It comes as Liberty Steel offices in Scotland were visited by the Serious Fraud Office on Wednesday as part of an ongoing investigation into alleged money laundering and fraud at GFG Alliance.
Sources with intimate knowledge of the Scottish Government’s transaction with GFG Alliance in relation to Lochaber have said the Government was told the deal with Sanjeev Gupta’s conglomerate may be in breach of state aid rules.
The Scottish Government maintains the guarantee agreement was in line with state aid rules and said the value of the securities would “more than cover” the cost of the guarantee.
However, critics said ministers were playing “roulette” with public finances and described the allegations as “deeply worrying”.
Documents obtained exclusively by The Scotsman detail what the Scottish Government agreed to in 2016 when it stepped in to help save around 200 jobs at the Lochaber smelter.
The agreement saw ministers guarantee 25 years of power purchases by Mr Gupta’s company from the hydropower plant owned by his father.
This contract was then transformed by Greensill Capital into almost £300m of debt, carrying a credit rating the same as UK sovereign bonds, which funded the purchase of the smelter for £330m.
The Financial Times revealed in November last year the total value of the Government’s guarantee provided to Liberty Steel was £586m, covering annual amounts worth between £14m and £32m.
Ministers also confirmed the net present value of the “revenue stream” relating to the power purchase agreement was £284m with 20 years of the guarantee left.
The details of how the guarantee was agreed and the exact pricing can now be revealed after a report by consultancy firm EY was disclosed to The Scotsman.
They come as a source close to the initial transaction between the Scottish Government and GFG said advice around state aid in regards to the Lochaber guarantee was ignored by ministers.
The source said: “The Scottish Government were advised the guarantee was likely in breach of state aid rules, which could carry serious consequences for both the Scottish Government and GFG, and that they should proceed with absolute caution, if at all, given numerous concerns surrounding GFG and the Lochaber business plan.”
The report states the fee payable to the Scottish Government for the guarantee would cost Gupta’s businesses an annualised figure of £1.1m, equivalent to £26.8m overall.
This would start, for the first five years, at £2.5m, before dropping to £1.7m from year six, and below £1m a year from year 12 of the 25-year-long guarantee.
It can also be revealed the value of the security was calculated by EY as being £162m. This, the report states, includes £148m connected to a first ranking security over the hydro station and £14m connected to the land.The smelter itself is not given a value as part of the security.
Ministers said recent accounts valued the assets in Fort William at £438m.
In the Scottish Government’s most recent consolidated accounts, the provision set aside for a potential call on the guarantee was increased from £37m to £161m as of March 2021.
Ministers said this additional provision was due to the ongoing uncertainty around the stability of GFG Alliance at that time.
The conglomerate has been under severe pressure since the collapse of Greensill Capital, its main funder, and on Wednesday saw several of Liberty Steel's offices visited by the Serious Fraud Office (SFO), including those in Scotland.
It comes almost a year after the SFO launched an investigation into suspected fraud and money laundering by GFG Alliance, which has thousands of staff in the UK.
The SFO confirmed teams from the organisation visited company offices to request documents including company balance sheets, annual reports and correspondence related to the investigation.
For the first time, details of how the guarantee fee was calculated can be revealed.
EY told ministers the guarantee pricing was “off market”, but the “only route available to complete the transaction within the timescale”.
The report stated: “The pricing from Greensill is off-market for the level of support being granted by ScotGov, however, it has offered funds in the timescales indicated by Liberty/SIMEC as required to complete the transaction.
"Any other route would now be out-with this timescale.” The document added: “There is a marked difference between this and comparable market PPAs, given the unique nature of this asset structure i.e. its current inability to export to the grid."
The guarantee fee paid by Liberty to the Scottish Government was calculated by extrapolating Tata Steel’s credit rating with rating agency CARE India and Moody’s to apply to Liberty House Group.
