Significant question marks remain over key conditions of £586m Lochaber smelter guarantee
Fresh disclosures have raised questions about the ability of GFG Alliance to meet conditions required to abide by the Scottish Government’s £586m Lochaber guarantee.
Scottish Ministers have been under pressure to be more transparent around their dealings with GFG Alliance following the collapse of the firm’s largest financer, Greensill Capital, last year.
Two conditions – the grid connection of a hydroplant and a new aluminium factory or billet plant – were key conditions of the deal, with GFG Alliance claiming both remain “firmly on track”.
GFG Alliance have interests in several Scottish assets including at the aluminium smelter at Lochaber and the Dalzell steelworks, with the Scottish Government’s involvement central in the deals to take over the plants.
In 2016, ministers agreed a £586m guarantee with Liberty Steel, a subsidiary of GFG Alliance which guaranteed 25 years of power purchases by the smelter from the nearby hydroplant, with the guarantee funding the purchase of the aluminium smelter.
The government stated earlier this year the remaining exposure sits at £284m with 20 years of the guarantee left to run.
Heavily redacted freedom of information disclosures show the minister for business, trade, tourism and enterprise, Ivan McKee, met with the chief executive of GFG Alliance, Sanjeev Gupta, four times in the last year.
All of the meetings have centred on GFG Alliance’s involvement in Scottish businesses, focusing mostly on the steel plant at Dalzell and the aluminium smelter at Lochaber, Fort William.
Concerns have been raised by Mr McKee about the potential impact of the ongoing refinancing and restructuring of the wider GFG Alliance group on future investment at the smelter.
A key aspect of the original agreement between the government and GFG Alliance was the construction of an alloy wheels plant, dropped as they became unfeasible following the “decline of the UK automotive industry”.
In September last year, planning permission was granted for the replacement for this project, an aluminium recycling plant, or billet plant, with an investment of £94m and significant upgrades of the nearby Corpach port.
This, meeting minutes show, will “double capacity” and “bring in recycling to capitalise on the UK exporting all its scrap” at the Lochaber plant.
However the plans appear to be stuck pending a further resolution to the wider problems affecting the wider GFG Alliance group.
Notes of a meeting on October 25 states that Mr Gupta “reiterated his commitment” but warned of a redacted issue relating to the billet plant.
The minutes add: “GFG is working on a bespoke solution that will be presented to Scottish Government when ready.”
Months later, minutes of a meeting between Mr McKee and Mr Gupta held on January 24 note that while GFG is “fully committed to the investments at Lochaber...the conclusion of global refinancing is required to make material progress of the downstream project”.
In further redacted notes, there is also reference to a “potential significant land transaction”, with Mr Gupta stating the priority is currently “on concluding refinancing to support project investment”.
Following a phone call meeting between the two men on March 24, redactions make progress difficult to assess however Mr Gupta is said to have noted “GFG’s desire to continue progress on delivery of the billet plant through further [redacted]”.
Minutes of a guarantee management meeting, held with advisers from Deloitte, PR firm Teneo, and members of the government and GFG Alliance, raise further questions about the ability of GFG to pay for the billet plant’s construction, which may have an increased budget.
They state: “The Billet Plant will need [redacted] Capex to progress.
"[Redacted] asked about approval for this figure given the increase on the original estimate (budget was £[redacted]). [Redacted] stated this would be for senior GFG management to respond on.”
Central to the original guarantee was the requirement to fully connect the hydroplant at the smelter to the grid.
This is critical to avoid the electricity produced at the hydroplant “stranded” and unable to be sold to market, and it is not clear whether the work will be completed before the ‘longstop date’ of the guarantee agreement – when conditions must be met by both parties and the deal completed.
Without a full grid connection, the ability of ministers to claw back any money lost or to have a profitable asset on their books should GFG Alliance collapse and the plant and smelter fall into public hands would be difficult and potentially require significant investment.
Publicly available information suggests that the grid connection at the site is partially upgraded to be able to export around 28MW of energy, around a third of the plant’s total possible output.
A full grid connection was viewed in the original agreement as necessary to enable the government to “reduce guarantee exposure in the future”.
Both the Scottish Government and GFG Alliance said work was ongoing at the site to fully connect the grid, with GFG claiming it would be completed later this year.
Disclosures also show that public statements about an investment of £275m by GFG Alliance, made in an opinion piece in the Scotland on Sunday in January by the company’s chief transformation officer, Jeff Kabel referred to “contribution to the economy” instead of “traditional investment”.
Despite concerns around whether conditions of the deal between GFG Alliance and the Scottish Government has been fully met, the Scottish Government refused to release any details about the payments due to it from the conglomerate.
It claimed releasing any information on the value, due date, received date, and whether the payment was the correct amount would create substantial prejudice to commercial interests of GFG Alliance.
The government has spent £800,000 in last year and £1.6m overall on consultancy advice from the giant firm Deloitte since they were hired in 2017, replacing the original consultants on the guarantee, EY.
A GFG Alliance spokesperson said: “ALVANCE is undertaking enhancements to upgrade the Lochaber plant’s connection to the grid, planned for completion in the fourth quarter of 2022.
"The Lochaber smelter is performing profitably despite the impact of high energy prices and our plans to nearly double capacity on site with a new recycling and billet casting plant remain firmly on track.
"As plans to expand progress, with the project already in front-end design and engineering, this will drive further spend in the local and national economy, and enable us to target rising demand for Lochaber’s low carbon aluminium.
"We will continue to invest to improve productivity, upgrade existing facilities and safeguard jobs for the long term”
A Scottish Government spokesperson said: “The existing grid connection at the site is being enhanced which will allow the operation to more efficiently export excess power.”
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