries you have a middle group, an affordable housing model for working families who can’t afford to pay urban rents and they get some support from the state. This cost rebate approach is very popular in a number of countries. We finance that all over Europe and we are working with the Department of Housing, the Land Development Agencies and some of the municipalities about how that works in other countries, and how they could set up financial structures that we could lend into. It requires regulation and it requires a new rental model, but we would be very happy to work on it.

Brexit and the Irish economy

IK: Let’s talk about Brexit, and the role that the EIB can play to help Ireland. The bank has upped its finance to help Ireland.

AMcD: In the last few years, we have been actively supporting Ireland in preparing for the downside risk of Brexit. This has been mainly in two areas. One in financing SMEs which could be vulnerable to Brexit, both from working capital requirements as a result of exchange rate movements and also financial growth longer-term investments that might be needed to shift them away from being so dependent on the UK market, particularly in the agri sector. We have out a billion euro of guarantees on the table for commercial banks that are lending to farmers, food businesses and other SMEs arising out of the vulnerability to Brexit. They have not all been fully drawn down yet. You can understand the reluctance. There is reluctance in the SME sector to draw down a lot of debt given the uncertainty. But nonetheless, the facilities are there and ready for companies when they need them. It is an important insurance.

The other thing we are doing is looking at infrastructure and Ireland’s connectivity. Obviously, the DAA. We are supporting the Port of Cork. We are working hard with EirGrid on the interconnector. And we are looking at some other projects that will help make sure Ireland is not physically isolated from European infrastructure.

IK: What is your take on the Irish economy now?

AMcD: Things are looking pretty good, aside from the storm clouds of Brexit on the horizon. I don’t envy the task of having to plan fiscal policy and other policies within that uncertainty. People are concerned about repeating some of the mistakes of the past. But when you look at the difference between now and 15 years ago, when you look at the metrics — the Irish economy is competitive, still generating a current account surplus and growth is not being driven by credit. The Irish banking system is not fixed but it is on the road to recovery. There are always dangers, always risk, but they are not the same risks as they were before. The biggest risk is Brexit,

I think Ireland has to go through ten years of building a stronger domestic innovation system – that is the big challenge. Bringing in foreign investment is fantastic. We should never lose that. But connecting it more strongly with an indigenous national innovation system is a big challenge. More investment in the universities, we need to spin out more companies.

IK: In relation to multinationals, there is a perceived bias towards multinationals from the state at the expense of indigenous businesses.

AMcD: I think that was certainly the case 20 years ago. I remember the time Enterprise Ireland and its predecessors were always the poor sister of the IDA. I really don’t think that is the case anymore. There is a huge effort in supporting domestic enterprise. But it requires a top-class education system. That is the biggest driver towards innovation. We have always had a good education system, but sometimes we have not realised the changes that were taking place in the rest of the world.  We have to run faster to stay still when it comes to education and innovation.

IK: I was looking through your country-specific report on Ireland for 2018. It was interesting that there was so much negativity within Irish businesses, but, in reality, they were performing well.

AMcD: Irish businesses were the only ones last year to be anticipating a net decline in investment levels. It stood out as the country most impacted psychologically by the risk of Brexit. This is all the more reason we need to pay special attention to Irish business.

IK: Is there a worry that Irish firms will pull back on investment?

AMcD: This is the damage that uncertainty creates; it delays or postpones investment decisions. This is why this needs to be clarified as quickly as possible. The delays were inevitable, and no doubt the right thing to do, but one of the downsides of it is that it makes it more difficult for businesses to plan. We are seeing that in terms of some of the schemes we have put in place such as the Brexit loan scheme last year. An attractive scheme for five to seven year financing. You can imagine the difficulties for SMEs trying to plan and take on debt for five to seven year projects in this environment and not knowing what the trading relationship will be with our largest trading partner.

Skills shortage

IK: The other touch point that has emerged in your data is a perceived skills shortage.

AMcD: This is a pan European issue, identified even in countries with much higher unemployment rates than Ireland. Inadequate skills is now being identified as the biggest barrier to making investments. In fact, companies are now saying that four or five years after the financial crisis, access to finance is not the barrier to making investments. It is access to people. This is in countries with unemployment rates, including France, of close to 10 per cent. There is a real gap in the labour market between the skills that people have and what is going to be required in the future. That is at two levels; at the corporate level, we are seeing it clearly that they need people with ICT skills and they are struggling to find it. Even in the public sector, municipalities are telling us that they still face budget constraints, but now access to skills is the biggest problem in terms of construction, project management and engineering skills. A lot of it disappeared after the crisis. There was little investment for ten years, we just cannot turn it on and off.

IK: How do we deal with it?

AMcD: It might sound trite, but we have to start investing in education and training again, and ramping that up. I was in government at the time when difficult decisions had to be made in terms of cutting budgets, and in fact the EIB became the only source of capital funding for the Irish universities system.

We have financed every single university in Ireland and we are now looking at all the institutes of technology. What we could finance were projects that generated cash flows. We are a bank. Universities were not going to borrow to invest in things that did not generate reasonable short term cash such as the business schools or student accommodation. There are whole other areas of university life that badly need it but do not generate immediate cash flows.

The business model for banks for undergraduate education is very challenging and we know how difficult this is to deal with politically. We need to generate a new financing model for undergraduate education but it has to happen.

IK: What are the biggest areas of investments in terms of sectors for the EIB going forward?

AMcD: If I look ahead over the next 30 years, the European Council just had a huge argument about whether to formally endorse this net zero emissions target for 2050. Most countries wanted to but some felt uncomfortable about it. One way or the other, we know the direction of travel. If you look at what the implications of that target are, we pretty much have to replace the entire capital stock in 30 years. It is our energy systems, it is transport, it is corporate assets, it is lock stock and barrel. So investment levels in physical assets are going to have to increase significantly in line if we are to embrace that target.

Equally an increasing proportion of that investment is going to be in intangible assets. We look at the nature of modern corporate competitive advantage in the 21st century, and it is very rarely driven by industrial processes any more. It is driven by organizational innovation, driven by information technology, driven by algorithms, machine learning and so on. We need to work out a model where we have an environment in Europe that encourages that type of innovation.

Actually, what we have in Europe is interesting. We have some of the best research and development, investments in science any place in the world. We see it with all the Nobel Prizes, all the banking and so on. But we need to commercialize it. That is a big challenge over the next ten years.