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NAO guide to demystify public sector corporate finance

Author: ICAEW Insights

Published: 16 Sep 2022

The National Audit Office has distilled analysis of 139 government corporate finance projects conducted over the last 35 years into a best practice guide in a bid to increase the likelihood of future project success.

The Guide to corporate finance in the public sector sets out key questions for senior decision makers to consider when overseeing corporate finance activities in the hope that mistakes of the past will be avoided against a backdrop of intense scrutiny of public funds.

The objective of the interactive guide is to help to demystify corporate finance for senior public sector staff working with corporate finance specialists; it will define key terms, describe how corporate finance relates to government and provide case studies to explain the value for money considerations gleaned from analysis of the NAO’s work over the last three and a half decades.

From the privatisation of Royal Mail, the sale of Eurostar or the government selling the stake it acquired in banks during the financial crisis to more recent examples such as the Bounce Back Loan Scheme and the creation of the UK Infrastructure Bank, the case studies highlight project successes – and common pitfalls – to help reduce risks and lay the foundations for future project success. 

Matthew Rees, a Director at the NAO who heads their Commercial Insights Hub and is an ICAEW Council Member, said the guide served as a prompt to bolster oversight and scrutiny of projects, touching on the capability of teams, ensuring the right transaction structures are in place, governance arrangements and practical questions around project evaluation, regulation and whether projects meet government standards.

“It’s very much informed by our hindsight reviews, but it’s intended to help people address future projects successfully. Any team that has been tasked with delivering a project is going to be able to start better equipped. If they haven’t thought about the questions we’re setting out, we would be concerned about whether they will succeed. It’s not a technical ‘how to do it’ manual. It’s asking, how do you know whether this is going to be a good outcome? Have you preemptively thought about the risks, the benefits and the challenges?”

Successive governments have used corporate finance techniques to raise funds through privatisations and asset sales, attract private capital, and support businesses through periods of market failure and the pandemic. As the external auditor of central government, the NAO has played a key role in evaluating these transactions in its value-for-money reports to Parliament. 

Rees says the objective is to demystify what is quite a complex area. “We’re not trying to put advisers out of business, we’re just trying to equip the customer to be more intelligent, more effective, and make sure they’ve got the right people and the right processes lined up.” 

Although the government has a growing corporate finance profession, skills and capability issues prevail and gaining the appropriate transaction experience remains a challenge. “When teams are forced into running complex projects without the preparation or the skill set, that’s where the risks are. This guide flags that high-risk point early on.” 

NAO believes the guide will also be of interest to professional advisers supporting government to deliver a range of transactions, including joint ventures, commercial investments, loans and guarantees. Similarly, the foundations of success highlighted by the guide could equally apply to local authorities, Rees says, as well as private sector conglomerates without an internal corporate finance function. “When we talk to CIPFA and the local government community, we can already see how they would use this.” 

“The risk to government borrowing to fiscal health and sustainability can be materially acted by whether these projects are done successfully or not. Unless you have good quality controls and outcomes, it can undermine public finance overall.”

David Petrie, ICAEW’s Head of Corporate Finance, said the NAO guide would prove an invaluable tool to help advisors understand the NAO’s key metrics of successful corporate finance projects, and avoid common pitfalls.

“This is an initiative that our members should be aware of because if they are working in one of the Big Four firms, or in one of the investment banks, and they are providing corporate finance advice to government, this guideline sets out the framework that the NAO is likely to be using, when it comes to preparing its reports on the outcome – positive or otherwise - of corporate finance projects.”

“Many of the elements set out in the guideline are important in all corporate finance engagements and this will undoubtedly be a useful reference point.”

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