HM Treasury’s Balance Sheet review, launched at the Autumn Budget 2017, set out to improve the management of the public sector balance sheet, deliver value for money and reduce risks.
The review has led to new areas of focus and the creation of two new teams - one to manage Knowledge Assets based in the Department for Business, Energy and Industrial Strategy (BEIS), and the Contingent Liability Central Capability based in UK Government Investments (UKGI). In this article, we find out more about the establishment of the latter.
UKGI is a government company wholly owned by HM Treasury, the government’s centre of excellence in corporate governance and corporate finance. It advises on all major UK government corporate finance matters, including financial interventions into corporate structures and corporate finance negotiations. It acquires, manages and executes the sale of all significant UK government corporate assets and acts as shareholder for UK government arm’s length bodies. Bolstering the UKGI team is a response to the increase in government demand for UKGI’s services across specialist areas.
Part of this exercise to widen UKGI’s function has been to establish UKGI’s Contingent Liability Central Capability (CLCC). The unit has been set up to strengthen contingent liability and risk management across government, providing analysis, advice and expertise.
Siobhan Duffy has been appointed as a Director to head the Contingent Liability Central Capability. She has 25 years’ experience in debt capital markets structuring and advising European corporates on debt issuance, including at NatWest Markets/RBS and at London Bridge Capital.
Duffy is delighted that CLCC sits within UKGI as this positioning assists with cross-government communications, with UKGI acting as a hub. UKGI also sits at the nexus of policy and advisory. “HM Treasury has also put a lot of thought and work into this structure which supports our mandate,” says Duffy. The project she is leading spans several years – reflecting the multi-year nature of contingent liabilities themselves.
Apart from being a centre of excellence within government, Duffy says that CLCC also brings clarity around existing and new contingent liabilities on the government’s account. “We can bring scrutiny to new contingent liabilities as they're added to the balance sheet to ensure that they have been well structured and priced to mitigate both the cost and the risk to the taxpayer,” she says. “It’s about being thorough and learning best practice from previous experience.”
Her first task is to build a team that comprises the knowledge and resources to enable CLCC to advise on the liabilities that the government is undertaking in an efficient and effective way. “Over the longer term, we will look back at the stock of contingent liabilities to understand what we have on the balance sheet, understand how comparable these contingent liabilities are, and then begin to understand common themes across those liabilities,” she says.
“We need to understand those risks and how coordinated they are, how correlated they are, and begin to delve into them on a technical basis,” she adds.
The nub of the CLCC’s work is to contribute intelligence to policy development. “This means working with the finance function to support colleagues in government with more knowledge around potential losses and alternative ways of structuring a potential liability,” she says. “We need to interact with policy teams. We have started to do this by reaching out to the major departments.” And the focus will not be just on those obvious areas of concern – like NHS litigation or nuclear risk – but on all those perhaps smaller areas of risk that could benefit from the support of Duffy’s department.
While the team will go through all these contingent liabilities, department by department, Duffy is keen to point out that her team will not be performing an audit, and by standing distinct from HM Treasury, CLCC is on neutral territory from the policy point of view. “We’re there to improve understanding around what risk there is. To understand these risks, we have to engage with the finance teams across all government departments.”
Adding value across the UK Government sounds like a daunting task. However, says Duffy, really it means coordinating across the finance function. “There are actually a lot of cross-governmental discussions around finance,” she says. “And there are a lot of forums where there is discussion around these topics. My impression is that the finance function is an easier conduit to communicate across government as there is a common basis to the finance role.”
“Already we are calculating the cost to the government and what the potential mitigations to those costs could be,” she said. “The Government Actuary’s Department (GAD) has been the central resource on this area historically and continues to take the lead on many of the analytical work streams. Some of the GAD team has been seconded across to CLCC to create a multi-disciplinary group.”
The centralisation of expertise to manage financial risk is not a novel concept – it has been played out at supra-national level and domestically in many other jurisdictions. “We're aware of what other governments have been doing, but it doesn’t all read directly across to what we do because they have different accounting structures,” says Duffy. “That means they will have a different way of managing contingent liabilities, but there are good lessons to be learned from looking at what other governments are doing. The IMF and OECD have also led on the value and importance of balance sheet management.”
Duffy points out that there is plenty of work to do, largely to build a better understanding of government’s exposure to risk. “This is because, historically, much of the emphasis in government has been around budgets and the spending side of public finances. The commitment to strengthen balance sheet efficiency has been welcomed by the Office for Budget Responsibility (OBR) whose latest report reflected a decrease in risk in the management of Contingent Liabilities with the formation of the CLCC” she says. And looking for risks in government accounts is no easy task – largely because of the range of issues and the uniqueness of risks which don’t come packaged with guides, data and ratings reports, but need analysis. But her banking background has given her the tools to look at risk in all its guises, understand it and figure out how the government can look to mitigate it.
Duffy points out that her colleagues in the public sector are tackling huge public finance challenges and progress is clearly being made. “What I see is genuine action and real skill. Ideas are being developed and strategies are being delivered,” she says, “and now it's my challenge to deliver as well.”
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