Public Accounts Committee
Oral evidence: Lessons for government: monitoring and responding to companies in distress, HC 425
Wednesday 17 January 2024
Ordered by the House of Commons to be published on 17 January 2024.
Members present: Dame Meg Hillier (Chair); Olivia Blake; Sir Geoffrey Clifton-Brown; Mr Jonathan Djanogly; Peter Grant; Sarah Olney.
Gareth Davies, Comptroller and Auditor General, National Audit Office, Simon Reason, Director, National Audit Office, Adrian Jenner, Director of Parliamentary Relations, National Audit Office, and David Fairbrother, Treasury Officer of Accounts, HM Treasury, were in attendance.
Questions 1 - 84
Witnesses
I: Jess Glover, Director General, Growth and Productivity, HM Treasury; Hannah Gray, Director, Special Situations Group, UK Government Investments; Neil Johnson, Director, Industry, Department for Business and Trade; Sir Gareth Rhys Williams CB, Government Chief Commercial Officer, Cabinet Office.
Written evidence from witnesses:
– [Add names of witnesses and hyperlink to submissions]
Report by the Comptroller and Auditor General
Lessons for government: monitoring and responding to companies in distress (HC 1866)
Examination of witnesses
Witnesses: Jess Glover, Hannah Gray, Neil Johnson and Sir Gareth Rhys Williams.
Q1 Chair: Welcome to the Public Accounts Committee on Wednesday 17 January 2024. Today we are looking at what happens when large-scale private companies that supply many of our public services fail. When they do, it often affects people’s lives very directly. Some are too big to fail. Historically, the Government have intervened very directly when that happens to make sure citizens and service users are not too badly affected.
With the pandemic, the war in Ukraine and the energy crisis, the Government’s approach is now changing. We have seen interventions in Bulb Energy, Silicon Valley Bank and Tata Steel, to name some. Back in the day, the Committee also looked at the collapse of Carillion and what happened then.
We have a really great panel of witnesses today to talk about what happens when a major company is under threat. At the moment, we are only looking at the interventions that have happened. We might want to tease out the ones that were near misses, where Government intervention has prevented a company from collapsing.
There is also a very interesting line that the Government have to tread between bailing out and supporting a private business and protecting the taxpayer. Clearly, taxpayers’ money is potentially at risk. These important industries are sometimes vital to the running of the country.
I am really pleased to welcome our witnesses today. Hannah Gray is the director of the special situations group at UK Government Investments, which provides senior and experienced people to sit on the boards of many arm’s length Government bodies and so has many years’ experience in this area of special intervention. She sits next to Jess Glover, who is the director general for growth and productivity at His Majesty’s Treasury.
We welcome back Sir Gareth Rhys Williams, who is the Government Chief Commercial Officer. He has long experience in that role and has brought the commercial function very much to the forefront of Government activity. Neil Johnson is the director for industry at the Department for Business and Trade. We have a real crack team.
Before we go into the main session, if I may, Sir Gareth, I wanted to ask you about Fujitsu. This has been massively in the news as a result of the Horizon scandal. A lot of people are asking questions about whether Fujitsu should ever win other Government contracts. I wondered whether you could lay out what the situation is in terms of contracting with a supplier as big as Fujitsu and whether it can indeed bid for further contracts and whether its record on Horizon will have any impact on that.
Sir Gareth Rhys Williams: That is a great question. Thank you for raising that so soon. I am delighted to answer it. I have a couple of things to say around this. This is a ghastly thing that has emerged. It has been emerging since 1999, but the drama at the beginning of the year really brought it out. Last night on “Newsnight” there was a sub-postmaster who had been convicted and whose mother, who had taken on the practice, was then also convicted. It is just ghastly, so these are absolutely fair questions.
I will perhaps talk generally, and then, if you want to ask questions about Fujitsu, please do. Generally speaking, debarment—not being able to bid for Government contracts at all—is rightly a very high bar; otherwise, there are all sorts of downside risks, such as alleged favouritism, market distortions and so on.
As you will remember from other sessions that we have had here, we have indeed disbarred other companies. The key test is whether the company has been shown to be guilty or we have concrete evidence of what is called grave professional misconduct.
Again, that is quite a high bar. In the case of a software company, simply having software that has bugs in it would probably not be that. If it were persistent, that would be a different thing. If they were not truthful about it, that would be a different thing again. It is a high bar. We need to be careful because otherwise companies will JR us. If they win, we will have achieved nothing. There is a balance there.
If we have been convinced by a court or a committee of authority—you will remember there was a case towards the end of last year where an overseas court decided that there was some guilt—there are three tests that will allow that vendor back into being able to bid. These are called self-cure.
The first is whether they have co-operated fully in the eyes of the relevant inquiry, including being open, honest, quick and proactive. Secondly, have they paid any fines, penalties, costs or whatever promptly, without arguing? Those two are relatively simple tests; they are relatively binary.
The more complicated one, which we have been through with a number of vendors, including a well-known aircraft manufacturer that was fined £3 billion not very long ago and went through a long process, is whether they have changed themselves sufficiently—that includes management, systems, reporting, whistleblowing lines, people surveys and a history of similar performance—to convince us they have cured themselves and the situation cannot arise again. They need to pass all three of those subsequent tests in order to be allowed back in. That is a process that, needless to say, does take some time. That is the current situation.
The new Procurement Act, which we discussed the last time I was here, changes that. It changes the hurdle somewhat on debarment. Currently, one way that we can demonstrate evidence is if we have won damages from a company that has failed in its delivery. That is quite a high bar because we need to prove that it was their fault and the court needs to award damages. That very rarely happens. It is sort of useless. It is a correct piece of law, but I cannot remember when that was last enacted.
The new Procurement Act, which will come into force in October this year, changes that. You may recall that in the Procurement Act we are now saying that any contracting authority in the country with a contract of more than £5 million total contract value—that might be five years times £1 million a year—has to publish three KPIs on Gov.Uk quarterly. If those fall persistently out of order—this is why we have talked in the past about being much tougher on poor performance—that contracting authority can ask the vendor to submit a plan to resolve the situation. If that is not successful, they can debar the company. That will now be held in a central debarment register, which is also one of the new aspects of the Procurement Act 2023. That is the good news.
None of that applies in this case because the new Act, although it is now law, has not yet—
Chair: It is not retrospective.
Sir Gareth Rhys Williams: These offences, such as they may be—we await the inquiry’s opinion—were in 1999 and the decade following. There is an important caveat here: we have to react within three years of knowledge. That generates a problem in this environment because this case has been going on.
Coming to the specific point that you mentioned, Chair, most of the cases, including the ones in 2019, were Post Office ex-employees taking the Post Office to court. While the judge in that inquiry made some very harsh comments about Fujitsu’s software, the way that they behaved and the way that some of their witnesses had behaved, it was not a case that Fujitsu was a party to.
The final judgment in that case was December 2019. At that time, the judge—forgive me if I get the nomenclature wrong—Justice Fraser referred the case to the DPP. That does not seem to have gone anywhere; others may know better. In February 2020, just before covid, the then Prime Minister instigated the current inquiry, of which we have been waiting for the output, frankly, because Fujitsu is a party to that inquiry.
Being candid, we had a number of run-ins with Fujitsu in the early 2000s. It long predates me. You heard yesterday from the Fujitsu EMEA chief executive. I would agree with him. The company is a completely different company from what it was prior to his arrival. We had a number of run-ins with them where the issue of debarment came up. There was an article in one of the papers over the weekend about that, and indeed Lord Maude spoke in the House of Lords very briefly about this a few days ago. We can discuss that if that is helpful.
In 2019, the judge opined that Fujitsu had not behaved well, to put it bluntly, but, because Fujitsu was not a party to that, while we were, frankly, contemplating what to do, the Prime Minister of the day announced this other inquiry, which was originally due to opine in August 2020. Of course, covid then got in the way. That is the inquiry that is now continuing, but it does have powers that we do not have to require information to be given to it.
I am sorry; that was very long, but I hope it was clear.
Chair: It is very helpful. We let it go long because it is really helpful to lay out very clearly the challenges of this issue.
Q2 Mr Djanogly: On the question of debarment, Sir Gareth, I think I am right in saying that, between the various regimes, you have mentioned two ways that it could happen: first, if they are proved wrong in court, or, secondly, if there are repeated failed KPIs. What about the situation where the company concerned admits that it was wrong? Just because they admit that they are wrong does not mean they should get another Government contract. Would that not work towards debarment?
Sir Gareth Rhys Williams: If I may, I will just add something that I forgot to say in response to the Chair’s question. This is not about large companies; this applies to all vendors. That is important to get across. The KPI point that I mentioned will unfortunately only come into effect in October this coming year. It is not relevant to this case in point.
If the inquiry that is now running had opined relatively quickly, having heard Fujitsu’s evidence directly and Fujitsu having been represented, and determined meaningful amounts of fault, we would have been able to pursue a gross professional misconduct charge against Fujitsu. That would still have left them with the option that they would likely say, as indeed is true, that they changed considerable chunks of their management in 2017 and 2019. Mr Patterson was appointed as Justice Fraser was writing his report. They have changed their processes.
Q3 Mr Djanogly: I am sorry; you have misunderstood me. If I can just go back a step, say there were no court cases, no inquiries, nothing. If Fujitsu or any other company were to turn around and say, “We are very sorry. We have looked at this again. We think we did wrong. We want to put it right. We are going to pay compensation,” or some other redress, would that in itself enable it to be debarred?