At the time of the guarantee, Liberty did not hold a credit rating with Moody’s, but due to having a credit rating with CARE India of AA-, was considered to have a rating “one notch below” that of Tata Steel’s with Moody’s of Ba 3 (or BB-).
The report states this allowed ministers to calculate the guarantee premium on the assumption the guarantee agreement would raise Liberty’s credit rating from Ba3 (BB-) to investment grade, despite the lack of a formal credit rating with Moody’s.
Around 2,000 new jobs in the Lochaber region were promised by Mr Gupta as part of his purchase of the smelter and planned alloy wheels plant, but only 50 jobs were created, the Government admitted last year.
Scottish Liberal Democrat economy spokesperson Willie Rennie accused the Government of “playing roulette with taxpayers’ money”.
He said: "With these guarantees GFG were laughing all the way to the bank.
"At the end of the day, the people I feel most sorry for are the workers and residents in Lochaber who were promised 2,000 jobs which have never materialised."
Scottish Labour’s finance spokesperson Daniel Johnson said: “This is only the latest development concerning the SNP Government’s dodgy deal with Gupta’s Liberty Steel Group.
“This ill-advised deal has jeopardised public finances in Scotland and it is deeply worrying to hear that the SNP may have ignored state aid rules.
“It’s all too clear that this nationalist administration cannot be trusted with the finances of Scotland.”
Financial projections provided by Liberty in the report state the Lochaber smelter was viable for 25 years with earnings before interest, taxes, depreciation, and amortization estimated at £623m.
However, EY’s report states the model assumed the completion of the £70m downstream alloy wheels factory by 2019, with the smelter predicted to make a loss of £17.3m between 2017 and 2018.
Models in the report add the smelter would make a loss of between £11m and £22.4m per year for the 25-year period, with an ending balance of -£380.6m by 2041.
The alloy wheels factory plan was ditched by Liberty in late 2020 due to what the company described as a “significant decline” in car manufacturing and replaced with plans for a £94m aluminium recycling facility, which received planning permission last year.
However, the report notes a “challenging assumption” central to the alloy wheels plant that it would sell 47 per cent of the UK’s market demand for alloy wheels.
Discussing the state aid test, the report states: “However, we have noted that the forecasts are not supported by a robust business plan and there are risks to achieving the forecasts.
"It is our understanding that Liberty intends to stand behind losses incurred to ensure the continued viability of the smelter following acquisition. A formal undertaking is to be granted by Liberty to this effect.”
Scottish Conservative shadow finance secretary Liz Smith said: “The saga over Lochaber smelter is becoming murkier and murkier by the day.
“Not only has this deal potentially broken state aid rules, but the Scottish taxpayer could end up footing a bill of £586m for a smelter that was valued at nothing.
“It seems that – like with Ferguson Marine – the SNP Government has again proceeded with a dubious deal against explicit advice.
“Given that only 50 of the 2000 promised jobs at the smelter have materialised, Scots will be outraged that such a staggering amount of public money has been put up to guarantee a completely unprofitable business.
“This has now gone beyond just another failed SNP vanity project – and the Nationalists will have urgent questions to answer.”
The Scottish Government said it was unable to comment on the SFO’s investigation into Liberty Steel, stating it related to Covid-19 business loans.
A spokesperson said: “It was absolutely right for the Scottish Government to provide the Lochaber guarantee to protect jobs in the region, underpin additional investment at the site, and promote industry in Scotland. Supporting the strategically important steel and aluminium sectors and the highly-skilled jobs they provide is a priority, while ensuring value for money to the public purse.
“There has been no call on the Scottish Government guarantee, no debt is owed to the Scottish Government under the Lochaber guarantee, all guarantee fees are up-to-date and we hold a comprehensive suite of securities in respect of the Lochaber guarantee. If the guarantee were to be called on, the assets secured to the Scottish Government would more than cover the cost of the guarantee.
“The Lochaber guarantee is compliant with EU state aid rules.”
GFG Alliance declined to comment.