On the face of it, you might not think a steel company, an energy supplier, a social care provider, a bank and a travel agent have much in common. But, if I name the companies – Sheffield Forgemasters, Bulb, Southern Cross, Northern Rock and Thomas Cook – you might recall the headlines about their financial difficulties that attracted a government response.
Why does government get involved?
In general, government believes that private sector companies should be allowed to fail as part of the efficient working of markets and the economy. However, company failure across a range of sectors can have serious consequences for government, taxpayers and service users. In examples like the ones above, government sometimes decides it needs to intervene – either to prevent the company from failing, rescue it, or manage the situation to prevent a disorderly collapse. After all, none of us expect to be left in the dark when our energy provider collapses.
At the NAO, we have examined the value for money of government interventions in a wide variety of distressed companies over a period of 20 years. Drawing on this body of work, and insights from experts at the centre of government, our new report and guide collate this learning and set out good practice. They aim to help civil servants preparing for, monitoring and responding to companies in financial distress. This comes at a time when we have seen an unusual level of state intervention to keep companies or services functioning in response to the pandemic and energy crisis. With company insolvencies set to be at their highest levels since the depths of the financial crisis in 2009, how can government be alive to the risks this poses and ready to respond if necessary?
Identifying vulnerabilities and preparing for distress
Government is increasingly aware of the risks associated with company failure. The Civil Service Board has identified the risk of market or supplier failure. The latest edition of the National Risk Register features several related risks and scenarios: failure of a major adult social care provider, of a critical public sector supplier and insolvency affecting fuel supply. The government’s new approach to resilience focuses on prevention and preparation for these types of risk.
Our guide highlights the importance of departments understanding where their objectives and the systems they oversee could be vulnerable to company, market or supply chain failure. This, we know, can be challenging – especially where a company provides services to several departments or cuts across multiple sectors. In examples like Carillion, CF Fertilisers and UKCloud, no single department had a complete picture of the public sector’s exposure to the company before it fell into financial distress.
Without good data and clarity over all the bodies involved and their responsibilities, monitoring and assessing these risks and coordinating contingency plans becomes challenging and time pressured. Government is aware of this – and Cabinet Office recently requested all departments assign a single
point of responsibility to enable better understanding of cross-government exposure to supply chain risks and help coordinate responses.
Responding to distress and managing complex interventions
If, or when, it comes to intervening, ministers and officials quickly become embroiled in complex decision making at speed. As we regularly find in our audits, ensuring value for money means careful consideration not just of short-term objectives but of longer-term scenarios. This includes plans for how government might manage and eventually ‘exit’ the intervention and recover taxpayer funding. It also means accounting for the wider implications of intervening and risks for the whole market.
In the case of Carillion, Cabinet Office rejected its requests for support to avoid setting an unhelpful precedent of bailout for other distressed suppliers (the moral hazard risk). Instead, it opted to fund a trading liquidation, with the company continuing to provide public services until alternative arrangements could be made. Despite government not providing direct support to the company, Carillion remains in the news more than 5 years after its collapse, with a recent record fine for its auditors and the Insolvency Service being left £8m out of pocket over Carillion proceedings. In any intervention decision, government needs to be aware of the potential for a long tail of involvement, which might include unforeseen costs and ongoing commitment of resources.
Demand for skills, experience and expertise
The examples we have looked at in the guide show that preparing for and responding to these situations require access to specialist skills not always readily available within government. To support the special administration of Bulb, government spending on advisers had reached £53 million at the end of January 2023. Amidst an increase in corporate finance work across government, the Public Accounts Committee has called for government to ensure all departments have access to the right skills and experience from within the civil service to handle future failures. And with a high turnover of civil servants working in this area, it is all the more important that lessons from these cases are not simply put on the shelf, never to be dusted off again. Our guide and report stand ready as a reference point for civil servants navigating these challenges.
Eloise Peck is a senior analyst working in the National Audit Office’s HM Treasury value for money audit team.