Source · Select Committees · Public Accounts Committee
Recommendation 25
25
Accepted
Treasury implements living wills, playbooks, and guidance to manage supplier failure risks.
Recommendation
We asked the Treasury how it supports government departments to prepare for and manage potential supplier failure, and what contingency plans it had in place to address supplier failures, particularly for critical services, to avoid over-reliance on Government support. The Treasury 51 C&AG’s Report, para 3.7 52 Q 62; C&AG’s Report, para 3.9 53 Qq 37-38 and 41, 45 54 Qq 37 and 52 55 Q 3 56 Qq 23, 79 and 81; C&AG’s Report, Investigation into the rescue of Carillion’s PFI hospital contracts, Session 2019–20, HC 23, January 2020, pp 5-6 16 highlighted that being ready for failure was one of the lessons learned from Carillion that the NAO and government had pointed to. The Treasury added that there are “living wills” in place within contracts which list all the services that are reliant on the supplier and how those services will continue in the event of insolvency. The Treasury also told us that all departments need contingency planning and to support this, it had published four playbooks by sector, 12 guidance notes, and a sourcing playbook which includes some of the resolution plans. Where necessary, the Government Commercial Function also assists departments with drawing up management plans.57 Contract management
Government Response Summary
The government agrees to enhance support for managing supplier failure, with a target date of May 2026, by issuing further guidance on contract and performance management and how to reset infrastructure projects.
Government Response
Accepted
HM Government
Accepted
5.1 The government agrees with the Committee’s recommendation. Target implementation date: May 2026 5.2 Identifying where the private sector is better placed to identify, assess, price and manage risks – and structuring contracts to reliably incentivise and capture that expertise – is key to private finance projects being able to demonstrate value for money. 5.3 Where risks are better managed by the private sector, it is important to carefully consider how contractual provisions can best ensure robust risk management throughout the asset’s lifecycle. However, supplier failure remains a risk in any contractual situation. Although robust due diligence and contractual provisions can reduce these risks and mitigate their impacts, some degree of counterparty risk is inevitable. 5.4 Some risks are better managed by the public sector, and it is poor value for money to attempt to transfer these. Contracting authorities should consider the overall package of risks and returns to assess whether a financing model offers good value for money compared to alternative financing options. 5.5 In implementing the 10 Year Infrastructure Strategy, the Treasury and NISTA will carefully consider the risk allocation in infrastructure procurement, and the involvement of private capital in taking risk in different elements of financing structures, to ensure value for money is achieved. The government has learned the lessons from the past and is applying these learnings to current and future projects. For example, the lessons learned from Hinkley Point C helped lead to Sizewell C’s pioneering use of a Regulated Asset Base model to more effectively allocate risk between the parties and which enabled the conclusion of a private equity raise. 5.6 NISTA offers expert advice to public bodies contracting private finance deals for infrastructure, and further support and guidance is available from the government’s Risk Centre of Excellence, including the Orange Book, and the Cabinet Office. 5.7 The Treasury and NISTA will set out further guidance by May 2026 regarding contract and performance management as well as how to reset infrastructure projects, complementing existing guidance such as Navigating the risks of PFI project distress (GOV.UK).