Sir Gareth Rhys Williams: No, because we would need to look at what the actual offence was. Was it gross professional misconduct or was it a legitimate mistake? We might all in this room have views on that, but that needs to be worked through. We still then need to ask, “Have they self-cured? Have they changed their processes? Have they upped their game? Have they changed their management? Do they have a culture in which people internally can speak up against bad management actions and so on and so forth?” That is indeed a process that we have just initiated with Fujitsu now. We need to work our way through that.
Q4 Mr Djanogly: I am not sure whether my question has been answered. What I have heard so far is that making an admission would stop them being debarred, unless you decided to take further action based on their admission.
Sir Gareth Rhys Williams: I am not aware of that route through this. If we take other cases, such as the public one that we discussed, which was all over the newspapers, where we worked through a cure process, that was a very public fine. The company in that case admitted liability, but we still have to go through the “Have you cured yourself?” exercise.
Bear in mind that these were legion errors—the company has now conceded that, which is a big step forward—that happened in the timeframe between 2000 and 2010. We need to discover whether they have cured themselves. Had they said yesterday, “We are an unreconstructed company. We are the bad company that we used to be, but we now admit fault,” we would be in a different place. That is not what they said yesterday.
That is why we are starting to talk to them about what can they do to convince us, in the event that the judge of the current inquiry finds, having heard all of their evidence, that they were likely guilty of gross professional misconduct.
Q5 Sarah Olney: We know there is going to be compensation paid to the sub-postmasters who were wrongly convicted or who lost money as a result of the scandal. The fact of the compensation has been agreed; it is just about the methods and amounts. There has been a suggestion that Fujitsu might contribute to some of the cost of that. I just wondered whether you wanted to comment on that in the light of what you have just said.
Sir Gareth Rhys Williams: I was watching the Select Committee yesterday with appropriate attention. What they have said—I do not want to put words in their mouth—is that when the judge opines as to where the guilt should—
Sarah Olney: You mean the public inquiry.
Sir Gareth Rhys Williams: No. Yesterday was the Business and Trade Select Committee. The same people are in front of the inquiry in a normal evidence session, I believe, on Friday. Yesterday was the Business and Trade Select Committee. Mr Patterson, who runs Europe and the Middle East for Fujitsu, said—I paraphrase—that they accept they need to contribute in line with wherever the current judge thinks the fault lies when he opines, which is due to be later this year or early next year.
Q6 Sarah Olney: That is what I wanted to clarify. When you talk about the judge opining, you mean the judge of the public inquiry.
Sir Gareth Rhys Williams: Yes.
Q7 Peter Grant: Thank you, Sir Gareth, for that comprehensive answer. My concern is that it is not a company that does something wrong; it is people who make the company do something wrong. If those individuals, as appears to be the case, are no longer involved with Fujitsu, they are involved in senior management somewhere else. Is there any process at all by which you can prevent those companies from bidding for Government contracts on the basis that they are now significantly influenced by somebody who was seen to be a very hostile player in the past?
Sir Gareth Rhys Williams: That is a very good question. We do track where people go. We have a tool called Spotlight, which does exactly what you suggest. It identifies where people have moved: have they created a company over here, collapsed it and set up another company over here?
Just to build on an earlier answer, that is why, when we do these cure exercises, which take months and in some cases years, we look for ongoing improvement in people metrics. Do the people working for a company believe the management to be honest? Do they believe the management to be ethical? Do they believe that, if they make a complaint, they will not be harmed themselves? Do they believe that action will be taken? Those are much more persuasive to me than talking to the senior management, who may say all sorts of things.
Q8 Chair: Can I just check on the Crown rep situation? There is still a Crown rep, presumably, for Fujitsu.
Sir Gareth Rhys Williams: Yes.
Q9 Chair: I guess he is pretty busy at the moment.
Sir Gareth Rhys Williams: He is earning his crust.
Q10 Chair: For the people who may be not used to following us but are following this session, do you want to just explain what a Crown rep is? That would be helpful.
Sir Gareth Rhys Williams: Crown reps are people who work for us part-time. We pay them, so they are our employees. They are definitely working for us.
Q11 Chair: By “us” you mean the Government.
Sir Gareth Rhys Williams: They work for the Government, yes. They are usually senior executives who have worked in the sector of the company for which they are the Crown rep. They are contracted never to work for that company so we do not have any risk in that regard.
They are there, frankly, to be my alter ego. There are 39 companies that we have Crown reps for. The reps have also done a lot of work recently for a number of councils, looking into some of their issues. They are experienced businessmen with relatively low ego at, let us say, the portfolio stage of their career, who are looking to do useful things.
We rotate the Crown reps every now and then because it is better that we do. The new Crown rep for Fujitsu took over recently. If it was not November, it was December. It might have been October, but it was recently. He has been thoroughly engaged, as have I, with the company since the new year.
Q12 Chair: We could talk about this a lot more. It was very helpful to have it laid out at this Committee following our sister Committee’s work yesterday. We will pause that there for now, but I know our sister Committee is continuing to explore this, possibly with you, as well as with the company concerned and with the Post Office.
I want to move on to our main session about what happens to companies in distress. I want to kick off with a broad point that you have acknowledged in this room, Sir Gareth. The civil service has learned—certainly, we have heard this from different Departments—that quite often Departments did not have a full understanding of the market or the companies in their area of operation but have learned lessons from covid. Is that true? If so, what lessons have been learned from covid?
The energy crisis is another example of a situation in which Departments had to get to know, at pace, the businesses in their area and the importance of them.
Sir Gareth Rhys Williams: That is a very good question. You will remember when we came in front of you when Carillion went bust. I remember talking then about when we were looking at Serco, which at the time or prior to that had been charged with fraud in the MoJ. At that time, which slightly predated my arrival, it took us six months to work out which contracts we had with the company in order to be able to scale the problem that we had.
We have got dramatically better at that. We had a discussion about data the last time I was in front of you. We are dramatically better. When the new Procurement Act comes in, we will have rights to get every contracting authority to fill in the paperwork that we have for central Government. We are now much quicker at working out where a supplier interacts with us.
The area that, even with the new Act, will remain tricky is where company A is a subcontractor to company B. We will be able to look through our databases very quickly at where company B supports us, but we will need to talk to that company to find out whether it is also subcontracting to company A, because that does not show up in our databases.
That was a problem at the time of Carillion. You will recall that it took us a while—it was a fortnight, so not that long—to work out who those companies were. The answer to that is exceptionally expensive and not accurate. We could try to build an enormous database to map other subcontractors to people way down our supply chain, but that is—
Q13 Chair: During covid, for instance, grants or loans were given out in the culture sector. At the time they might have been given to, for example, a theatre, but there was not quite the understanding that a lighting company or a sound company might also be integral to the theatre. There was a bit of a lack of depth in the understanding of certain sectors. That is just one example of many that we came across.
It is surely not impossible, as we talked about, to require living wills for companies and, if there is a point of crisis, with the Crown reps right there to know when that point of crisis might arise, to be able to say, “Here is the document that shows you all our current subcontractors.” Therefore, you would have that information quickly.
Sir Gareth Rhys Williams: Indeed, we do that. We do that for what we call critical contracts and complex outsourcing contracts. “Complex” does not necessarily mean “difficult”. In this context, it means when we outsource something where there is no other market that is non-Government. An example might be prison rehab. There is no private sector market for that. We are the only customer.
In those areas, we ask for living wills and we take the effort to go down, but we are still only going down a couple of tiers. The pernicious or very difficult-to-spot problem, more correctly, that we had with a company called UKCloud, which the NAO’s Report references, was four tiers down. The size of database and the cost of maintaining a database like that across 10,000 contracts is—
Q14 Chair: They are also moving contracts.
Sir Gareth Rhys Williams: Yes, the point is you have to update this daily; otherwise, it rapidly becomes useless.
Q15 Chair: We are going to come on to them because there are some specific examples. Is there anything else you want to add?
Sir Gareth Rhys Williams: The point about theatres and covid I am probably going to shuffle to one of my colleagues. The only thing I would say about covid is that what we have learned through covid is that we need to be sharper about systemic problems that come upon us much more rapidly. With an individual company, we track them financially—we may come back to that—and we can hopefully see it coming, and it is a one-off. The problem with covid was that Chinese supply disappeared completely.
I don’t know whether Jess wants to talk about the theatre example.
Jess Glover: Chair, would you like me to come on to, from a Treasury perspective, what lessons we learned from covid?
Chair: Yes, it would be very helpful if you could summarise those.
Jess Glover: First of all, we are tremendously grateful for the NAO’s Report. We have worked very collaboratively with them and, on the whole, we really agree with the lessons in there. We can go into that in more detail.
Going back as far as no-deal exit planning, then covid and the energy crisis, we have learned that, prior to all of that, we had a rather ad hoc framework for addressing companies in distress-type situations. That framework is now very clear. It has been in place since mid-2020. It is public. The Report refers to it. We have a really clear set of principles for when a company is in distress. We know what principles and what process we should apply.
I want to go into that in more depth, if you are interested, but one of the lessons that we have learned from the crises we have experienced over the last few years is that the framework is incredibly important.
Chair: Being ready and having a plan is important.
