Liberty Steel and the Future of the UK Steel Industry

The corporate structure and governance of GFG Alliance companies resulted in no formal oversight or accountability of the decisions taken by Sanjeev Gupta. Mr Gupta put members of his staff in an unacceptable position by employing them with job titles associated with traditional executive functions in well run companies, without giving them the required access to information or decision-making powers necessary for them to perform their duties. It is unclear why Mr Gupta opted to structure his companies in this unusual and, given the scale of his operations, unacceptable way.

We recommend that Ministers reflect on the systemic risks to UK industry posed by such unusual corporate structures and, if deemed necessary, bring forward amendments to the Companies Act. (Paragraph 29) Audit

We were not reassured by the evidence presented by King & King and note the legal restrictions placed upon Mr Patel, and other auditors who had previously audited GFG Alliance companies, by Sanjeev Gupta.

Despite public statements over a number of years to the contrary, we see, as yet, no tangible evidence that Sanjeev Gupta and GFG Alliance companies are making improvements to corporate governance or improving transparency through the publication of consolidated accounts.

We found it utterly unconvincing, and do not believe that King & King had the capacity, expertise, or resources to audit the accounts of multiple large GFG Alliance and Liberty Steel UK companies representing over £2.5 billion of revenue.

The reputation of Liberty Steel UK has been threatened by the poor audit and accounting practices of GFG Alliance, including the changing of accounting deadlines and its inability to produce consolidated accounts. As these accounts are yet to be published it is difficult to see the true financial picture of Liberty Steel UK. Unless remedied, these deficiencies severely limit the potential of that firm to be viewed as a reliable partner in any long-term strategy for the UK steel industry.

We recommend that the Financial Reporting Council, as the competent authority for audit in the UK, refer this case to the relevant Recognised Supervisory Body, the Institute of Chartered Accountants for England and Wales, to investigate King & King under the Audit Enforcement Procedure as a matter of urgent public interest. (Paragraph 51) Liberty Steel and the Future of the UK Steel Industry 63 Government rejection of funding for Liberty Steel UK

We commend the Government’s decision to reject GFG Alliance’s request for £170 million of financial support in March 2021. The Secretary of State was correct to be cautious about providing a large grant to a group of companies with a centralised, complex and opaque governance structure.

In light of the Greensill Capital collapse and subsequent financial hardship of GFG Alliance and Liberty Steel UK, we urge the Government to give consideration to formalising the fit and proper person test for private company directors within any future steel sector deal.

We note the recent developments within GFG Alliance and Liberty Steel UK and welcome the injection of capital at Liberty Steel’s Rotherham plant. However, we note that once again Sanjeev Gupta has decided to set up an additional corporate entity to provide financial support to Liberty Steel UK companies without clear reporting and decision making on the source and terms of use of that funding.

We would welcome the Insolvency Service considering whether, on the basis of the evidence we have received, Sanjeev Gupta may have acted in breach of his fiduciary duties as a company director in the United Kingdom.

More broadly, we believe that until Mr Gupta restructures his GFG Alliance companies into a more acceptable corporate structure and publishes consolidated accounts that are adequately audited, that he fails to fulfil the criteria that we believe should be applied to define a fit and proper person for the purposes of receiving any form of Government support. (Paragraph 62) Supply Chain Finance

The way in which future, or prospective, receivables operated between GFG Alliance and Greensill Capital is disputed by both parties. We note that several claims have been made about the use of future receivables and their relation to “suspect invoices” and welcome the Serious Fraud Office’s investigation into this matter.

Steel is a foundational industry in the UK and in need of significant structural reform. The use of high-risk financial funding practices, such as future receivables lending, that Greensill Capital and GFG Alliance engaged in are barriers to such reforms. By his use of such practices Mr Gupta, the so-called “saviour of steel” is creating uncertainties that further undermine the long term viability of the steel industry in the UK.

We recommend that the Financial Conduct Authority and HM Treasury investigate the use of, and accounting rules for, future or prospective receivables.

GFG Alliance’s reported engagement in circular trading, or REPO structures, exacerbated a concentration risk to Greensill Capital by raising large amounts of working capital against invoices created to raise finance instead of selling steel to genuine customers. (Paragraph 86) 64 Liberty Steel and the Future of the UK Steel Industry

We did not receive evidence that the use of circular trading between companies is a systemic issue, but note the potential criminal liability associated with the worst examples of financial engineering between businesses. Despite repeated reassurances from GFG Alliance, we remain unconvinced by Sanjeev Gupta’s attempts to re- structure and re-finance his businesses. We are not satisfied that Sanjeev Gupta is adequately addressing the many fundamental issues and concerns associated with the corporate governance, leadership, transparency, funding and operations of his businesses and remained concerned that this poses a threat to the long-term prospects of Liberty Steel UK. (Paragraph 87) Coronavirus Large Business Interruption Loans Scheme

We note that concerns were raised by HM Treasury and shared with BEIS about GFG Alliance and Wyelands Bank during the accreditation process of Greensill Capital to the CLBIL scheme.

