Support for distressed companies: Government must be a step ahead of next crisis

PAC identifies tendency to push ahead with private sector partnerships without consideration of risk

High staff turnover risks loss of institutional memory of at-risk companies and sectors

Government must be a step ahead of crises caused by the next major company or sectoral failure. In a report published today, the Public Accounts Committee (PAC) calls on the Government to do more to monitor the financial resilience of sectors and companies, so it is well placed to respond in the case of the failure of a strategically important company or key supplier.

State intervention in private sector company failure is considered a last resort, but there are cases where Government has decided it is necessary to step in to protect society or the economy. The PAC’s report finds no joined-up Government approach for collecting intelligence on supplier, company, and supply chain resilience. A good example of why this is particularly important is CF Fertilisers and the CO2 market, where a CO2 supply shortage seemed to come as a surprise to the Government in September 2021.

The report further warns of a tendency in Government to push ahead with new private sector relationships without careful consideration of resulting risk or liability exposure, with a frequent failure to understand the economic and business models of contractors. An example of this would be the reforms rushed through by the Ministry of Justice to outsource probation services to community rehabilitation companies, a risky approach in outsourcing a service for the first time in an untested market.

Government interventions in distressed companies can involve significant amounts of taxpayer money; with cases ranging from Carillion to Northern Rock to Bulb Energy, as well as the unprecedented interventions to keep companies functioning and sustain essential services in response to the pandemic and the energy crisis. But the PAC’s report finds no evidence that interventions are being evaluated consistently and transparently, or that lessons are shared across government.

The PAC also warns of a lack of institutional memory across Government relating to at-risk companies and sectors. A high turnover of staff in government means that corporate knowledge held by departments, which may be commercially sensitive and therefore restricted to a small handful of individuals, is at risk of being lost.

Dame Meg Hillier MP, Chair of the Committee, said: “When the failures of private companies or indeed entire sectors poses a risk to society or the economy, Government will need to take a view as to whether or not to step in. But Government ought only to be deciding how to proceed based on the best available evidence and consistent institutional knowledge, and our report warns that neither routinely underpin policy delivery.

“Worryingly, we have identified a tendency for Departments to embark upon private sector partnerships without as close an eye on the risk to taxpayers’ money as they perhaps should have. State support for private companies will naturally always be a contentious area, with many liable to view such failures as the simple judgment of the market, and not a proper recipient of taxpayer support. It is precisely for this reason that the Government must ensure that it maintains a consistent and evidence-based approach when deciding to act.”

PAC report conclusions and recommendations  

1. There is still a long way to go to ensure the government has the right sources of intelligence and a joined-up approach to building a complete picture of supplier, company, and supply chain resilience. The Cabinet Office has published a new Resilience Framework focusing on prevention and preparation for risks, and the Department for Business and Trade has set out to make the UK government a centre of excellence for supply chain analysis and risk assessment. However, there is no consistent approach across departments for collecting intelligence on the financial resilience of suppliers, companies, and supply chains. The success of the government’s commitments and activities in this area depends heavily on whether it is joined up in its approach to collecting and sharing intelligence. This is particularly important where companies or suppliers cut across multiple policy areas or departmental remits, as demonstrated by the example of CF Fertilisers and the CO2 market. Despite multiple warning signs about overconcentration of the market and previous supply issues, it seemed to come as a surprise to the government when the UK faced a CO2 supply shortage in September 2021 and it had to step in.

Recommendation 1: In the Treasury Minute response, HM Treasury, the Cabinet Office and the Department for Business and Trade should:

• clarify who is responsible for ensuring intelligence about the resilience of companies, suppliers and supply chains is shared, coordinated and escalated where necessary; and
• summarise what lessons they have learned from experience about the government’s approach to gathering and sharing intelligence across government, and what action they are taking as a result.

2. We are concerned that departments are not maintaining institutional knowledge relating to ‘at risk’ companies and sectors. HM Treasury monitors the health and resilience of the corporate sector as a whole and the Department for Business and Trade oversees industry and different priority sectors and has a role in responding to economic shocks. It is the responsibility of individual departments to monitor the health of their sectors, and those at the centre of government say they are not aware of any one sector that is more at risk than others. However, a high turnover of staff in government means that corporate knowledge held by departments, which may be commercially sensitive and therefore restricted to a small handful of individuals, is at risk of being lost. HM Treasury spending teams act as the filter for warnings from departments, but turnover of staff in HM Treasury is historically even higher.

Recommendation 2: In the Treasury Minute response, HM Treasury and the Cabinet Office should set out how they will support departments to maintain a continuous level of knowledge about risks to companies and supply chains in sectors that are relevant to their departmental duties and objectives.