Jess Glover: Yes. It is important to have a plan and be ready, and to have a guiding set of principles that are known, shared and understood and a process that you go into when a signal of distress arises, which is the playbook that you apply. Of course, any particular incident is going to be unique to itself, but nevertheless you have a framework from which you start. Having that framework is a really important lesson that we have learned.
Having the right skills and capabilities in place is, as the Report highlights, a really critical lesson. The truth is that that is patchy across Government. Those civil servants and teams that have had to deal with situations that are similar to a company or sector being in distress, for whatever reason know it—they get it, they understand it, they have had to do it—but if there is no institutional memory baked into—
Q16 Chair: How are you going to resolve that? If we think about the DWP, Neil Couling has been there through the banking crash, covid and Brexit while also dealing with universal credit all that time. That is unusual. How do you hold that institutional memory? I am aware that Hannah Gray has long experience of this. We will come to you in a moment because you are part of that institutional memory, Ms Gray.
Jess Glover: There is a structural answer to that. In the centre, in my team in the Treasury, we have a special situations team, which is a holder of expertise and long-term and horizontal perspectives on any particular isolated case. In UKGI, we have Hannah and her teams; we also have Gareth and his teams. We have three pockets in the centre that operate together, which collectively form expertise and experience in both the framework and the practice of how this all works.
That is not enough, though. Part of the job of those teams and part of the job of the three of us sitting here is to make sure the awareness and understanding of the framework, the playbook, the principles and the process are continually refreshed across Government. We do that through the training that my team provides to other Departments, which the Cabinet Office also does, and through regular communication about what the system is.
For example, Gareth Davies, the chair and permanent secretary of DBT, who is not to be confused with other Gareth Davieses around—
Chair: Yes, or the other Gareths around.
Jess Glover: Gareth Davies and James Bowler chair a regular permanent secretaries group on growth. We send out the playbook, the guidance and so on on the principles and the process once a month or once every six weeks so they can re-cascade it to their teams. That is another example.
To take another example, at the initiative of colleagues in the team, I have just launched a corporate finance network in the Treasury, which is designed to spread knowledge, understanding and experience.
There are the formal, institutional and structural things that you have to have in place in order to keep the institutional memory going, but then you also need to make the most of the informal contacts and networks between people to make sure their expertise is valued and brought to bear on particular cases when necessary.
Q17 Chair: You mentioned expertise. That leads us neatly to Hannah Gray. Do you want to explain, Ms Gray, how long you have been dealing with special situations? What is your take on the lessons that have been learned? Crucially, could you pick up on this issue about institutional memory? You have a lot of it.
Hannah Gray: I am a recovering investment banker. I have been advising companies in distress on the other side of the fence, as it were, since 2003. I joined UKGI in 2017 and took over control of what we call the special situations team, which sounds rather more exciting than a lot of what we actually do. I have had a good six years’ experience in Government. In fact, on my first day I had the pleasure of joining Gareth in a meeting in respect to Carillion. It was a baptism of fire, it is fair to say.
Chair: You basically have 20 years’ experience in this area.
Hannah Gray: Yes. Since coming here, I have discovered that I use very much the same skills and experience that I had in the private sector, looking at it through a slightly different lens, to understand the behaviours of others that we have as counterparts. We act as a bridge between the Government and the private sector and those companies facing distress there.
In my team—we added it up—we have a total of 225 years’ experience of financial distress. We are 18 people, so we are rather long in the tooth. UKGI has been working as an institution to support Government colleagues in dealing with issues around financial failure since the Southern Cross failure back in the early 2000s.
We have a lot of institutional experience to draw on and we have the links into departmental colleagues. As we bring in new people, we learn. We find that some of the people who work alongside us stay in their roles for a while and create that institutional memory, and some of them move organically within the civil service. They take the knowledge of us and what we can do with them and they create that knowledge in a new hub.
For example, we had a project come in from the Foreign Office. One of the finance team had previously been at the Ministry of Justice and had worked with us there. When they found a problem supplier, they were able to pick up the phone and call us. Not only is the NAO Report very helpful for signposting, but colleagues who have lived through these experiences take those and bring them with them to new places.
Q18 Chair: Are they also coming to you to avert a crisis? Very usefully, the NAO—it starts on page 32 in appendix 2—has listed all of the examples where Government have intervened, but there are also examples where Government have not intervened. Do you get involved in those too? Can you give an example?
Hannah Gray: Yes, absolutely. About nine times out of 10, people come to us with a company that has come to them and said it is facing imminent financial troubles. Quite often, they are not so imminent or troublesome as it says, but it has come in the hope that we will perhaps do something. We act as a support to the departmental colleagues in talking to these companies and helping get to the crux of the matter and the bottom of the facts.
We also give colleagues the space to do the policy work around whether this is something where there is a policy objective to support or whether we should let the market step in and do what it needs to do. An example of that would be something like Flybe. As you may remember, in January 2020 Flybe came to the Department for Business and said it would fail in six days. I can give you some more detail on that if that would be helpful.
Q19 Chair: We are aware. In the end, the Government decided that the market could intervene to support.
Hannah Gray: We also put advisers in to do some due diligence. They spent four days in the company, kicked the tyres and were able to opine to us that this was a very badly run company and that it would not be a good use of Government money because, if we put a penny in at the top, we might not be able to work out where that penny would go and it might not be focused on what we needed it to.
Q20 Chair: That is a very good pictorial description of it. Does anybody else want to come in on that? I do not want to prolong this point particularly because I do need to get to Mr Djanogly.
Jess Glover: I wanted to comment on the lesson on roles and responsibilities, which is very clear in the Report as well, if that would be helpful. I absolutely agree with the Report’s conclusion that it needs to be very clear whose job it is to do what in these circumstances.
I just want to reiterate that the first principle by which we are all operating is that Government should not be intervening in these cases and that it is for the market, as Hannah says, in most cases to determine the right solution, whether it is the failure of that company or otherwise. The lead Department is responsible for its sector.
That comes to the point you were making in the question you asked specifically about theatres and so on. Following covid and the energy crisis, lead Departments are much savvier about the risks and pressures that their sector faces, whether it is inflation, labour market-related or whatever it might be that is unique to their sectors. They are much more on top of those things now than they were previously. Quite a lot of learning has taken place there.
The Treasury’s role, just to come on to that briefly, is as a last resort function. What happens is the lead Department signals to the Treasury if there is a company in distress-type situation where they might expect the Treasury to need to get involved either from an economics ministry point of view or a finance ministry point of view. I am very happy to go into that further, if it is helpful.
Sir Gareth Rhys Williams: I just want to build on what Hannah was saying. With the companies that we deal with, we have a slightly different interest, because if we are dealing with them and they are a specialist company, we have an interest in keeping them afloat.
Using the “afloat” analogy, this is a little bit iceberg-like. The ones that have cropped up in the NAO’s Report are just the tip of the iceberg. We try to get engaged with companies much earlier to help them, to point out their problems so they can get them fixed and to prod them really quite hard to get their problems fixed before they end up working with us.
Q21 Chair: You may remember that this Committee saw not just all the Carillion papers, but, after a Humble Address from the House, all the strategic supplier papers. They were not public papers, but I can reveal publicly that they laid out very clearly the concerns of the Department and indeed of this Committee and other parts of the system, and then you had a rating about whether they were risky or not. The rating was the private bit, but we could see that work. We have seen the evidence of what you do with the strategic suppliers.
Sir Gareth Rhys Williams: We are monitoring 1,500 companies. What has changed over the years is that Hannah’s team, my team and Jess’s team to an extent—we are more in the restructuring business—are quite trusted by companies. That is not true in every case, but they are prepared to come to us, take us off to the side, if they are a public company, and tell us stuff confidentially so we can be part of the solution. That is a big part of what underpins our resilience.
Q22 Mr Djanogly: My first question was going to be, “Who is responsible for what?” Ms Glover has spoken to that. Indeed, as she has pointed out, paragraph 1.6 of the NAO Report says, “Departments are responsible for understanding and monitoring risks to their policy objectives and legal duties.” Paragraph 1.7 says, “The relevant Department is also responsible for delivering and monitoring any intervention or Government support.” We have set out who is responsible for what. How can you give comfort to this Committee that that is happening?
Jess Glover: I am very happy to answer that. The lead Department is responsible for monitoring its own sector or sectors, as I said, and indeed for understanding which particular companies in that sector are significant and critical. Within that structure, the accounting officer is responsible to this Committee for all the things that any accounting officer is responsible for in terms of managing public money and the principles of regularity, propriety, feasibility, value for money and everything that you expect from an accounting officer.
The way the system works is that the information that a particular sector or company is in distress can come in one of two possible ways. In reality, it comes in both of these ways. The first is the informal network of interaction between relevant teams that just happens all the time. For example, Hannah’s teams, my teams and Gareth’s teams are in touch with each other informally multiple times every week. Were a sector or company to be a matter of alarm or future potential alarm, that would be known among that group.
More formally, at the point at which any Department is seeking to prepare any sort of financial contribution to any company, it is highly likely to be novel, contentious or repercussive and therefore highly likely to require Treasury approval. That would also formally come through the spending team. That is how the system gets alerted in the first place.
Q23 Mr Djanogly: In recent times, have there been instances where that alert system has not worked and you have learned lessons from that?
