UK auditor highlights taxpayer risk of guarantees

The National Audit Office, which scrutinises public spending, has questioned whether risks to taxpayers from the UK Guarantees Scheme are being reliably measured.

The UK Guarantees Scheme (UKGS), which was launched in 2012 to provide support for infrastructure projects which might not otherwise proceed for lack of financing, has come under close scrutiny from the independent National Audit Office (NAO), which looks at whether public money is being spent wisely.

UKGS came into being at a time when private finance for infrastructure was heavily constrained and committed to provide up to £40 billion (€53 billion; $61 billion) in guarantees by a closing date of December 2016.

Under the scheme, the Treasury guarantees that lenders to infrastructure projects will be repaid in full and on time, irrespective of project performance. Project risk is transferred to government – and ultimately the taxpayer – in return for a fee. The guarantee cannot be withdrawn, or level of fee changed, if project risk or market prices change.

Ironically, during what was arguably the period of most need, few projects received guarantees. To date, the Treasury has guaranteed just £1.7 billion of finance across eight projects. However, with market conditions now having improved considerably, the Treasury has pre-qualified (deemed eligible for support) a further 39 projects worth £34 billion, which could result in up to £24 billion of fresh guarantees. These include the Hinkley Point C nuclear power plant which alone could account for up to £17 billion.

Of the projects receiving guarantees so far, the length of exposure varies greatly – from 5 years in the case of the Grangemouth ethane import and storage facility, up to 44 years for the new campus at the University of Northampton.

The NAO accuses the Treasury of not applying its eligibility criteria for projects strictly enough to decide whether they genuinely need a guarantee. It cites an £8.8 million project to install energy-saving lighting in 150 car parks as being of a scale that cannot reasonably be described as meeting its test of a project being ‘nationally significant’.

It goes on to say that the Treasury does not consider the overall value for money of the projects but uses a narrow test that the fee charged must represent a market price for the risk. But the NAO states that it “does not have full confidence in the reliability or completeness of market benchmarks to measure actual risks to the taxpayer”.

The NAO also found that the extra cost of using guarantees as opposed to direct lending could be between £35 million and £120 million per year.

“It is good that Treasuruy has a formal governance process and commercial specialists to help evaluate, manage and set a price for risks to the taxpayer,” said Amyas Morse, head of the NAO, in a statement. “However, we question whether this approach can measure long-term risks to the taxpayer reliably.”

“As market conditions improve, the Treasury should ensure that it is rigorous and objective in ensuring that guarantees for projects are genuinely needed and that the projects supported bring significant public value,” added Morse.