UK Guarantees: how you can get support

Joey Gardiner’s recent article on the government’s UK Guarantees scheme considered how infrastructure project promoters will soon be applying to HM Treasury’s quango, Infrastructure UK (IUK), to kick-start infrastructure projects that may have stalled due to adverse credit conditions.

Although the scheme has been open for business since 18 July 2012, it remains shrouded in uncertainty. The Treasury intends to explain the detail of the proposals at briefing events throughout September but it remains to be seen when the first awards will be made and how long it will take to get projects up and running.

What we do know is that projects will need to first qualify by demonstrating to IUK that they satisfy five eligibility criteria:

• The project must be “nationally significant” as identified in the government’s National Infrastructure Plan 2011.
• They must be ready to start construction within 12 months from a guarantee being given and having obtained (or about to obtain) necessary planning and other required consents.
• The project must be “financially credible” with equity finance committed and sponsors willing to accept restructuring of the project to limit taxpayer risk.
• The project must be dependant on a UK Guarantee to proceed and not be otherwise financeable within a reasonable timeframe.
• The project must represent good value to the taxpayer and be assessed by the Treasury to have acceptable credit quality, not present unacceptable risk and make a positive impact on economic growth.

The Treasury is committed to implementing a “robust assessment and approvals process”, and project promoters and bidders will therefore need to look at how they might need to make adjustments to their project to better improve their chances of a successful application.

It remains to be seen when the scheme’s first awards will be made

But project promoters won’t convince IUK that a project is “nationally significant” if it isn’t. And the requirement that the project represents “good value to the taxpayer” appears to be an unashamedly subjective requirement, providing the government with a get-out if it feels a project doesn’t represent the best use of its support.

Project participants can however take steps to improve their chances of satisfying the other three criteria. Take the requirement that the project will be shovel ready in 12 months. Ideally project documentation should address that requirement so that IUK can see that the project team is paying more than just lip service to the achievement of a timely start on site.

The Treasury is at pains to stress that projects satisfying the eligibility criteria will then be subject to a detailed project assessment, full due diligence and project monitoring, so it is assumed that once the project is deemed eligible, IUK will put its faith in robust procurement, and won’t adopt a strict “use it or lose it” approach after 12 months.

The Treasury will wish to ensure that the risk of any guarantee it provides is limited by a sufficient amount of private equity ahead of it, in order to satisfy its requirement that the project be financially credible.

The Treasury may require a counter indemnity from the project vehicle. Well-prepared project participants will be able to demonstrate to IUK that they have discussed the need to back such indemnity into the project documentation by identifying a call on the guarantee as a specific head of claim.

In view of the fourth head of eligibility, the project will have been through the mill previously in an attempt to raise private finance. Therefore the project documentation should already provide for the normal gamut of warranties, third party rights, guarantees, bonds and insurance.

An eventful few months lie ahead for the industry.

Paul Brampton is head of construction and engineering at IBB Solicitors