The Chancellor of the Exchequer and the Chief Secretary announced the UK Guarantees Scheme today (18 July 2012).
The scheme has been introduced to avoid delays to investment in UK infrastructure projects that may have stalled because of adverse credit conditions. It works by providing a sovereign-backed guarantee to help projects access finance.
The government must guarantee a financial obligation, but there is wide discretion over how a guarantee is structured in terms of scale, timing, risk exposure and relationship, subject to the needs and dynamics of each individual project. Guarantees are provided on a commercial basis, with pricing depending on the risk and structure of a particular project. Guarantees for up to £40 billion in aggregate can be offered.
Projects must fall within the definition of infrastructure as set out by the Infrastructure (Financial Assistance) Act.
Project sponsors are encouraged to approach Infrastructure UK to have a commercially confidential discussion about how a guarantee might be able to help raise finance for their project.
The first formal step is for projects to be considered eligible for support, or ‘prequalified’. The financial credibility, stage of development, need for a guarantee, significance and value for money for the taxpayer of the project will all be considerations at this stage. Once a project has been deemed prequalified, the sponsor and IUK will enter into due diligence discussions that are standard for lenders. Projects will then be put through an internal HMT Risk Committee before being submitted to the Chancellor for approval.
The legislation that underpins the scheme received Royal Assent on 31 October 2012.
Photo by jonbgem on Flickr. Used under Creative Commons.