WEEKLY COMMENT 6-12-2012

 

 

 

 

WEEKLY COMMENT 6-12-2012

By Barry Edwards

There was a vast amount of information released connected with the Autumn Statement which has taken some time to skim through and check for relevance to business.

The Autumn Statement was not the grand economic growth plan that we were lead to believe was going to be unveiled by the Chancellor. In previous weekly comments; Lord Heseltine’s report and infrastructure were discussed which were referred to in the statement but not as a cohesive plan to really make a difference.

The proposal by Lord Heseltine to bring together all government support for business in one department is planned to be adopted in 2015 and The Chancellor also announced that £5 billion will be spent on various infrastructure projects that are ready to go to be paid for by various cut backs on tax allowances.

Corporation tax has been reduced further to 21% from April 2014 making it the lowest in any developed country, which does help attract businesses from other countries to set up or establish a head office here.

There was a substantial increase to £250,000 per annum in investment allowances for a further 2 years and more support for exports but apart from that there was precious little to excite SME’s. Everything else for business had been announced previously.

For me, the most interesting was the confirmation of £40 billion in guarantees for infrastructure projects which I had not noticed prior to the statement. However, I do find that the conditions are rather strange since they are asking for equity to be in place as a condition before a guarantee can be given. Traditionally you either have about 30% equity or a guarantee to get the funding for a project, requiring both will not make it easy for the sponsors.

So you can form your own opinion, below are the terms and conditions for the guarantees from the HM Treasury site;

UK Guarantees

The Chancellor of the Exchequer and Chief Secretary to the Treasury announced the UK Guarantees scheme on 18 July 2012.  The scheme aims to kick start critical infrastructure projects that may have stalled because of adverse credit conditions.

Around £40 billion of projects could qualify for the provision of guarantees.  These projects could come from a range of sectors including transport, utilities, energy and communications.  Eligible projects will be subject to charges, due diligence and as a minimum must meet five key criteria:

  • Nationally significant, as identified in the Government’s National Infrastructure Plan 2011.  The Government will also consider other exceptional projects of national or economic significance on a case-by-case basis, such as university infrastructure;
  • 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;
  • Financially credible, with equity finance committed and project sponsors willing to accept appropriate restructuring of the project to limit any risk to the taxpayer;
  • Dependent on a guarantee to proceed and not otherwise financeable within a reasonable timeframe; and
  • Good value to the taxpayer, assessed by HM Treasury to have acceptable credit quality, not present unacceptable fiscal or economic risks and to make a positive impact on economic growth.

The Government will consider the most effective form of guarantee on a case-by-case basis using a robust assessment and approvals process.  The outline process for project sponsors to submit an application for an infrastructure guarantee is will involve three key stages:

  • Stage 1: Project screening against key eligibility criteria – from today, projects can be submitted for consideration against the headline eligibility criteria;
  • Stage 2: Shortlisted selected projects will undergo a detailed project assessment and full due diligence through a robust project assessment framework (both qualitative and quantitative) and approvals process; and 
  • Stage 3: Ongoing due diligence and project monitoring by experienced infrastructure commercial specialists, working closely with project sponsors.

The Government has wide discretion over how a guarantee is structured in terms of scale, timing, risk exposure and relationship, subject to the terms and dynamics of each individual project.  The guarantees could cover key project risks such as construction, performance or revenue risk.

Commercial specialists will work closely with sponsor Departments, project teams (both public and private) and their commercial and financial advisers to understand key project risks, structure and undertake full due diligence.

Projects which are classified in the private sector and where the project sponsors wish to make an application should initially contact Infrastructure UK, which is the HM Treasury unit charged with providing a stronger focus on the UK’s long-term infrastructure priorities.

HM Treasury will not accept direct applications from third-party advisors, unless previously discussed and agreed with HM Treasury. Project sponsors of public sector projects should make a direct application to HM Treasury in conjunction with the sponsor Department or relevant procuring authority.

 

This is certainly not a clear criterion for sponsors to be sure that the original expenditure of putting the project together, which is normally the equity content for infrastructure and usually quite substantial, will be a worthwhile investment.

The Chancellor announced that £10 billion was already committed and ready to proceed. We will have to wait and see if they do actually happen.

The concept of using guarantees is the right way forward in my view and we have explained that in the Economic Growth Plan (see right hand column). The criteria need to be much clearer and the process from inception to funding should be properly monitored to make sure that the investment in the preparation is on track to conform to them.

It is a shame that more thought has not gone into making the growth of the economy a real priority. Every time our team talks to government and submits suggestions and ideas to give some guidance on how this could be done, very little seems to sink in and all we get is some minor tinkering at the edges without any definite clear plan. Even Lord Heseltine has trouble being heard so we should not be that surprised we are ignored as well.

It looks as though the economy has to get a lot worse before any notice is taken and that is a distinct possibility if the government continues to adopt the approach they are taking.

That’s all this week, more observations next week.