UK Guarantee scheme to notch first successes

A growing pipeline of deals is set to benefit from the UK’s Guarantee scheme, announcements made this week suggest.

The £375 billion (€448 billion; $612 billion) National Infrastructure Plan, a revamped version of which was unveiled yesterday by the Treasury, made the headlines by managing to enlist the support of six of the country’s major insurance companies, who pledged to spend £25 billion on infrastructure over the next five years.

But a less-noted breakthrough was the promise of an extended use of the UK Guarantee Scheme, which was launched last year to underwrite projects at risk of stalling amid tough credit conditions.

The plan, which detailed £66 billion in additional spending to be made in the coming decades, also gave the green light to a government guarantee for Hitachi to build a new nuclear power station at Wylfa, North Wales. This followed the state’s guarantee for EDF’s Hinkley Point plant in Somerset, and came with a similar pledge to support the £1 billion Northern Line extension to Battersea in London.

Shortly after yesterday’s statement by Chief Secretary to the Treasury Danny Alexander MP, came the announcement that the government would guarantee the installation of new, efficient lighting systems at 149 NCP car parks across the UK, to be undertaken next year as part of a deal involving Sustainable Development Capital, Future Energy Solutions and the Green Investment Bank.

According to Alexander, the move demonstrates the flexibility of the UK Guarantee scheme as it shows that the government is “using the strength of its balance sheet to support important projects that affect day to day lives of people in the UK”.

Critics have argued that despite its capacity to underwrite up to £40 billion of infrastructure investments up to 2016 – and although £33 billion of energy and transport projects have qualified for funds – only one of them, the biomass conversion of Drax power station, has used the scheme in the 15 months since the policy was launched.

While a number of projects have already prequalified – including the £16 billion Hinkley Point nuclear plant – the guarantee can’t be awarded until these have gone through due diligence and are ready to raise financing, a process that can take a long time to complete.

Yet that needn’t always be a concern, some industry insiders told Infrastructure Investor upon release of the plan yesterday.

“The point about infrastructure projects for the insurers is that they often contain implicit government support by virtue of the projects representing strategic importance to the government and society as a whole,” said Robert Gray and Nancy Eller, partners at law firm CMS.

“Therefore, for the right projects there is no need for explicit government support, such as would be provided by the government’s new £40bn UK guarantee scheme. For other projects, at certain stages of development, government support may be required to attract institutional investors – unless there are other means of derisking certain aspects of the project or mitigating those risks.”

Most commentators welcomed the greater pipeline to be covered by governmental guarantees. Yet there were still doubts that yesterday’s announcement would lead to an immediate, extended use of the scheme.

“The government guarantees scheme is making a difference,” said Nick Prior, head of infrastructure at Deloitte. “This has been the most impactful announcement on infrastructure to date. But, the reality is, little of this money will be spent this side of 2015, so we won’t see shovels in the ground on new projects for some time.”

Kate Orviss, infrastructure partner at Pinsent Masons, agreed, noting that there was a stark distinction between investing in established infrastructure assets and investing in developing and delivering new infrastructure, where the potential risks were often much greater.

“Even the new improved National Infrastructure Plan 2013 hasn't solved that conundrum yet and it is new infrastructure that the UK needs,” she added.

This year’s Autumn Statement, delivered today by UK Chancellor George Osborne, reiterated a commitment to “push the boundaries of endeavour” to build the infrastructure “critical to the country’s future”. That included sponsoring controversial projects such as the High Speed Two railway, which will cut the journey from London to Birmingham to just 49 minutes but has been attacked on economic, financial and environmental grounds.