Ministers reduce provision on Lochaber smelter, but still worth more than £100m

The Scottish Government’s provision relating to the Lochaber smelter guarantee has been valued down by around £47 million – a sign the risks around the deal are beginning to lessen.

However, the updated figure is still a significant increase from two years ago when it was valued at £37m. Last year the Government’s consolidated accounts valued the provision at £161m, but this has decreased to £114m for 2021/22.

In previous years the provision was based on “a technical assessment of a range of credit risk scenarios” and underlines the still high risk around the deal due to the financial pressures on Sanjeev Gupta’s GFG Alliance conglomerate, the ultimate owners of the smelter.

The 2016 deal between Mr Gupta and the Government involved ministers guaranteeing the power purchase obligations of the smelter from the nearby hydroplant. Ministers receive an annual fee for the guarantee, which is worth between £14m and £32m a year over the life of the contract. The overall value was £568m when agreed six years ago.

This guarantee allowed Mr Gupta to raise funds to purchase the smelter and save it from closure.

Following the collapse of GFG’s main funder, Greensill Capital, the steel giant has been attempting to refinance its business. It announced an agreement in principle around its global operations last month, releasing some of the immediate pressure on the business.

The consolidated Government accounts state the new provision “includes consideration of the comprehensive security package the Scottish Government received in exchange for the provision of the guarantee, consisting of the smelter, the hydro power station, extensive land holdings and a series of other protections”.

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