The Chancellor has announced that the Government will guarantee infrastructure schemes which have stalled because of financing problems. However, given the tight eligibility criteria and with no promise of new money, it is not clear how many projects will actually be able to benefit from this new scheme.
The announcement follows just days after the International Monetary Fund (IMF) cut its growth forecast for the UK by 0.6% for each of the next two years down to 0.2% in 2012 and 1.4% in 2013 - worse than any other major advanced economy, according to the IMF.
The scheme could prove a lifeline for projects that are struggling to keep afloat after funders have backed off. But there has already been some criticism of the proposals, with Labour's Shadow Chief Secretary to the Treasury, Rachel Reeves, pointing out that there is no guarantee that these government-backed loans will see any infrastructure projects going ahead in the next year which wouldn’t have happened anyway.
The UK Guarantees scheme is being run by Infrastructure UK, part of HM Treasury, and is open to applications now. It has three parts:
- guarantees for “up to £40bn worth” of major infrastructure projects that must be ready to start in the 12 months following a guarantee being given
- a new temporary lending programme for around 30 public private partnership infrastructure projects worth an estimated £6bn, available over the next 12 months; and
- a £5bn export refinancing facility that will provide long-term loans for overseas buyers of UK exports at competitive rates by guaranteeing a series of short-term bank loans.
Major infrastructure projects
Eligible major infrastructure projects in sectors such as transport, utilities, energy and communications must meet five key criteria – they must be:
- “nationally significant”, i.e. in the Government’s National Infrastructure Plan 2011, therefore, on the face of it sectors such as housing and education will not be eligible unless such projects can demonstrate they are exceptional in terms of national or economic significance (which will be considered by the Government on a case by case basis)
- ready to start construction within 12 months from a guarantee being given, with all necessary planning and other required consents in place
- financially credible, with equity finance agreed and project sponsors willing to accept appropriate restructuring of the project
- good value to the taxpayer - assessed by HM Treasury to have acceptable credit quality, not present unacceptable fiscal or economic risks and to make a positive impact on economic growth; and crucially
- unable to obtain finance within a reasonable timeframe without this guarantee.
The Government will decide how a guarantee will be tailored to any particular project in terms of the scale, timing, risk exposure and relationship, but the guarantees could cover key project risks such as construction, performance or revenue risk.
The first guarantees are expected to be awarded in the Autumn, subject to the enabling legislation being passed.
Temporary Lending Programme
In addition, the Government has indicated that an estimated £6bn worth of projects in sectors such as health, housing and education will be eligible to apply for funds under the new temporary lending programme, to help major Public Private Partnership (PPP) infrastructure projects that are struggling to secure the required amount of private lending to go ahead.
Eligible projects will be expected to have passed the usual Government approval processes, including affordability and value for money tests, and to be ready to proceed to financial close with the required project equity and the majority of required debt available from the private sector.
Any such loans would be made on commercial terms, alongside the existing commercial lenders and for a minority of the project debt requirement. The programme is only open for a year, to 18 July 2013.
The loans themselves will be advanced by an existing wholly-owned Government company, the Infrastructure Financing Unit Ltd (IFUL). Applications for loans will be considered through IFUL’s commercial due diligence and credit approval process, to the same standard a commercial lender would apply.
Export refinancing facility
This £5bn facility will support sectors such as aerospace, oil and gas extraction equipment, transport and telecommunications infrastructure services, hospital construction and management services, and sports infrastructure. However, it will not be available until later this year.
Where is the risk?
For the Government, the scheme has been drafted in such a way as to minimise any repeat of the problems it has had with PFI. The Chancellor was also very careful to avoid promising any extra money - the major infrastructure projects guarantees will be included as contingent liabilities on the Government balance sheet, similar to investment under PFI, while loans advanced under the temporary programme will be funded from existing departmental capital budgets. Given that Government Departments have had their budgets slashed, they are unlikely to have much spare money hanging around to lend.
The criteria for a project to be eligible for the provision of guarantees is extremely high and essentially provides the Government with ultimate discretion over whether a project will be successful in its application. For project financers, it is hard to see how a project could meet these conditions and yet not be able to obtain finance from commercial funders.
Should I apply?
The scheme is now open to applications. Private sector project sponsors should initially contact Infrastructure UK while sponsors of public sector projects should apply directly to HM Treasury in conjunction with the sponsor Department or relevant procuring authority.
Applications for temporary loans can be made to Infrastructure UK by project authorities or sponsoring Departments.
Stalled hospital projects may be able to move forward provided they are able to progress through the hoops of procuring a partner and being ready to start construction within a maximum of 24 months of the scheme getting underway. While this may benefit smaller deals or those already in procurement this is unlikely to benefit a major scheme in the pre-procurement stage.