This week the Chief Secretary to HM Treasury, Danny Alexander MP, announced that forty major infrastructure projects in the UK have ‘pre-qualified’ for up to £40 billion of government backed guarantees. Over half of the planned developments are in the energy sector, with potential unconditional financial guarantees available for low carbon projects, such as Mainstream Renewable Power’s Neart Na Gaoithe offshore wind farm in Scotland, the Drax Power scheme to convert their coal power station in North Yorkshire to biomass, and the new nuclear plant planned at Hinkley Point C.
The developer at Hinkley Point C, EDF Energy, this week also concluded their long running negotiations with the Department for Energy and Climate Change, and agreed a strike price per megawatt hour – the price the government will be willing to pay for the electricity generated. The total capital investment for building this plant alone could top £16 billion, though Chinese investment is now anticipated following the Chancellor of the Exchequer’s visit to that country earlier this month.
Other pre-qualified developments include transport infrastructure projects, such as the Able Marine Energy Park in North Lincolnshire, the Mersey Gateway Bridge and the Northern Line extension to Battersea. The relocation of the University of Northampton is also in line for backing, as well as twenty four other projects the details of which have been kept confidential.
The Infrastructure (Financial Assistance) Act 2012 provided for up to £50 billion of government backing, and one fifth of this has already been allocated to housing guarantees, including the recently commenced support for loans to most residential property buyers. The remaining amount will be available by way of irrevocable financial guarantees, to the benefit of any lender or investor in the major infrastructure projects preferred this week. The UK Guarantee Scheme, as it is known, is intended to encourage investment from both UK and foreign backers in key developments that are currently in or have recently completed the key consenting stages throughout the UK.
The scheme itself is purposefully designed to be as flexible as possible, and whilst draft agreements have been provided by HM Treasury’s legal advisers, the government guarantee (for which a market rate fee will be charged to the beneficiary, and so presumably wrapped into infrastructure project costs) will be tailored to individual projects, their corporate structures and sectors. It is possible that the guarantee may be used to assist the raising of either debt or capital finance. However, pre-qualification does not mean that the government guarantee is certain. HM Treasury officials will rigorously assess and carry out due diligence on each project, probably at the same time as investors are doing the same, before putting the development before a risk committee and the Chancellor for final approval.
Since the election in 2010, the coalition government has been eager to emphasise the importance of infrastructure investment as part of their strategy for economic recovery. Many of the projects announced this week will require significant capital investment soon, and yet may still be in the pre-construction stages well after the next general election. However, passing a pre-qualification test at this early stage, and the possibility of future financial guarantees, should provide much needed confidence for the longer term.
See more details on the projects and scheme by clicking here.