Jess Glover: The thing about the system is that it never quite copes with the unknown unknowns, of course. In recent times, since covid and the energy crisis, the system has worked pretty well. As you have seen, there is a whole table full of examples of cases that have been considered and a very small number of those where action has eventually been taken.
I would highlight, not least because I happened to be working on it at the time in the Cabinet Office, the fertilisers example. That was an example of something that could have been alerted ahead of time had we understood that supply chain risk more systemically, and was alerted fairly late in the day because we did not know that the supply of CO2 was dependent on that particular company.
Neil and his colleagues in DBT—Neil might want to say more about this—now have a system that is designed to get further upstream of those sorts of cases in understanding where our critical supply chain risks and vulnerabilities are and getting Departments to be looking at those and tracking those, subject to Gareth’s caveat that we cannot possibly know everything about everything. Unfortunately, I cannot offer the Committee the guarantee that we always will, but it is probably worth spending a bit of time on that supply chain system, if helpful.
Neil Johnson: In terms of what we have in the Department, we have sector teams that are constantly out talking to companies, looking for red flags, as Jess described, and looking for companies that might be experiencing financial difficulty. We are doing continuous monitoring. For example, we use publicly available data like IEA forecasts on energy, the Experian distress index, shipping forecasts and things like that. We are trying to spot stuff before it becomes a problem.
As Jess alluded to on the CO2 fertiliser issue, which I also worked on, we were slightly caught off guard because we did not really understand that supply chain in depth. We did not really understand quite how far into critical infrastructure it would go if a fairly innocuous product—fertiliser and CO2—were knocked out.
Working with Jess’s team and Hannah’s team, in that case we reacted incredibly quickly when we found out how important it was. We intervened very sharply and the market became much more resilient because of that. That was a cross-team effort.
Jess Glover: I should have said that my team in the Treasury is not just sitting waiting for the alarm signal to sound and leaping into action at that moment. The series of conversations that happens informally across Government is very active and proactive. Part of the team monitors the health of the UK corporate sector overall, looking at a series of indicators: output through GVA; distress through solvencies and debt; and resilience through bank deposits. It monitors the sector as a whole looking for particular signals of distress. Were it to determine that a particular sector was looking bad on those indicators, it would initiate a conversation with the Department to compare its understanding of that sector and how well it was faring.
Q24 Mr Djanogly: Ms Glover, you talked about how you ensure that Departments understand and deliver their responsibilities. Who manages that process? How are single points of responsibility established and checked on?
Jess Glover: Your question may be referring to different processes. Just to check whether I have understood, there is the DBT-led supply chain resilience work, where there is a set of things that Neil might want to talk about. The Cabinet Office now has a newly established resilience directorate—it was established a year or so ago—that owns the UK Government resilience framework, the national risk register and the process of reporting to Parliament annually on the UK Government resilience framework and so on. To go back to the question of the Report, companies in distress, the Treasury owns the principles and the process there, but Departments own their particular sectors.
Your question is about how we make sure those roles and responsibilities are understood and that the right people are doing the right things. On companies in distress, as I say, the framework is a playbook. It is a guidebook; it is guidance. It is sent out to Departments both at a high level, permanent secretary-to-permanent secretary level, and regularly at working level to remind people that it is there. We have teach-ins and so on to talk people through how it works and operates.
The Report says we could probably do a better job of communicating that on a more systematic and regular basis and really making sure that the right people in sector teams and Departments understand that the toolkit is there. I agree with that. That is something that I want to look at doing.
Q25 Sir Geoffrey Clifton-Brown: Mr Johnson, you raised the CF Fertilisers point. In hindsight, thinking about the lessons learned, should the Competition and Markets Authority not have had a view on this? When fertiliser companies merged, it should have become obvious that there was a monopoly CO2 supplier. Whatever the different ramifications of where CO2 goes, which was the problem in this case, they should have realised that they were a monopoly supplier and at that point, surely, bells ought to have rung.
Neil Johnson: The CMA did look into this in quite a lot of detail and took the view that it did not think there was a risk from having a monopoly in this market because it was relatively easy to import the main product, which was fertiliser.
The problem in this case was that the product that turned out to be critical was not fertiliser at all; it was a by-product, which was effectively in a lot of cases being vented into the atmosphere. It turned out that the energy crisis that was happening at the time caused a very specific issue, which was that the UK fertiliser industry went down at exactly the same time as the European fertiliser industry went down because everyone’s energy prices had rocketed.
It was not only the case that you could not produce in the UK; it was also very hard to import it. You could not get it from overseas either. That was a very specific situation, which at the time required the Government to step in and intervene to ensure production in the UK. In general, the market would have reacted and we would have been able to import it over a period of time. The problem was that it could not react quickly enough.
Q26 Mr Djanogly: The Cabinet Office and resilience aspect of this was mentioned, so let us just cover that. Sir Gareth, you came to this Committee in 2018 as part of an inquiry into strategic suppliers. I am looking at your evidence, and you said that “there are no hard levers from the Cabinet Office into Departments”. The adoption of best practice by Departments was therefore a voluntary matter. Five years later, have you changed your mind?
Sir Gareth Rhys Williams: It is a good question. I am tempted to say “some Departments and some ALBs”. Things have moved on. The commercial function has grown in credibility as we have upgraded and trained people and as the work we do has become perhaps more widely known. That is by and large not the case any more.
Six months or maybe a year ago—I forget when—we merged all the commercial operating standards that we mark ourselves against to see how well we are doing, so we can share best practice. That included the NHS and the LGA. It really was a watershed moment. We are now comparing all sorts of entities and looking for best practice. That is slightly in the past.
I was going to build on what Jess was saying. I was wondering whether your comment about having a single point of responsibility related to this. The last time that we did have a company that we needed to look at, Alex Chisholm wrote out asking each Department to nominate a single point of responsibility—a SPOR—in their operations team.
Q27 Mr Djanogly: Was that done?
Sir Gareth Rhys Williams: Yes.
Chair: Sir Alex Chisholm heads the Cabinet Office, just to be clear for anyone who might not know who that is.
Sir Gareth Rhys Williams: He is the chief operating officer for the civil service. He wrote to everyone in that context because it was important that we had an operations lead in each Department. The example we were talking about, UKCloud, was four tiers down. It was not really within the purview of the commercial directors, over whom I have some control.
That worked extremely well. The next time we have something similar, we will need to refresh that because doubtless people will have moved on. It is important to have someone in the Departments so we can have a Government-wide call. When we did Carillion, I remember that we had 200 or 300 people on a call. We need to know that the same people are turning up each time. If two of them do not, something will go wrong somewhere.
Q28 Sarah Olney: I wonder whether I could pick up on what you were saying about market monitoring and ask about Silicon Valley Bank because it is a recent example. How prepared were the Government, either for that specific failure or perhaps for a failure in that sector? Perhaps you can comment a bit on the response.
Jess Glover: The Treasury definitely learned a lot from the handling and management of the financial crisis. There are all sorts of structures in place now that were not in place then. We have a financial stability team in the Treasury that works incredibly closely with the Financial Conduct Authority, the Bank of England and other relevant bodies.
That team is constantly monitoring the health of the financial services sector, such that, when the situation around Silicon Valley Bank arose, we were collectively, with those other partners, in a position to be able to rapidly support the sale of the company to HSBC in a way that protected the consumers involved, maintained financial stability and minimised the cost and liability to the taxpayer.
In terms of the reaction in the Silicon Valley Bank situation, on which Hannah may also wish to comment, some of the way we responded was because of the lessons that we had learned from previous crises and the systems that the Treasury has put in place since.
You asked me what we have learned from that situation. There is a whole financial stability framework, which we rather assumed needed to apply specifically to medium-to-large financial institutions. Through this, we discovered that it also needs to apply to smaller banks. We are now putting in place more arrangements to shore up the structures around those smaller banks as well. Hannah may wish to say more about that.
Hannah Gray: I am not sure I can talk about the financial stability aspects of it, but certainly when Silicon Valley Bank rose to the surface, my team was one of a number of teams that were stood up over the course of a weekend to come up with a rapid set of different contingency plans. Plan A, which was everyone’s preferred outcome, was the sale to HSBC. We had another four or five different contingency options that we were ready to enact over the course of the weekend or into the Monday, if the company did go into an insolvency process. The main aim was to address the Treasury’s policy objective, which was to protect the deposits of those companies and reduce the impact on the tech sector.
Jess Glover: It is also important to underscore that the Treasury is very keen to learn the lessons from that exercise. The Financial Stability Board is now carrying out an exercise to learn lessons from that period, in which we are fully engaged and which we fully support. I have probably not given you a complete answer in terms of what we think we will learn because we think there will be more to come.
Q29 Sarah Olney: We have talked quite a lot about roles and responsibilities across Government for identifying risks, but I wonder whether we can talk a bit about capacity. What capacity exists within all the relevant Departments to spend the time that is needed? Do we have the right skills in all the Departments where these risks need to be identified?
Gareth, I wonder whether I could start with you. What is being done to ensure that the right risk-identifying capacity exists in the relevant Departments?
Sir Gareth Rhys Williams: The distress management team comes under the control or responsibility of our markets and suppliers team, which is a central team in the Cabinet Office. We have managed to keep the funding for that relatively stable over the last few years. We have 20-odd Crown reps and 40 other people in the team. Yes, they rotate, but they are always working on two, three or four projects on the go at any one time. They are keeping themselves refreshed, and we rotate those colleagues into Departments and then back out again, so they see both ends of the piece of string, if you like.
