Finance and Public Administration Committee
Lochaber Contingent Liability
Letter from the Minister for Business, Trade, Tourism and Enterprise to the Convener of 16 December 2021
Dear Kenneth
With the laying of the Scottish Government’s Consolidated Accounts for 2020-21 in Parliament today I wanted to draw your attention to the increased accounting provision relating to the Lochaber guarantee, and provide some additional context and reassurance to the Committee that this does not impact the Scottish Government’s funding position in any way.
As part of the Accounts publication the ‘Economy, Fair Work and Culture Portfolio Outturn Statement’ on page 113 reports an increased provision of £124m AME spend under Enterprise, Trade and Investment against a nil budget. The valuation is calculated using the requirements of IFRS 9 (International Financial Reporting Standards) for Financial Guarantee Contracts. Audit Scotland have reviewed the treatment applied and are content.
The increased provision is informed by a technical assessment of a range of credit risk scenarios carried out by independent advisers. The guarantee itself has not been called and the change in provision is an accounting adjustment only and does not impact Scottish Government spending. It is important also to note that the provision relates to the previous financial year (2020/21); it is not a forecast of likely outcomes in respect of the guarantee and the provision remains under annual review and is therefore subject to change.
For planning rather than accounting purposes the Scottish Government assesses the Lochaber guarantee exposure in line with HM Treasury Green Book guidance. This analysis, again informed by independent advice, concludes that the value of the security granted to the Scottish Government exceeds the present value of the payments guaranteed.
However, international financial accounting standards require the Scottish Government to take a more prudent view on the calculation of the potential liability and the value of the underlying security. The IFRS accounting assessment also takes into account the credit strength of the GFG Alliance, which had deteriorated following the failure of Greensill Capital (UK) Limited as its principal funder on 8 March 2021.
Security
Under the power purchase agreement guaranteed by the Scottish Government the primary payment obligation falls on the smelter to pay for the power it consumes.
Should the Scottish Government require to make any payment under the Lochaber Guarantee and Reimbursement Agreement, it is thereafter able to recover the full amount of any such payment from other members of the Liberty / Simec Groups by virtue of a series of cross-guarantees.
In addition, the Scottish Government has security over the smelter, the Fort William hydro-electric power station and substantial land holdings in support of its guarantee. This means that in any potential default scenario, the Scottish Government would be able to utilise these assets to recover any amounts it had required to pay.
The net present value of the remaining power purchase agreement revenue stream over the remaining 20 years is £286 million, while the companies’ valued the assets at Fort William at £438 million in their 2019 accounts.
Economic return
The Scottish Government’s guarantee has helped to secure the future of aluminium and renewable energy production in Lochaber and supported a great many livelihoods. The combined smelter, hydro-electric power station and estates businesses are now operating profitably and have created 40 new jobs since 2016, increasing direct employment in the complex to 200 jobs while supporting a valuable supply chain with hundreds of associated jobs.
This valuable economic return and the greater prospective economic benefits still to be realised through the GFG investment plan were central to Finance Committee’s support for the guarantee in 2016.
Should the Committee require anything clarified further I would of course be happy to provide more information.