UK Treasury urged to review infrastructure guarantee scheme as market conditions improve

In a new report, the National Audit Office found that the UK Guarantees scheme was still being used to support lending for new infrastructure projects, even though the tough market conditions that it was introduced to address were improving. It said that the Treasury must be "rigorous and objective" when assessing future projects to ensure that taxpayers only bore the risk of projects of significant value to the public.

"The Treasury takes a narrow view that guarantees are value for money if the fee covers the risk," said NAO head Amyas Morse.

"It is good that Treasury has a formal governance process and commercial specialists to help evaluate, manage and set a price for risks to the taxpayer. However, we question whether this approach can measure long-term risks to taxpayers reliably. As market conditions improve, the Treasury should ensure that it is rigorous and objective in ensuring that guarantees for projects are genuinely needed and that the projects supported bring significant public value," he said.

Announced in July 2012, UK Guarantees were designed to benefit up to £40 billion worth of financially credible, major infrastructure projects which were struggling to obtain funding through traditional sources due to the adverse credit conditions. The scheme enables the UK government to guarantee a proportion of the capital value of a project in exchange for a fee, ensuring that private lenders to that project will be repaid in full and on time irrespective of project performance.

In its report, the NAO said that UK Guarantees had played an important role in ensuring that progress could continue on some major infrastructure projects. It found that the Treasury had guaranteed £1.7bn of finance across eight projects and 'prequalified' a further 39, potentially resulting in up to £24bn in guarantees. However, it was concerned that the Treasury was unable to withdraw a guarantee or change the fee once issued, even if progress risk or market prices changed. It said that the scheme had been intentionally designed for maximum flexibility, with no upper limit on the risk that would be ultimately borne by the taxpayer.

The scheme as originally announced set out five eligibility criteria that qualifying projects would have to meet before they could apply. These required projects to be nationally significant, of acceptable credit quality, good value to the taxpayer, dependent on a guarantee to proceed and ready to start construction within 12 months of the guarantee being given. However, the NAO said that the Treasury had not put in place objective tests to ensure that these criteria were applied consistently.

The NAO found that rather than consider the overall value for money of projects, the Treasury instead used a narrow test that the guarantee fee must represent a market price for the risk. However, these market benchmarks did not always measure the actual risks to the taxpayer reliably, the NAO said. In addition, the criteria stating that projects should have acceptable credit quality was not precisely defined, while in one example the Treasury had supported an £8.8 million project to install energy saving lighting in 150 car parks that could not reasonably be described as 'nationally significant'.

The report recommended that the Treasury reassess the eligibility of those projects that had prequalified for the scheme, but where the arrangements had not been finalised; and then review these annually. It should also ensure that objective criteria were used to award any guarantees. The NAO also recommended that the Treasury report to the UK parliament annually on the level of risk associated with its portfolio of guarantees.

The UK Guarantees scheme is due to run until December 2016.