We recognise that the subsequent level of interest from the BEIS Department about the accreditation of Greensill Capital was “unusual” but we are confident that this did not impact the approval process and the British Business Bank’s decision remained independent. Given the potential impact of the financial position of Greensill Capital on Liberty Steel’s UK operations, we acknowledge the due diligence of both the Secretary of State and his officials in monitoring the accreditation process closely was entirely proper.

However, the collapse of Greensill Capital and its impact on Liberty Steel UK highlights the fragility of the sector in the UK more generally and raises far reaching and fundamental questions for the Government to consider in terms of how it should work with the industry to secure a sustainable, long-term future. (Paragraph 104) Challenges and opportunities facing the UK steel industry Electricity prices

High electricity prices are hindering the ability of UK steel producers to compete on the international market and are a deterrent to inward investment. If the Government is serious about decarbonising the steel industry, it must first recognise the severity of the challenge energy prices pose to steel companies in achieving the transition to net zero and take action to reduce these costs.

UK steel producers were already facing some of the highest electricity prices in Europe prior to recent rises in the wholesale price of gas. Soaring gas prices have since transformed what was a long-standing problem into an immediate crisis. We urge the Government to support UK steel producers but note that short-term bailouts must not be at the expense of a longer-term strategy to secure a level playing field for UK steel producers with their European counterparts.

We recognise that decisions on how and whether to compensate industry for the costs of electricity will, by necessity, have implications for consumers and other network users. However, it is clear that current electricity costs for UK steel Liberty Steel and the Future of the UK Steel Industry 65 producers are unsustainable. Compensation provided by the Government to the UK steel industry to date has fallen far short of the support offered to their competitors and has not translated into a meaningful reduction in the price disparity. Energy policy costs have been brought down but remain twice as high as those in France and Germany while network costs are almost ten times as high. Further support from the UK Government will be needed if the UK steel industry is to compete on a level playing field and attract investment. This issue will only become more urgent as the industry moves to decarbonise and the sector’s demand for electricity rises accordingly.

If additional support is not forthcoming, high electricity prices will continue to have a pernicious effect on the UK steel industry, resulting in long-term decline and future crises. The Government should set out, following a consultation with industry, what support it will offer beyond the current compensation scheme to reduce the cost of electricity for UK steel producers and bring them in line with those of their competitors. At a minimum, the price disparity should be brought down to within £1/MWh of the total cost faced by key competitors in France and Germany and the Government should track any disparity going forward to ensure it does not widen again.

When implemented, the Targeted Charging Review has the potential to burden UK steel producers with costs exceeding relief provided to the sector as an energy intensive industry. We note that despite this decision having a potentially significant impact on UK steel producers it has been left entirely to Ofgem without the opportunity for the Government to intervene.

Given that UK steel producers are already facing some of the highest electricity prices in Europe and that demand for electricity will only increase as the sector decarbonises, the Government should exempt the steel sector from increased costs arising from Targeted Charging Review reforms. (Paragraph 132) Public Procurement

Despite advances made since the publication of the Procurement Policy Note in 2015, UK steel producers are still encountering challenges when competing for and securing public contracts. Much of this is due to an opaque and informal approach taken to steel procurement by contracting authorities and action is needed from the Government to make this process more transparent. Furthermore, a lack of transparency in steel supply chains together with an absence of explicit guidance on how social and environmental considerations should be applied has meant that broader objectives are being missed. Public procurement of steel has the potential to deliver wider benefits and further action is needed to ensure that the full value offered by UK steel producers is taken into account when supplying steel into public projects.

To ensure full transparency, the Procurement Policy Note (PPN) on steel procurement in major projects should be updated to include a requirement for contracting authorities to provide supply chain plans and publicise supply opportunities for UK steel producers. The Government should also publish updated guidance on how social and environmental considerations should be made in relation to steel purchases to ensure these are taken into account by contracting authorities. (Paragraph 142) 66 Liberty Steel and the Future of the UK Steel Industry

High-quality data will be essential for monitoring and improving compliance with steel procurement policy. However, this data is currently incomplete with only partial data being reported by Government Departments and Arm’s Length Bodies. We welcome the work of the Steel Procurement Taskforce in working to improve the quality of this data. However, at the very least, all Government projects should be fully reporting on the value and origin of their steel requirements.

A requirement should be set for all Government projects, including steel contracts awarded by the Contracts for Difference scheme and Highways England, to fully report on the value and origin of their steel requirements.

