GuarantCo: Callable Capital Agreement

Dominic Raab Excerpts

Tuesday 23rd February 2021 Written Statements

[The Secretary of State for Foreign, Commonwealth and Development Affairs and First Secretary of State (Dominic Raab)]

It is normal practice, when a Government Department proposes to undertake a contingent liability in excess of £300,000 for which there is no specific statutory authority, for the Minister concerned to present a departmental minute to Parliament giving particulars of the liability created and explaining the circumstances; and to refrain from incurring the liability until 14 parliamentary sitting days after the issue of the statement, except in cases of special urgency.

I have today laid a departmental minute outlining details of a new liability of up to £90 million which FCDO has undertaken in respect of the Private Infrastructure Development Group (PIDG). This £90 million increase will be added to the existing liability of £40 million for PIDG which has been in place since 2016, creating a total liability of £130 million.

GuarantCo was established in 2003 as an investment facility of PIDG. PIDG encourages and mobilises private investment in infrastructure in the frontier markets of sub-Saharan Africa and south and south-east Asia. PIDG makes it viable for private investors to participate in infrastructure deals, using limited sums from its publicly funded trust to crowd-in many times that value in private capital. The UK has committed over £1 billion to PIDG since 2002 alongside other donors. This has collectively leveraged over £26 billion in investment from the private sector and partner international and development finance institutions.

PIDG supports private investment throughout the project development cycle from its earliest stages, through a number of separate facilities or companies. GuarantCo supports local currency lending for infrastructure projects in developing countries by providing guarantees to banks and bond investors. This helps to reduce the risks to borrowers of borrowing in hard currency for projects that earn revenues locally, while reducing the risks to lenders to enable them to finance projects in developing countries. In this way, it helps to promote domestic infrastructure financing and self-sustaining capital market development in low and lower-middle income countries.

GuarantCo’s business model requires it to demonstrate the capacity to honour guarantees for transactions it is discussing with counterparties. GuarantCo expects to have only a minimal number of defaulting projects. However, it needs to have a legally solid call on sufficient capital for it to pay out against called guarantees.

Until 2016, the UK supported GuarantCo through paid-in capital. To ensure better value for money for UK taxpayer funding, the UK entered into an arrangement with GuarantCo in 2016 to provide support in the form of unfunded, callable equity—capital. It is this arrangement which FCDO is now proposing to amend, increasing the callable capital to a total of £130 million, and adjusting the terms to better reflect the current operating environment of GuarantCo. This form of support allows cash to remain with HM Government, only releasing funds if and when there is a clear need for the money.

GuarantCo will continue to be able to leverage its increased equity base as it will have a sovereign guarantee of callable capital. Consequently, it will be able to continue its development objectives and significantly expand its pipeline of projects.

FCDO’s total contingent liability for GuarantCo would be increased by £90 million to a total of £130 million under this renewed callable capital agreement. This £90 million increase is part of the overall approved budget for PIDG under its current business case. The sole purpose of this arrangement is to achieve better value for money for taxpayers by providing callable capital instead of cash while achieving the same development outcomes.

The agreement would be in place for 20 years and capital can be called by GuarantCo only if predefined “trigger” events are met. The trigger events are based on GuarantCo’s liquidity position. If its liquidity falls below the amount of USD $100 million, this would trigger a tranche of the callable capital to be paid out —subsequent tranches would be paid out only if liquidity fell below this amount again, with three tranches in total. For this trigger event to occur, it would require GuarantCo to lose over 60% of its paid-in equity—approximately US $200 million. FCDO considers the risk of this happening to be low but not negligible. Even if called towards the end of the agreement, it would still provide better value for money than FCDO providing cash now.

FCDO will continue to review the financial performance with GuarantCo regularly and GuarantCo will be required to report quarterly on the risk of the capital being called. In the circumstance where the contingent liability is called, provision for any payment will be sought through the normal supply procedure.

The Treasury has approved the proposal in principle. If, during the period of 14 parliamentary sitting days beginning on the date on which this minute was laid before Parliament a Member signifies an objection by giving notice of a parliamentary question or by otherwise raising the matter in Parliament, final approval to proceed with incurring the liability will be withheld pending an examination of the objection.

[HCWS789]