Brexit could cost DFID £200M in contract guarantees

LONDON — The United Kingdom government is preparing to cover about £200 million ($244 million) worth of European Union aid contracts in the event of a no-deal Brexit, according to the most comprehensive figures available yet — more than double the figure previously provided by the government.

U.K.-based organizations are likely to become ineligible for much EU aid funding after the country leaves the bloc. If no agreement is reached on the terms of its exit, many are concerned that existing contracts could be suddenly cut off, leaving projects in limbo.

In March, the Department for International Development agreed to underwrite those contracts to avoid a funding cliff-edge. In a statement to Parliament at the time, then-Secretary of State for International Development Penny Mordaunt said the exact size of the liability was unknown but was estimated at around £90 million.

However, speaking at the Bond Funding for Development conference in London on Monday, Victoria Wickenden, director of programs at Care International U.K. — which is coordinating the scheme on behalf of DFID — said the latest estimate is around £200 million, based on an exit date of Oct. 31. That figure covers about 200 contracts held by 58 organizations.

Chris Carter, deputy head of DFID’s Europe department, added that: “We still don’t fully know how large this fund will have to be. The EU … won’t share any figures at all, they won’t share what they know about the numbers of projects, the size of those projects with us, so we had to just work that out with [civil society organizations] submitting [their] requests” for financial assurance.

The U.K. is currently scheduled to leave the EU at the end of the month, although parliament has instructed Prime Minister Boris Johnson to seek an extension until January if no deal has been struck. Johnson insists he will push ahead with an Oct. 31 exit date regardless.

As a result, Carter noted that it is still unclear whether financial assurance will be needed. Even in a no-deal scenario, the U.K. has the option to pay into the EU’s 2019 and 2020 budgets, which would mean U.K. organizations remain eligible for funding during that period, he said.

And if the assurance is triggered, it remains unclear whether the EU will continue to manage those programs while DFID funds them, or how that arrangement will work.

But Carter said DFID had made a number of “concessions” to make things as easy as possible for affected organizations.

First, contracts will continue to run according to the EU, rather than DFID, rules.

Second, he said, “we won’t go through our normal processes with an organization ... before we release funding. We will prioritize getting money to you and ask questions later. That’s quite radical for DFID and it was very hard to agree, but it makes sense. We could spend three months trying to do due diligence or whatever else we would have asked of you before we release funding, by which time you could have run out of money.”

Third, DFID will honor the euro amount to avoid exchange rate uncertainty — something U.K.-based organizations have struggled with in the aftermath of the Brexit referendum. “It defeats the object of the guarantee if it’s below… what you expected,” he said.

Finally, Carter said that European sub-contractors on programs led by U.K. organizations will also be covered; and that if a U.K. organization is a partner on a contract led by a European organization, the U.K.-implemented part of the project will be covered.

Wickenden said onboarding to the fund was already starting — including sharing draft contracts and due diligence information, and clearing bank details — so that “whatever then happens on the 31st [of October], we’ll be able to cope with it on the 1st [of November].”

She added that any organization that hasn’t yet registered a project that could be eligible should do so with DFID as soon as possible and then get in touch with Care’s Brexit team.

“It’s terrifying that we could have contracts cancelled and that services that poor people depend on wholly could have been deleted, so I think the most important thing for me with this fund is that if the worst happens we’ll be able to [prevent that] from happening,” she said.

Carter concluded that: “It does remain difficult. There is so much uncertainty … We have a lot of work to do at DFID to really think hard about how to implement it.” 

“We have thought about the first period where we will prioritize funding, but what we would do after three months, what we would do after six months, how we would manage it internally, we’ve still got to decide that. We can’t do that until we know what kind of no deal we’re in” — if it’s a no deal at all.”