Would Forgemasters really have made a profit?

There are many issues to debate with regard to the loan promised by the previous Government to Sheffield Forgemasters, which was cancelled by the new Coalition.

A new one was opened up on Tuesday by Clive Betts, MP for Sheffield South West. Mr Betts asked a Parliamentary question to find out how much interest Forgemasters would have paid on the £80 million loan (had it been given).

The Minister, Mark Prisk, replied:

"The planned repayment period for the loan to Sheffield Forgemasters was 14 years. The total planned repayment amount would be £110.9 million."

Cue Clive Betts announcing triumphantly in the Sheffield Star that the loan would have been "profitable for the Treasury", assuming a pure profit of £30.9 million.

Unfortunately for him, it's not that simple.

If this really was such a profitable enterprise and such a sure thing, why is there no private sector investor willing to put their money behind it? The fact is that even with this money there's still a serious risk Forgemasters would not survive or be profitable.

Even worse, Mr Betts has failed to take into account the costs to the Government of providing this money. The loan was cancelled to reduce the deficit - meaning that if it went ahead, the Government would be borrowing the money to loan to Forgemasters.

What is the interest rate paid on Government borrowing? This was going to be a 14 year loan, so you can take the 10 year interest rate of 3.35% (or indeed the 15 year rate of 3.88%). According to David Miliband the Forgemasters loan was to be at an interest rate of 3.5%, meaning that the true "profit" to the Treasury is either absolutely negligible or would actually be a loss.

Clive Betts had better look for a different argument.

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