Decisive action should be taken to ensure that UK steel producers do not miss out on the Government’s ambitious infrastructure programme. Setting minimum UK steel content targets for major public projects would serve as an important first step to improving opportunities for UK steel producers. The Government should introduce minimum UK steel content targets for major public projects, starting with High Speed 2. (Paragraph 151) Trade

Given that global steel markets continue to be heavily distorted by state subsidisation and that the EU and the US continue to apply tariffs on imported steel, the UK requires a response from Government regarding potential trade divergence towards UK markets and significant injury to UK steel producers.

We share the concerns expressed to us that the Trade Remedies Authority’s recommendation to revoke safeguards on nine categories of steel imports was not based on an open dialogue with industry and had therefore missed the wider impact its decision would have had on UK steel producers. These concerns also appear to be shared by the UK Government as demonstrated by its decision to overrule the Trade Remedies Authority’s recommendation and grant industry more time to appeal its decision. A two-way dialogue with industry must inform future recommendations by the Trade Remedies Authority and we welcome the opportunity given to both parties to do so. (Paragraph 165) Decarbonisation

There is a clear lack of direction with respect to the future of the nation’s blast furnaces both within the Government and in industry. A range of options exist for the decarbonisation of primary steelmaking, including carbon capture and storage (CCS), hydrogen, or a mixture of technologies running in parallel. It will ultimately be for the sector and each individual business, with its own unique sites and products, to work out which technology is optimal for them. However, to enable these decisions industry requires certainty from Government on infrastructure and wider system changes.

We found broad agreement that the UK should retain a primary steelmaking capacity rather than push its emissions and business abroad, a point recognised in the Government’s own Industrial Decarbonisation Strategy. However, if the Government is serious about its emissions targets and given that the nation’s blast Liberty Steel and the Future of the UK Steel Industry 67 furnaces will soon need to be replaced, if the UK is to retain its primary steelmaking capacity then key decisions and certainty are needed imminently. The Government’s Industrial Decarbonisation strategy has so far failed to provide this certainty and the Government must step up its efforts to provide industry with direction and a supportive policy environment to enable it to transition to a low carbon future.

We identified enthusiasm from many witnesses for the use of hydrogen direct reduced iron as a technology well-suited to decarbonising the UK steel industry. However, as with other potential solutions, it is a technology that remains untested at scale. A pilot of hydrogen-based steel production in the UK would help to inform future decisions on decarbonisation; create initial capability; develop UK-based expertise; and facilitate a switch to hydrogen once the technology is proven.

The Government should commit to a pilot of hydrogen-based steel production in the UK as part of its industrial decarbonisation strategy. Funding for the project should be sought in partnership with interested steel businesses or backed in part by the Clean Steel Fund. The Government should further consult on the most appropriate location for the pilot which would deliver the widest benefit for industry as a whole.

Previously used steel, also known as scrap, will play a central role in efforts to decarbonise the UK steel industry. The high availability of scrap in the UK represents a valuable resource which is under-utilised, and a range of measures will be needed to ensure that the recycling of scrap is a more attractive option for UK steel producers than exporting it abroad for others to recycle. We welcome the work of the UK Steel Council in attempting to find solutions to this issue and call on Ministers from both the Department for Business, Energy and Industrial Strategy and the Department for Environment, Food and Rural Affairs (with respect to waste policy) to work with the Council to optimise steel recycling in the UK. (Paragraph 191) The future of the UK steel industry

Many of the challenges facing the UK steel industry today are long-running and have led to crises in the past. Without fundamental reform of energy pricing and a clear decarbonisation strategy, the sector will fail to attract much needed investment and continue on a path of accelerating decline. The Government’s rhetoric on the strategic importance of the sector must be matched by supportive policy.

A successful transition to net zero will be dependent on addressing the wider challenges and opportunities facing the UK steel industry. These issues will need to be tackled as part of a broader, strategic approach to decarbonisation.

The steel industry has faced a number of crises in recent years but action to support the sector has been taken on a mostly ad hoc, reactive basis. The sector cannot continue to lurch from crisis to crisis and action is needed now if the UK is to retain a resilient and competitive domestic industry. Decarbonisation presents a unique opportunity to realign the sector but this will require a comprehensive, joined- up policy framework to remove barriers to transformation and enable critical investment decisions. (Paragraph 208) 68 Liberty Steel and the Future of the UK Steel Industry

We call on Ministers to establish a new Sector Deal for the steel industry. The Sector Deal should address long-running challenges to the sector’s competitiveness as part of a cohesive plan for decarbonising the industry. It should set out a range of supportive policies to assist this transition and a clear roadmap for how the industry will decarbonise in line with the Government’s target to cut emissions by 78% by 2035 and reach net zero by 2050. This Sector Deal should be developed in response to the Steel Council’s report later this year and announced no later than Summer 2022. (Paragraph 209) Liberty Steel and the Future of the UK Steel Industry 69