The Balance Sheet Review, published in November 2020, sought to identify opportunities to dispose of assets that no longer serve a policy purpose, improve returns on retained assets and reduce the cost and risk of liabilities.
The report is split into three key themes as follows:
1) Transparency – long-term impacts of policies on the balance sheet
2) Asset management – delivering better value for money from assets
3) Risk management – strengthening control of long-term risks and the costs of liabilities.
The Balance Sheet Review highlights how fiscal decision making can be better informed by considering the impact of policies on a wide range of balance sheet metrics. Under transparency, the report states that ‘improving the coverage, quality, frequency and timeliness of balance sheet information is key to understanding the long-term impacts of policies on the public finances and to unlocking the gains from taking a more active approach to the management of the public sector balance sheet.’
Effective asset management to achieve value for money is central to the Balance Sheet Review. A number of initiatives are outlined in the report such as the creation of a new digital national asset register to better manage public sector properties by providing information on vacant, surplus and available estate. The Government Property Agency has recently been set up to manage the estate of some government departments centrally, looking to reduce costs and increase efficiencies by benefiting from staff expertise and economies of scale.
The Balance Sheet Review also makes the case for the need to maximise the value of intangibles in the public sector, including intellectual property rights, research & development, technology and data, with the report estimating that these assets could be worth as much as £150bn. These assets remain largely underexploited and the government has set up a unit to manage intangible assets more effectively.
Knowledge Assets Team
The Knowledge Asset team is based in the Department for Business, Energy and Industrial Strategy (BEIS) and their remit is to identify, protect and support the exploitation of knowledge assets to help maximise the social, economic and financial value they generate. (click this link for more detail)
They will be working closely across Whitehall as well as the private sector to identify and commercialise intangible assets. They take their inspiration from Oxford University which has successfully spun off various enterprises over the years based on their in-house R&D activity. They are very much looking to raise revenue by monetising public sector intellectual property by creating companies to take the ideas to market.
The risk management chapter of the Balance Sheet Review looks at how to improve the identification and mitigation of balance sheet risk as well as to improve the capability to understand and manage risk and to improve compensation for risk to protect the taxpayer.
Liabilities, by definition, result in an outflow of resources and are thus a fiscal risk to the government. When the likelihood of that outflow is either quite low or the outflow is hard to quantify, then accounting rules state that an off-balance sheet contingent liability should be recorded. As per the latest Whole of Government accounts, contingent liabilities totalled £80.1bn and therefore pose a sizable fiscal risk.
Improved understanding of risks is seen as critical to managing them better, which is why the Contingent Liability Central Capability unit has recently been established to strengthen the management of contingent liabilities.
Contingent Liability Team
The Contingent Liability Central Capability (CLCC) is an analytical and advisory unit based within UK Government Investments (UKGI) to strengthen contingent liabilities expertise across government (click here for more detail).
One of the areas of focus is on new contingent liabilities, looking at loan guarantees and indemnities. CLCC will work with departments to quantify risks, incorporate risk mitigations and advise on charging appropriate premiums for risk transferred to government (such as export guarantees).
They will also be reviewing the existing stock of contingent liabilities to develop a deeper understanding of the risks involved to help inform HM Treasury’s risk management and contingency planning. This will include stress testing to determine the economic conditions to which the government is especially vulnerable.
Henning Diederichs, Manager, Public Sector Financial Reporting, at ICAEW commented: “HM Treasury’s Balance Sheet Review is an excellent report with many interesting ideas, but we were concerned about the next steps and how the proposals might be taken forward. So, it is great to see the formation of the knowledge assets team and the contingency liabilities team.
“It is important to strengthen and improve the skills levels of the public sector and to commercialise transactions where possible – either by charging an appropriate fee to take on a risk or by nurturing innovative ideas with the aim of bringing these to market. Co-ordinating this ambitious work across government and sharing best practice and lessons learned will be crucial to the success of these teams.”
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