It is something that we need to keep constantly working at. We had an ad out for new Crown reps the other day. We have a good list of applicants. We are chewing through those at the moment. It is quite an interesting role for people to do because it allows colleagues to work right across Government, which is interesting. It does not always happen. When these things happen, they can be quite intense and people can learn quite quickly. It is a pretty well-recruited team.
Q30 Sarah Olney: Regulators also have a critical function to play when companies are at risk. Mr Johnson, in your experience, what has been the role of regulators in sharing intelligence with Government? This Committee has previously looked at Bulb Energy. We will be getting on to that at some point. Ofgem was key in that particular example. We have talked about the FCA. In your experience, what has been the role of regulators? What more do you think needs to happen?
Neil Johnson: Our relationship with the regulators has been pretty effective. We are constantly talking to regulators. When I was in the Department for Business, it was Ofgem. DEFRA is continuously talking to Ofwat. It is a pretty open and effective relationship.
All I would say is that they face, like we do, a challenging task. As Sir Gareth mentioned, we are constantly competing for the same skills, frankly. If you look at the skills in my team, I need people with commercial skills, financial skills and accounting skills. I need people with the skills to talk to companies. Those skills are pretty in demand in the private sector and in Government. The regulators face the same challenges, frankly.
Q31 Sarah Olney: Have you formalised the role of a regulator at a time when you may need to respond in an emergency to a company in distress in their sector, Sir Gareth?
Sir Gareth Rhys Williams: A good example would be the Pensions Regulator. In a lot of the cases that Hannah, I and our teams have worked on, there has been a threat to a company’s pension by a company becoming insolvent. The Pensions Regulator has an absolutely crucial role there. It is very clear on the lines that cannot be crossed. I was going to say that we have not had one recently, so I am touching wood. We have built up a rapport over time. They understand what we are trying to achieve. We know very clearly what they are trying to achieve. I hope there is mutual respect there. That would be the main regulator in our area, apart from the Insolvency Service, which is not really a regulator in that sense but does have powers, which is perhaps slightly different.
Jess Glover: It is worth adding that, for those regulated sectors like energy and water, the regulator has a big role to play both in seeking to understand what is going on in the sector and in shoring up resilience in the sector. When a distress situation such as Bulb arose, which, as you say, you might come on to, Ofgem was fully involved both in helping design the solutions at the time and in the work and study it is doing into how to improve the overall market, again learning the lessons from that Bulb intervention.
Q32 Sarah Olney: Moving on to a different topic, Sir Gareth, do you have an understanding of the overall level of liability the Government might be exposed to in the unfortunate circumstance, shall we say, of many different companies being in distress at a similar time? Is that something you record anywhere? What is the worst-case scenario that you might be working towards in terms of a level of liability?
Sir Gareth Rhys Williams: It is a very good question. I would separate liability and risk. The bigger number is the risk number. If a vendor fails and we do not manage to catch it in the way that—touch wood—we have managed to thus far, that is not a liability, but it will generate liabilities as we run out of whatever it is that that company provides for us.
There is liability in relation to the couple or three—perhaps a couple more—companies that we have put into managed insolvency. You will remember the analogy of rolling pianos down stairs, which we used before. There, the Cabinet Office has had to underwrite the expenses of the official receiver. We usually manage to claw back most of that money.
The figure quoted in the NAO Report was a liability of £150 million. That was the initial cap. If we do not come in at a quarter of that, I would be very surprised. The OR has yet to do its final accounts, but we are talking that sort of quantum. On UKCloud, from memory, the cost to Government was of the order of £15 million or £16 million, so much smaller than the repair costs of letting it break and then trying to start it up again from scratch.
Jess Glover: On an economy-wide scale, the very clear in-principle position is that the Government do not intervene. Part of the reason for that is because intervening left, right and centre would be wildly unaffordable.
The principles we apply are that the company in question has to have a viable long-term future; its failure would have to cause a disproportionate harm socially or economically; all other options must have been exhausted; or the company must be facing time-limited difficulties due to exogenous disruption. These set an incredibly high bar for the Government intervening for a company in distress. Value for money and it being a reasonable use of taxpayer funds is always at the top of our minds with that. The bar is so high to prevent the potential unlimited costs.
Hannah Gray: Insolvency is not death; it often can be a very useful tool to recycle a good business into different hands and to recycle stakeholders’ funds.
Sir Gareth Rhys Williams: I gave the number for Carillion. I forget—Hannah will remember, no doubt—the revenue of Carillion; I think it was £2.5 billion or something like that. To put the numbers in context, broadly speaking, there were 25,000 UK employees. For the company at the time, we were looking for what I felt was going to be an initial injection of £600 million, which we decided not to go for. In terms of what it ended up costing us, the final number is still to be agreed with the OR, but let us say it is about £40 million. You can see that is a much better solution than any other way out.
Hannah Gray: It is fair to say, Gareth, that in that VFM analysis of whether it would be better to put money in at the top of Carillion and to help that protect our contracts, the corporate structure was such that if we put the money in, it could have bled out anywhere. With a focused insolvency, the OR could have an eye on protecting our contracts and that continuity of provision, which was the leading light of our work.
Chair: We remember that at the time Carillion still thought it might get money a few days before it collapsed, but the decision was made and mostly recovered, except for the two hospitals that were in a very far-gone state. We consider that a reasonable success on the Public Accounts Committee. That is about the most positive you get from us.
Q33 Sarah Olney: We don’t say that very often, do we? I want to ask Ms Glover a question. There are high levels of insolvencies across the economy. In the first quarter of 2023, we saw high interest rates, high inflation and lots of difficulties in the economy. Are there any particular sectors that are currently giving you particular concern?
Jess Glover: It is a really good question. As I said, one of the things that my team in the Treasury does is monitor various indicators of the health and resilience of the corporate sector as a whole. The short answer to your question is no, there are not any particular sectors that are currently causing us more concern than others or than at other times. We know there are high inflation costs and higher wage costs, but, looking across those sectors, there is no one sector that seems to be more in trouble than any others.
Q34 Sarah Olney: Should I take it from that that they all are?
Jess Glover: You should take it from that that we are monitoring the situation very closely. There is not currently a sector that is leading us to imagine that we are going to need to think of a sector-wide intervention, but we are watching the situation very closely.
On insolvencies, you are right to raise the higher level of insolvencies, but at the same time the number of businesses has increased, so insolvencies as a proportion of businesses have not risen in the same way as insolvencies in absolute terms.
Q35 Sarah Olney: That possibly goes back to Ms Gray’s point that sometimes an insolvency is a way of refreshing or renewing a business. Maybe that is what we are seeing.
Hannah Gray: We have seen in the Insolvency Service statistics that came out earlier in the week that the peak of insolvencies was in May 2023. It is declining from that point, and, while it is higher year on year, it is not necessarily higher per se. We are having the catch-up effect of 10,000 missing insolvencies that did not happen during the covid years for a variety of reasons.
Q36 Sarah Olney: There is a backlog of insolvency.
Jess Glover: I think there probably is. We should prepare ourselves for seeing more insolvencies because of that backlog effect, and also because interest rate rises have historically led to insolvencies several quarters later—three or four quarters later.
Q37 Sarah Olney: We are still expecting to see insolvencies as a result of those effects, but that does not necessarily make you concerned.
Jess Glover: The insolvencies that we are seeing and the higher numbers of insolvencies we are seeing are fairly evenly spread across sectors, so it does not make us more concerned about one sector over another. As Hannah says, insolvencies can be healthy, but they can be a cause for concern, and that is why we monitor very closely what is going on across the corporate sector, and also why we monitor very closely, of course, the macro-level growth and GDP-type stats that we look at all the time.
I want to make sure that I have not come across as complacent. I am saying that I am not sure there is a particular sector that is suffering more than others. We are monitoring all the corporate sectors very closely.
Sir Gareth Rhys Williams: There is a point of data to back up what Jess was saying. Construction is usually held as the most fragile sector, with low margin and complex working capital arrangements. According to the data, 16% of insolvencies are in construction. That is bad, but it is not 50%. It is not a dominant sector in the way that perhaps you are talking to.
At the other end of the lifecycle, we can and have done good things to help. Four or five years ago, we introduced a prompt payment exclusion for companies. We will not allow companies to bid if they are not paying their suppliers promptly, and that was defined as 60 days. We started at 90% in 60 days, and the Chancellor in the autumn statement announced an ambition to move that stepwise average to 55, 50, 45 and so on. Build UK, which is a construction trade association, says that that move alone, just at the 60-day mark, has reduced payable days in construction by 25%, from memory. That has a dramatic effect on the survivability of companies.
Q38 Sarah Olney: It increases their resilience.
Sir Gareth Rhys Williams: Yes, because they get their cash faster.
Q39 Chair: That simple move has built resilience into the sector.
Sir Gareth Rhys Williams: Velocity of money in any economy is a good thing, and if we can ensure that our supply chain is being paid promptly, that is a good thing and helps avoid, to an extent—it is not the only driver—the problem in the first place, which is obviously a better place to be than trying to sort companies out later.
Q40 Peter Grant: Can I come back to the comment you made a few minutes ago, Ms Glover, about the number of businesses increasing? How are you measuring that? We know that there are new companies being created by the thousand, probably the tens of thousand, that do not exist. They get a company registration for purposes that the Chinese Government know but the rest of us do not. How do you ensure that when you talk about the number of businesses, you are measuring businesses that are trading rather than those that have been set up with no intention of them ever carrying out any activity?