3. We are not convinced that accounting officers give sufficient consideration to the commercial models of those they contract with, which means they do not understand the potential risks (including supplier failure). HM Treasury suggests accounting officers should produce a formal Accounting Officer Assessment for any significant novel and contentious proposal involving the use of public funds. However, we often see a tendency in government to push ahead with new projects and commitments involving the private sector without careful consideration of the risks and liabilities it exposes the government to. Too often, the government has failed to understand the economic and business models of the suppliers it contracts with, and as a result has not been able to assess whether the gain-share and pain-share mechanisms of the contract are appropriate. This includes risks with outsourcing a service for the first time in “untested markets”, which we saw materialise when the Ministry of Justice rushed through reforms to outsource probation services to community rehabilitation companies. The Government Commercial Function now advocates piloting and scenario-testing in these situations but could not tell us how it measured success.

Recommendation 3: HM Treasury should set out in the Treasury Minute response how it will ensure accounting officers explicitly address the risks presented by suppliers’ commercial models in Accounting Officer Assessments for new projects and commitments involving private companies. Should the assessment identify a risk of company failure, we expect it to include an estimate of the impact of supplier failure, high-level contingency plans should failure occur, and an estimate of the potential costs incurred.

4. We are concerned that accounting officers may not always be equipped to protect taxpayers’ money when making decisions on intervention in these fast-paced, high-pressure situations. This Committee and previous committees have reported many times over the past two decades on government interventions in financially distressed companies. Prior to 2020, the government acknowledges that it took an ad hoc approach to providing support to distressed companies. Since then, HM Treasury has established some high-level principles to apply to company distress cases. Nonetheless, decisions about whether or how to intervene in companies require accounting officers to make difficult judgements and balance complex trade-offs, often at speed. In the case of Silicon Valley Bank UK, government officials had to rapidly draw up several options for how the government could respond to the situation, over the course of a weekend. Accounting officers need to ensure any decisions on intervention adhere to the principles of feasibility, propriety, regularity and value for money, as set out in Managing Public Money. It is important therefore that accounting officers can articulate the trade-offs they are balancing and any consequences of their decisions, including how any moral hazard (where support for one company creates an incentive for other companies to take risks with the expectation they will also be supported) or free rider risks (where the company’s incumbent lenders or shareholders may benefit from government support without having to contribute themselves) might be managed over the course of an intervention. It is also important that they consider exit strategies and articulate how they will manage the intervention under different scenarios, including if the government ends up being involved for the medium to long term, and consequent unforeseen costs.

Recommendation 4: HM Treasury should set out in the Treasury Minute response what it is doing to support accounting officers to discharge their duties and protect taxpayers’ money over the course of any company intervention. This should include any training activity and ways in which it is sharing and embedding the NAO’s good practice guidance.

5. The Cabinet Office has not assessed or coherently identified the skills and expertise needed for monitoring and responding to companies in distress. We have previously raised concerns about the level of commercial, risk management and corporate finance expertise in government amid increasing demand for these skills, all of which are important for monitoring and responding to companies in distress. Departments and regulators face the challenge of competing with the private sector for these high-in-demand skills.  The Government Commercial Function, UK Government Investments (UKGI) and HM Treasury are having to do more work to support companies with restructuring. The UKGI special situations team has been involved in over 200 company distress cases in the last six years. HM Treasury acknowledges that having the right skills and capabilities in place is a critical lesson, but also that they are currently patchy across government. There are pockets of expertise, but no one has taken responsibility for assessing the varied skills needed for monitoring and responding to companies in distress.

Recommendation 5: The Cabinet Office Commercial Function should set functional standards for monitoring and responding to companies in distress. As part of this process, the Function should write to the Committee within six months, explaining:

• The skill requirement across government for monitoring and responding to companies or suppliers in distress;
• The current level of these skills and expertise across government and where gaps exist;
• How the Commercial Function plans to close the gaps identified; and
• How the Commercial Function will ensure departments know where, how and when to access support.

6. It is vital that the government evaluates and shares the lessons from these cases on a timely and consistent basis, regardless of whether the case resulted in government intervention. We have previously found that much of government activity and spending is not evaluated robustly, or at all. Government interventions in distressed companies can involve significant amounts of taxpayer money, and yet it is not evident that these interventions are being evaluated consistently and transparently, or that lessons are being shared across government. There are also many cases where the government ultimately decides not to intervene, or finds other non-financial ways to support the distressed company or manage the situation. It is important that the government documents its rationale and learning from these cases too. The government does not appear to be routinely learning from other countries and their processes for intervening in distressed companies, although it has expressed an interest in doing so. A lack of institutional memory across government coupled with a lack of systematic evaluation puts government at risk of not learning what works for future cases.

Recommendation 6: HM Treasury should set out in its Treasury Minute response how it will update its approach to evaluating company distress cases (including those that have not resulted in government intervention), and how lessons are shared across sectors. Alongside its Treasury Minute response HM Treasury and UK Government Investments should also provide some examples of lessons learned reports or evaluations from recent cases.