Source · Select Committees · Public Accounts Committee
Recommendation 3
3
Accepted
Set out how HM Treasury will ensure accounting officers address supplier commercial model risks.
Recommendation
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 6 Monitoring and responding to companies in distress 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.
Government Response Summary
The government states it already ensures Accounting Officers address supplier commercial risks through existing guidance documents like the AO Assessments Guidance, Managing Public Money, the Sourcing Playbook (which includes guidance on supplier failure and contingency planning), and the Orange Book for risk management.
Government Response
Accepted
HM Government
Accepted
The government agrees with the Committee’s recommendation. Recommendation implemented Guidance documents require Accounting Officers (AOs) to consider commercial risks in their decision-making, including around the financial resilience of suppliers. Individual departments are then responsible for providing their AO advice in line with this guidance. The AO Assessments Guidance sets out four standards when considering projects and proposals. AOs must consider value for money, which includes evaluating risks from third party involvement. The feasibility standard also requires AOs to consider commercial factors. Managing Public Money (MPM) complements the above guidance and sets out responsibility for ensuring an organisation’s procurement, projects and processes are systematically evaluated to provide confidence about suitability, effectiveness, prudence, quality, and good value. MPM includes specific expectations on assessing risks and provides links to commercial guidance. The Government Commercial Function’s ‘Sourcing Playbook’ sets out a recommended approach to assessing the economic and financial standing of bidders, determining their capacity to deliver as part of the initial selection process. There is a chapter on resolution, providing guidance on monitoring and contingency planning for the failure of suppliers (underpinned by a detailed resolution planning note). The Orange Book provides detailed guidance on risk management, including risks from supplier failure and mitigations to manage this. In addition to the above guidance, departments and AOs are supported by professionally qualified finance directors and specialist procurement and commercial teams. MPM requires all draft assessments to be approved by a department’s senior finance officer before being submitted to the AO.