Jess Glover: It is a very good question. The figures that I was using to make the point I was making earlier relate to the active business register. That is the system there, but I am very happy to go and look into and report back on how we might determine whether or not those people on the active business register are actively trading. I am afraid I do not have the answer to that now.
Q41 Chair: It would be helpful if you can find any intelligence on that, because it is a fair point. It could completely alter the real picture.
One of the things you have touched on a bit is where you get intelligence from. We are quite clear with the strategic suppliers that the Crown reps have quite an in-depth understanding of what is going on or they have access to a lot of information. What other sources of information are there? Where is the market being monitored?
Mr Johnson was discussing earlier the example of fertiliser. While there was intelligence about the fertiliser market, there was not about where CO2 was coming from and the impact of that in manufacturing, in abattoirs, and therefore in the pork industry and so on. Where are you currently getting information from, and where have you learned lessons over recent years about where you should be gathering intelligence differently?
Jess Glover: Let me answer that from a Treasury point of view, and then Gareth will probably want to come in from the supply chains point of view. One of the lessons we have learned over the last few years is that actively monitoring the corporate sector is an important and critical part of what we do centrally in the Treasury. We look at the output of the sector as a whole, we look at the solvencies rate and the debt rate, and we look at bank deposits. We look at those sources of data to give us an overall picture of the UK corporate sector, and that is where I am getting the intelligence from that allows me to say that I cannot see that one sector over another is experiencing more difficulty than others currently.
Beyond that, I would point to the supply chains work that Neil can tell you about in a moment, but also the national risk register and the national resilience framework work that Gareth’s colleagues in the Cabinet Office lead on, as proactive signals to the system of where we want intelligence and where we have mechanisms to draw that intelligence in.
Beyond that, as I said, Departments lead on their sectors, and it is for them to monitor the health of their sectors. Without knowing this, my presumption would be that they would do that through a series of data-gathering exercises and looking for indicators of health in the sector, supplementing that through all the informal contacts that they have with their sectors.
Of course, there is also a fairly intensive series of conversations that happens between Government and the private sector. That can be centrally through Treasury engagement with various representative organisations or whatever. Those representative organisations are also very helpful in sending us their regular reports.
Q42 Chair: Can you give an example of a sector where you get—
Jess Glover: The CBI, for example, sends us its monthly report on the intelligence it is gathering from its sectors. It might signal to us that inflation, rising wages or industrial action is a concern in some sectors. There is a whole rich picture that we gather, but, as I say, we rely on Departments to monitor their own sectors.
Q43 Chair: Talking of Departments, Neil Johnson, where are you getting intelligence from? Obviously, you are responsible for industry, which is a rather big area, but how much do you work with other Departments, for example, to feed in knowledge of specific industries?
Neil Johnson: In addition to my industry brief, I have a role in economic shocks generally, and monitoring and forecasting. We liaise with other Departments and we also provide information to other Departments.
In terms of the information we are using, we are very analytical-heavy. We are using things like energy forecast data and the number of HR1 forms for insolvencies that are coming through. We are looking at Experian’s report on the stress warning in companies, and we also have sector teams who are actively talking at CEO level to companies, day in and day out, to try to identify where issues might be arising.
To give you an example, we talked about CO2 earlier. What we learned from that was that if you see energy price spikes or shipping problems, that is probably very likely going to lead through into your big energy-intensive firms. We are now heavily monitoring the energy markets to try to see where, for example, gas supplies might be being held up or where there might be energy price spikes coming, because we know if we see that, then we are going to see energy-intensive firms probably starting to struggle.
Q44 Chair: Do you look at things like the shipping list to see what the cost is of containers? I gather that is quite a good indicator.
Neil Johnson: Yes, exactly, or indeed where the shipping is going. If it is being diverted on much longer shipping routes, as is happening now, we might see, for example, constraints on construction supplies, and therefore we might see problems in the construction sector. We are very analytical-heavy, as well as talking to businesses all the time.
The other thing I wanted to raise was in terms of learning lessons. I just wanted to draw your attention to the critical imports and supply chains strategy that the Department published this morning, which effectively lays out the work the Department for Business and Trade is doing to monitor these supply chains, to look at the health of the supply chains, and to try to forecast where things are coming, working with businesses and academia to get those early warning signals, and also trying to work out how we can adapt to long-term trends.
For example, going back to the energy markets, Russian gas taken out of the energy market is a structural change that is leading to a structural price change in the market. What is that going to mean for our companies? That is the kind of stuff we are doing.
Q45 Chair: Thomas Cook and Monarch are two travel agencies that collapsed in recent years. We had a look at this on the Committee. One of the striking things there was that individuals who were bailed out by the Government had had private travel insurance, but because the Government took the view, which I think was legitimate, that they had to repatriate an awful lot of British citizens on holiday, the repatriation happened and, once ATOL was drained, that was paid for by the taxpayer; they certainly subsidised that. So you had the insurance model within the industry, which covered some of it, but the individual insurance of individual customers was never drawn down.
I remember talking to the Secretary of State at the time, because they had the courtesy to talk to me about the money that they had allocated in advance in case this happened. The taxpayer was on the hook. People had paid for their private insurance, but the insurance companies never had to cough up, and it seems that the Government never did pursue recovering the money through the private insurance route, which would have been quite a challenge, I can imagine.
Has there been any learning from that experience about the balance between the self-insurance of an industry through ATOL and individual insurance versus the Government’s bailout? Ms Gray, I am trying to think whether you were around in this role.
Hannah Gray: I was around. It happened just after British Steel went into liquidation. I can recollect that the Department for Business was doing a piece of work to identify where we might have similar risks, but I am afraid I cannot recollect where that got to because we went into covid shortly after that.
Jess Glover: I am afraid we might have to come back to you on this, unless Neil or Gareth have anything to add. I know from my preparation for this Committee that of course there was a big difference between cases. We repatriated Thomas Cook passengers because there was not a viable and available alternative for them; the reason we did not do the same for Flybe was because there was.
Clearly, at a macro level those decisions were taken very much with the taxpayer and value for money in mind. Your particular question about the structure of the insurance set-up there and the extent to which the taxpayer has had to foot the bill against the insurers is a valid one, but we should return to you on it.
Q46 Chair: It just seems to me that people paid their insurance premiums for a product that they never called upon because they had by then been repatriated, so it could possibly have been a legal battle if it had gone ahead, with insurers saying, “You have got back, so what are we paying for?” The taxpayer funded something that had already been, effectively, privately established.
Jess Glover: It may well be that our colleagues in the Department for Transport, if they were here, would have plenty to say about it.
Q47 Chair: That is quite a specific point, but the wider point is that the ATOL support meant that there was the ATT to support people in that situation, so there was a self-insurance through the system. Is that something that you have looked at and think should be happening in other sectors as a precautionary intervention?
Jess Glover: It is not something that I am aware that we have looked at. Again, you make a very valid point and it is something that we should consider.
Chair: It is preventive, I suppose.
Q48 Sir Geoffrey Clifton-Brown: Mr Johnson, I am going to follow up on a couple of questions that you have answered. Both you and Ms Glover have mentioned all sorts of ways you get intelligence, but surely one of the key ways that you have not mentioned is the market. Let me give an example. Intelligence from the market in Hong Kong was the first indicator that Barings was in trouble, and even their major lender banks did not know until that intelligence came about. What do you do to gain intelligence from the market?
Neil Johnson: I should say that I am not a financial analyst myself; I have financial analysts in my team who are monitoring the financial markets, as I am sure happens in the Treasury. As you say, the financial markets are often the first indicator that trouble in a sector is coming. The classic is the share price. A massive crash in the share price of a major company would flag that up to us very soon.
Jess Glover: I confirm that analysts in the Treasury constantly monitor financial markets here and globally. There is a flow of information within the Treasury about what is happening in those financial markets. It is absolutely one of our sources of intelligence, adding to the overall picture.
Sir Gareth Rhys Williams: One of the things we are looking for is that we are trying to catch companies before they get into real trouble. I mentioned Spotlight, but there are other tools that look at late filing of accounts, resignations of non-executives, resignations of auditors or debt that is not being rolled over by a lending bank. If the composition of a banking syndicate is changing, that is an indicator that someone is selling for some reason, and that usually comes a long way before a profit warning or a share price collapse. By the time that happens, it is frequently too late to do anything.
In any private sector supply chain, everyone in the supply chain knows that they depend on each other. When I joined here, it was not the case that we would hear from other members of the supply chain about worries they had about someone else in the supply chain, whereas now my markets and suppliers team—Hannah’s team—are trusted recipients of that semi-anonymous data. We treat it as though it were anonymous. We are hearing things from the supply market where they have spotted something, perhaps way down in the supply chain, that we could not reasonably have spotted, such as a non-listed company where the financial data is much thinner. That trust is really important. We are regarded as people who treat this information sensitively and carefully, and act subtly where we can to get it fixed. That is as important as the hard data.
Neil’s team have some excellent databases. In the MoD they are building some databases that do not look by sector or by product type as Neil’s do, but work down contract by contract, which you can do in a military context because there is generally a much longer approval cycle for the componentry and we can track right the way down. As I said in my opening remarks, that is hard to do in the generality. It is as much about trust and informed information as it is about data, at least in my area.
