Source · Select Committees · Public Accounts Committee
Recommendation 19
19
Accepted
Government employs stringent due diligence and asset security to mitigate moral hazard risks.
Conclusion
We asked the witnesses how they manage the risks of moral hazard (where support for one company creates an incentive for other companies to take risks with the expectation they will also be supported) and free riders (where the company’s incumbent lenders or shareholders may benefit from government support without having to contribute themselves) when deciding if and how to intervene in a company.50 The Treasury explained how it sets “the bar very high” and conducts very detailed due diligence on the companies, 42 C&AG’s Report, para 1.4, Figure 4 43 Q15 44 C&AG’s Report, paras 3.3, 3.5 45 Q22 46 C&AG’s Report, Lessons learned: tackling fraud and protecting propriety in government spending during an emergency, Session 2023–24, HC 444, 8 February 2024, Lesson 2, para 19 47 C&AG’s Report, para 3.6 48 Qq18–19 49 Q28 50 Qq61–64 ; C&AG’s Report, para 3.2 Monitoring and responding to companies in distress 15 such that the cases where it does intervene “are very few and far between”. UKGI told us how it is very mindful of the free rider problem and, if other financial stakeholders did not play their part, government would take assets as security to protect the taxpayer’s position.51 For example, when providing a £30 million loan to Celsa Steel, the government set the conditions of the support so that public money would be protected if the company became insolvent and it would get a greater return if the company did well. UKGI agreed that this would be a model it would intend to follow in the future.52
Government Response Summary
The government agrees with the recommendation and aims to implement it by July 2024. It details existing guidance, support teams, and practices for managing interventions and protecting taxpayer interests, and commits to shortly re-issuing relevant information and the NAO's good practice guide to departments.
Government Response
Accepted
HM Government
Accepted
4.1 The government agrees with the Committee’s recommendation. Target implementation date: July 2024 4.2 The Accounting Officers’ (AO) Assessments Guidance and Survival Guide provide advice on AO responsibilities. Managing Public Money provides complementary information and highlights Cabinet Office guidance. 4.3 The Cabinet Office’s Commercial team publishes a range of guidance on identifying and responding to company financial distress. This includes playbooks, e-learning, deep dive training and on-going written guidance. 4.4 HM Treasury’s Special Situations team provides central expertise and support for departments when considering bespoke interventions, ensuring they are designed on commercial terms to protect taxpayers’ interests and reflect the government’s principles for intervention. Departments are also supported by UK Government Investments (UKGI), the government’s centre of excellence for corporate finance. 4.5 The Department for Business and Trade’s Special Situations team engages across their sector teams and other government departments to respond to economic shocks, signposting others to specialist services across Whitehall. 4.6 While it is departments’ responsibility to monitor interventions, HM Treasury will often place conditions on spending approvals that appropriate follow-up work is conducted over the life of an intervention. 4.7 The Second Permanent Secretary of the Treasury regularly writes to departments to draw their attention to the principles and processes for intervention on company cases. This is supplemented by detailed guidance circulated by HM Treasury’s Special Situations team. 4.8 The government considers that publication of the National Audit Office’s report provides a timely opportunity to further highlight guidance for dealing with distressed companies. HM Treasury will therefore shortly re-issue information across departments and AOs including the NAO’s good practice guide.