Government unveils "UK Guarantees" scheme to support infrastructure investment

Applications for the scheme, which could reduce the credit risk of up to £40 billion worth of major infrastructure projects, can be made from today. It will be open to financially credible, nationally significant infrastructure projects, as identified in November's National Infrastructure Plan, provided work can begin on those projects within 12 months from the guarantee being given. However the scheme will not initially cover affordable housing projects, despite previous hints that it would from Business Secretary Vince Cable.

As part of the scheme a new temporary lending facility will be made available to around 30 public private partnership (PPP) infrastructure projects worth an estimated £6bn which are struggling to secure the required amount of private sector finance. An additional export financing facility worth £5bn will be made available later this year to ensure overseas buyers have the long-term funding they need to support British exporters.

"The measures we're announcing today will help work get started on many important infrastructure projects and help out major exporters, providing lasting benefits for thousands of people and a significant boost to the economy," Treasury Secretary Danny Alexander said, announcing the scheme.

The scheme could, he said, support projects from a range of sectors including transport, utilities, energy and communications. The Government will consider the most effective way to guarantee each project on a case by case basis with the first guarantees likely to be awarded in the autumn, subject to legislation.

Infrastructure law expert Alan Aisbett of Pinsent Masons, the law firm behind Out-Law.com, said that the programme was an extension of the Government's recent credit-easing initiatives for businesses, such as the National Loan Guarantee Scheme and new Funding for Lending Scheme, announced last month. However, he sounded a note of caution as to the likely impact of the scheme due to the lack of 'shovel ready' infrastructure projects eligible to benefit from the funding.

"To qualify for these guarantees – which will probably be funded either through first loss debt or unfunded guarantees to project lenders – projects must be ready to start within 12 months of the guarantees being given and satisfy five criteria," he explained. "Due to the amount of work which has been put on hold in recent years, the extent of such a pipeline remains to be seen. Advances also need to be made on establishing and equipping institutional funds to be ready to invest."

Applications for a UK Guarantee should be made to Infrastructure UK, the Treasury body responsible for enabling investment in UK infrastructure. Projects must meet five eligibility criteria and will be subject to detailed project assessment, as well as ongoing due diligence and project monitoring.

To be eligible to apply projects must be nationally significant, financially credible, good value to the taxpayer and dependent on a guarantee to proceed. They must be ready to start construction within 12 months from the guarantee being given, and have obtained or be about to obtain any necessary planning or other consents.

The Government has "wide discretion" over the type of guarantee that will be granted to each project in terms of scale, timing, risk exposure and relationship to the project. A guarantee could cover any of the main types of project risk including construction, performance or revenue risk.

The Treasury's announcement did not indicate whether the scheme would ultimately be extended to the housing sector. Vince Cable trailed the idea of a UK guarantee scheme, to include support for affordable housing and housing associations, in a speech to think tank Centre Forum last month. "Government guarantees could trigger a significant volume of housing investment," he said at the time.

"The Government's announcement of the guarantee scheme is yet another public indication of how central infrastructure delivery is to its growth agenda. But it can also be seen as a snub to the housing sector, particularly for the social housing providers who had been expecting a similar announcement on guarantees to support much-needed investment in housing delivery," said planning law expert Marcus Bate of Pinsent Masons.

"Whether that snub is merely temporary is unclear. What is clear, though, is that the recently published 2011 Census unequivocally demonstrates a compelling need to house, as well as to service, a fast growing population, particularly in London, where supply of new homes continues to lag behind demand, making housing less affordable and less available. The housing sector needs more public sector support to meet this challenge, whether in the form of Government guarantees or other finance and regulatory stimuli," said Bate.

The temporary lending scheme announced by the Government will allow project authorities or sponsors to access finance for a "minority" of their debt requirements through Infrastructure UK in cases where a PPP project is struggling to secure the necessary private finance to go ahead. The loans will be made on commercial terms, alongside funds from the existing commercial lenders, and will be funded from existing departmental capital budgets.

Infrastructure law expert Patrick Twist of Pinsent Masons said that Infrastructure Finance Unit Limited (IFUL), the Government-owned company that will provide lending facility, has so far provided one loan, to the Manchester Waste project in 2009.

"The facility wasn't used thereafter because, contrary to expectations, there was sufficient – if limited – project finance capacity to provide the necessary funding," he said. "Credit is available now, albeit on much tougher terms than a few years ago. If IFUL is to provide funding 'on commercial terms' it is not obvious that it will make much difference."

The Treasury said that it was making the loans available as an "exceptional response" to the current market conditions and that the facility would be a "temporary intervention", initially available for 12 months.