Hannah Gray: It is similar in our area. We receive market intelligence from people in the market. We are talking to the lenders and financial advisers about what they are seeing. We are also used as a signpost into Government, which is helpful. If you have a company that does not know Government and you want to get our attention, we can act helpfully to direct them to the right Departments, and so there is this chatter going on.
To Gareth’s point, if you put three suppliers in a sector into a room and ask who is worst-performing, and two out of three point to the same one, it is worth having a bit more of a dig at it. We had a situation in clinical waste where the market told Gareth’s team that they were worried about one of the subcontractors, and a bit of digging discovered quite a problem.
Q49 Sir Geoffrey Clifton-Brown: Sir Gareth, that very helpful answer leads me into my next question to Mr Johnson. I want to build on Ms Olney’s question on regulators. Your answer was quite optimistic about regulators, and I wonder about the difference in financial performance between those regulators that are habitually dealing with financial matters, and those regulators that only deal with it on the edge. Let me cite—this will give you a clue where my questions are going next—Ofwat.
Neil Johnson: I was going to add something on the previous question, if that is okay. All of the analysis and the information we collect, in my experience, only indicates where you should look more closely. The best intelligence you get is from talking to companies directly, getting out on the ground and seeing what is going on with the companies. All your analysis and evidence points you in the right direction. I should have added that to the last question.
On your question on regulators, I have to confess that I am probably not the best person, because most of the sectors that I work with are not particularly highly regulated. For example, DESNZ would be the right place in the energy sector, and Ofwat would be for DEFRA.
I work very closely with the Insolvency Service. I work very closely with the Health and Safety Executive on chemicals, for example, about chemical safety and critical supply. Those are the kinds of regulators I am much more engaged with. I have to say that, in my engagements with them, their relationship with us is incredibly open. They are incredibly effective and very engaging people, and very keen to help us identify where companies are struggling, but, to be completely frank, I am not that involved with Ofwat.
Q50 Sir Geoffrey Clifton-Brown: Can I redirect the question to Ms Glover then, perhaps?
Jess Glover: I am not expert enough to make a comparative judgment between different regulators, the level of their experience in dealing with financial matters and their expertise in doing so. As Neil says, it is for the Department in question to own the relationship with a regulator and to be able to talk in depth and in detail with others, including this Committee, about those sectors.
Our experience with Ofgem and the energy sector over recent years—although, as I say, it is now DESNZ, formerly BEIS, that is the lead Department in that area—is that we have worked very closely with Jonathan Brearley and his colleagues, including through the energy crisis. The work that they are doing now on the overall retail market, and the proposals that we expect them to be coming up with in order to demonstrate how those lessons have been learned and what the right structure of the retail market is, is work that we have full confidence in and are doing very closely with them.
Q51 Sir Geoffrey Clifton-Brown: It was Ofwat that I specifically mentioned, and it will now become clear why I mentioned Ofwat. One of our major water suppliers is becoming highly indebted. Are you engaged with the water sector? Energy is one utility, but there are other utilities, and I am going to come on to other utilities in a minute. Water is probably our key utility.
Jess Glover: DEFRA has responsibility for the water sector, for the policies surrounding the water sector, for Ofwat and indeed for the Environment Agency and the Drinking Water Inspectorate too. Ofwat has been quite transparent about its concerns about the financial situation of one water company in its open remarks to Parliament and in its annual reporting, and it is in live conversations with that company to improve that company’s financial position, which I do not want to go into any further at this moment.
Another thing that I am aware of is that Ofwat has taken steps in recent years, in the light of the health of the overall sector, to improve the sector’s financial resilience through measures to improve or require more ringfencing provisions in water companies, to protect the capital that they have to be deployed on to providing the service to the consumers that they need to provide, and in order to shore up their financial position. In addition, the Government have trebled Ofwat’s enforcement capability, with an extra £11.3 million to enable Ofwat to carry out its enforcement duties.
Q52 Sir Geoffrey Clifton-Brown: You were being careful with your answers and I am being careful with my question, because this is sensitive territory, but that particular regulator has known about this situation for decades, albeit that it has got substantially worse in the last year or two. It should never have been allowed to get to where it has got to, and I am just wondering whether these habitually non-financial regulators need to get more expertise in the financial regulation side of their business.
Jess Glover: I would point again to the steps that Ofwat and DEFRA have taken recently to improve the financial resilience of the sector. There are live conversations going about the financial resilience of a particular company that neither you nor I want to get into in more detail in this forum.
If I can zoom out totally from that specific case, if you are asking me whether all regulators would benefit from a greater level of financial expertise, then I suspect my answer would be yes. I am very happy to take that away and look into it a bit more closely as a cross-sector thing with my departmental colleagues, if that is what the Committee want me to do.
Q53 Sir Geoffrey Clifton-Brown: Yes. Bearing in mind the Bulb experience in the energy market—I am talking about the water market, but there are other markets, communications and so on—I wonder whether there is a further job of work that somebody needs to be doing with the regulators in these key utilities that will, as we know in the case of Bulb, affect a large number of consumers when things go wrong.
Jess Glover: The regulators and Departments in question have the responsibility to make sure that they have the capacity and the capability they need, including financial expertise, in order to be able to discharge their duties and their responsibilities, so I would not want to take away from their responsibilities in doing that. Nevertheless, as a cross-cutting question across our regulated utilities about roles, capacity and capability, which is a theme of the Report, I am very happy to take that away and look at it.
Q54 Sir Geoffrey Clifton-Brown: Just while we are on key utilities, the Report alludes to the Air Berlin wind-down. I am just wondering, in terms of different international regimes—we have gone on to the issue of insolvencies—whether there is any international information that would tell us any lessons about how to deal with these companies, and indeed sectors, that are likely to get into trouble.
Jess Glover: I read that area of the Report with interest and have often, in my own career so far, dealt with this kind of interface between the domestic and the international. While each country and economy is unique, it would be valuable to look at the way other countries structure their framework for intervention or non-intervention, and to look at whether any countries have similar or equivalent frameworks and arrangements to the sorts of principles that we have, which I talked you and other Committee members through earlier in this session. It would be valuable to look at that. I do not know whether Gareth or Hannah have any experience of having done that previously, but I definitely noted that area of the Report with interest, and I agree it would be valuable to do.
Sir Gareth Rhys Williams: Carillion had a very large business in Canada, which I am afraid we were completely disinterested in, I think rightly. By the time we get to distressed companies—
Sir Geoffrey Clifton-Brown: I didn’t mean the individual companies; I meant the sector.
Chair: Throughout covid, PPE was manufactured in China, and there has been an issue—
Sir Gareth Rhys Williams: What I am saying is that each country has its own different way of handling insolvencies. When you get into those short strokes, then things will be different. How different countries have the debates on the questions you are asking, I do not know.
Q55 Sir Geoffrey Clifton-Brown: It is fair enough to say that you do not know.
Can I move on to something totally different and look at key sectors where there might be a risk to the economy? I am thinking of super-chips. There is clearly a problem with Taiwan holding the balance of manufacture of super-chips. Even at a lower level of chips, I made an awful fuss about the Chinese taking over a stake in Newport Wafer Fab. Fortunately, that has now been resolved, at a considerable cost to the taxpayer, and it has now been sold to an American company. Do you look at strategic areas of the economy to make sure that we are at least prepared for a systemic risk?
Jess Glover: Neil might want to respond to that from the critical supply chains point of view.
Neil Johnson: I will not cover chips in particular because that is DCMS’s responsibility, but yes, in a whole range of industries we are looking at what we can do to bring supply back onshore or to protect supply chains.
In the space I am working in, we have looked at critical minerals and how we can bring critical mineral supply back onshore because we know, for example, that we are going to need vast amounts of lithium and vast amounts of cobalt. As you were alluding to, lots of those minerals are now controlled by China, so there is an awful lot of work going on between Government, academia and business to say, “How do we make the UK an attractive place to bring those supply chains back onshore?”
I would just highlight the Tata gigafactory investment. Again, how do you bring manufacturing capability back into the UK? What role can Government play in creating both the policy environment and the cost structure so that it is beneficial for the companies to be here and, in the case of Tata, a small amount of seed funding to get them here? What can you do as a Government to bring those key companies and key sectors back into the UK? We are definitely doing an awful lot of work in that space.
Jess Glover: It is worth saying that it is the Department for Science, Innovation and Technology that is now responsible for semiconductors. It published its semiconductor strategy in March 2023, precisely in recognition of the structural question that you raise. DBT has the critical minerals strategy that it has published too.
One of the things the Chancellor announced in the autumn statement was the Green Industries Growth Accelerator, which was nearly £1 billion designed to support the supply chains required for hydrogen, carbon capture and storage, and other renewable sectors of the future.
It is a totally valid question. It is quite a difficult question, not least because we are not an economy that can suddenly onshore everything that we need and build and make it all here. The work that we have done over recent years to much better understand the supply chain reliances that we have, where they come from and how vulnerable they are is really important work to help us at least have a much clearer understanding and picture of where those vulnerabilities might lie, with a strategic conversation then about where we are content to bear that and where we are not.
