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GuarantCo: Callable Capital Agreement

Volume 613: debated on Wednesday 13 July 2016

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 the liability of up to £40 million which DFID has undertaken in respect of the Private Infrastructure Development Group (PIDG).

GuarantCo was established in 2003 as an investment facility of the 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 US $1.2 billion committed by PIDG donors since 2002 has leveraged over US $20 billion in private investment and a further US $9 billion in investment from 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 remove the risk of currency devaluation for investors and allows them to structure tailored financial instruments. 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 issue guarantees for transactions it is discussing with counterparties. GuarantCo expects to only have 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.

Currently DFID supports GuarantCo through paid-in capital. To ensure better value for money for UK taxpayer funding, however, DFID is proposing to enter into an agreement with GuarantCo for callable equity (capital). This will allow cash to remain with HM Government. It also responds to a key recommendation of the National Audit Office in its report “Oversight of the Private Infrastructure Development Group” (HC 265) in July 2014 to improve how DFID

“critically reviews its funding of the activities of multilateral bodies such as PIDG, only releasing funds once there is a clear need for the money and the capacity to make good use of it. This will enable it to compare PIDG with other options and avoid large unused cash balances”.

GuarantCo will still 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 expand its pipeline of projects.

DFID’s total contingent liability for GuarantCo would be £40 million under this callable capital agreement. This 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 10 years and capital can be called by GuarantCo if the value of its guarantee portfolio is more than five times its equity. This would require GuarantCo to lose about 60% (or US $166 million) of its paid-in equity at a guarantee portfolio of US $1 billion. DFID 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 DFID providing cash now. DFID 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 (i.e. 13 to 21 July and 5 to 15 September), 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.

[HCWS85]