Q56 Chair: There is one thing I want to come back to you on, Ms Glover. Mr Grant picked up on the issue of the sectoral impacts of businesses that are going under, but we also have the challenge of bounce-back loans with a 10-year life. Some companies were effectively being propped up by that money, and we know that they have a long time to come. Do you have any understanding in the Treasury of companies that might be at risk if it were not for the bounce-back loans? There is potentially a whole different ecosystem, effectively, there for some of those businesses.
Jess Glover: I am afraid I am going to have to come back to you on that one as well.
Q57 Chair: I appreciate that it is a big question to ask. Basically, there was easier money going into some businesses that might have otherwise struggled. Some of them may come through it, but it means you have a different landscape with the long tail of covid.
Jess Glover: It is a good question. I should look at it. The one thing I would say is about the principles against which we operate—that the default is not to intervene and not to provide support. The reason for there having being more cases of that more recently is the unusual circumstances that we have been facing, and not a change in Government policy. The principles that I outlined would still apply in terms of individual companies and cases.
Q58 Mr Djanogly: We have been talking about warning signs, and I would like to move on to Government interventions. There is a very helpful figure 3 in the NAO Report, which has the various possibilities in an interactive format. Ms Gray, how do you decide what support is appropriate in a particular circumstance? Can you take us through the stages of your mindsets?
Hannah Gray: First, UKGI does not make the decision. It is for the Departments and their Ministers to make a decision based on their policy outcome. The first element is the Department articulating what a good outcome would look like against those policy objectives, and at that point we ground ourselves almost in the Green Book: “Let’s put every idea for what we could do here on to the table.”
That is a toolbox that ranges from warm words—“Come and have a cup of tea with the Minister and be told that you are important, but we can see you solving this for yourselves, so well done”—through to nationalisation, and there is a whole grey area in the middle of things that we will look at that might be appropriate. We will assess all of those against the framework of policy objectives of the Department. Are we focused on continuity of services? Is there a bit of IP that we need to protect here? Is it jobs in an area? It is those sorts of things.
Then, having narrowed that down, we will look at a set of potential interventions, but we will also look at that against doing nothing. What would the Government have to do in the event that we do not have an intervention? What is our contingency and continuity plan in that event?
To the point Gareth made on Carillion, we will then assess the various costs of those options. Is it better to do something before a company fails and to help avoid that failure, or is it better to help manage that process of failure in an orderly fashion so that it is controlled and not precipitous, and there is funding to enable an insolvency process? Therefore, what is the least worst of those outcomes?
Once the Minister has decided what they would prefer to do, my team will work on the technical side and bring our expertise to ensure that any intervention, if we do it, is structured to protect the taxpayer’s money. We seek to protect the downside and we seek to restrict cash flow out of the entity, and then, if there is a world in which the sun shines and the sky is blue, to participate in the upside that comes as a result of our intervention.
Q59 Mr Djanogly: Is this work done in-house or do you go to outside firms?
Hannah Gray: Some of it is done in-house and some of it is done outside. We want to base a decision for Ministers, and our advice to them, on data, not anecdote. We will often do what a lending bank would do in the same situation, which is to get external financial advisers to do what is called an independent business review. It is exactly what somebody else seeking to make a lending decision would do. You get a bunch of accountants to go in. They lift the bonnet, look at the wiring, kick the tyres and see what the size of the problem is. Invariably, approaches to Government are whole numbers and not odd numbers. We see what the levers are that the company can pull themselves. What can they do as self-help measures? We also look at who else can take part in that.
The NAO Report references the free rider problem in paragraph 3.2. We are very mindful that other financial stakeholders, be they the shareholders, the creditors or the lenders, also have a valid part to play. If they are not prepared to take that part, they need to step back and allow Government to step into their position, so for example to take assets as security to protect the taxpayer’s position.
Q60 Mr Djanogly: Thank you. That is a very helpful explanation. Ms Glover, what was the thinking behind a case like Flybe or Britishvolt, where no support was offered to the company?
Jess Glover: Interestingly, the process that Hannah has just described in the abstract was exactly the process that we went through on Britishvolt. There we were in conversation with the company, and we had a set of conditions that we were very clear were a prerequisite to Government involvement in the company, which related exactly to taxpayer money and value for money.
The support on offer was related to the automotive transformation fund, but that had conditions attached. Britishvolt requested further support. That would have had extra conditions attached, and, in the end, from our point of view, those conditions were not met. The case for taxpayer spend on that company was not there and was not made, and it is one of the many examples of the Government deciding not to intervene.
Q61 Mr Djanogly: How do you manage the risk of moral hazard or, in other words, one company saying, “You did it for them; you must do it for us too”?
Jess Glover: It is a very valid question and it is one that we are very concerned about in terms of the way that we approach these problems. I would come back to the framework and the principles that I set out at the beginning in terms of the way that we consider companies in distress. We set the bar incredibly high. The level of due diligence and interrogation we do, including with Hannah and her team, into any company where Government intervention is considered is very detailed, and that means that those cases where we do intervene are very few and far between.
The other thing that is relevant, of course, is the accounting officer responsibility of the individual Department. Those accounting officers, as you know, take that role and their role with respect to public money incredibly seriously. They also take their accountability to Parliament, including to this Committee, incredibly seriously. The answer is that we set the bar very high, such that we are minimising the risk of people getting over it who should not.
Sir Gareth Rhys Williams: I cannot think of any that have been a supplier to us where we have invested in a business. We have either been prodding them to restructure themselves, to refinance themselves or to sell things in order to prop up their balance sheet or whatever. For those that have not done it, we have then put them through a supported insolvency.
The only one that was different from that is Sheffield Forgemasters, which was a supplier to the MoD and to the nuclear industry. That is the only one I can think of among companies that are suppliers. It is different for the wider-economy companies, which is what Jess looks after. There is just the one example.
Q62 Mr Djanogly: Have companies ever threatened litigation, saying, “You did it for them; why do you not do it for us?”
Sir Gareth Rhys Williams: They have threatened dire consequences such as collapse of supply chain, collapse of industry or ghastly outturns for Government contracts, but that is why we spend so much time on our preparatory planning. As soon as we see a flag, in the way that Neil was discussing earlier, we start running contingency plans. For the ones we are worried about structurally, we already have those contingency plans filed away. It is our job to look at those dire warnings from a company seeking money and see if we believe them.
Q63 Mr Djanogly: What about debt and equity holders, so-called free riders? These are people who would lose their money other than for the fact that the taxpayer has come in. In any normal circumstances they would be out of the picture, but they survive because the company has been supported.
Sir Gareth Rhys Williams: As I say, the only one in my area of work when we have supported a vendor has been Sheffield Forgemasters. I think we bought it for a very de minimis sum.
Hannah Gray: It was £2.56 million, Gareth.
Sir Gareth Rhys Williams: Well, okay, but not—
Q64 Mr Djanogly: Is this something that comes up?
Hannah Gray: The free rider problem is something we absolutely bear in mind. If we take the example of Celsa—the £30 million loan support made to a steel rebar company during covid—you will see that what we did there is entirely in those lines that nobody gets a free run.
Our intervention was put in on an equivalent level into the security with the existing asset-backed lenders. Other lenders made space for us to have that security, so we were protecting the downside. If there was an insolvency, we could see through the work that our advisers had done on their diligence that we would get our money back. We then made sure that we benchmarked the interest rate that we got to be equivalent to what any other distressed company would get.
We then added in what we called a contingent value right, which meant that, if the company did well on a EBITDA basis, so in terms of its profitability, and hit certain threshold metrics, we got a greater return. Therefore, we moved from a 5% over LIBOR to a 10% over SONIA interest rate, so a cash pay return. In terms of the shareholders, we took a 20% warrant of options in the company so we had the right to acquire, for very little, 20% of the company. That was subsequently bought back from us by the shareholders for £2 million.
Q65 Mr Djanogly: Is this a model that you intend to follow in the future?
Hannah Gray: Yes, absolutely. I moved into this job from investment banking, and I worked as a poacher on the other side, advising hedge funds and other investors into distressed places on how best to structure that, because they want to protect their downside and participate in the upside. What I have brought along to this job is effectively the same principles. The taxpayer, if they are the last person standing, should be financing and protected in the same way that a distressed hedge fund would be. Therefore, we would encourage people who are in those situations where very few others will step forward to look to that coterie of investors to do a similar thing. An example of that is Virgin Atlantic, which applied for financing from us and ended up getting up a new investment from Davidson Kempner, which is a distressed adviser.
Mr Djanogly: Finally, I want to touch on management accountability. In a normal insolvency situation, the Insolvency Service would do a report and look for wrongful trading, let alone fraud or worse things, and directors could be disqualified and so forth, or made personally accountable for the debts of the company. In a situation where the Government are putting money in, and the Insolvency Service has its insolvency procedure, they may get off procedures or attention that would otherwise have been on them if the company had gone into an insolvency procedure. How do you make sure that directors retain the same level of accountability?
Hannah Gray: It is fair to say that, if we thought there was poor behaviour by a group of directors, one element of the diligence that we would ask our advisers to do would be to look at whether this is a well-run company that is in line with what we perceive to be good corporate governance. We would be very reluctant to put Government money to work in those situations.
We have also used our interventions to strengthen corporate governance. We have occasions where we will put somebody on to the board, either as an observer or an executive director, in order to make sure that we have that ability to influence the behaviours. We will stop dividends as a condition of the intervention, and make sure that arm’s length payments to, for example, a group company, are done on an audited basis to ensure that people are not able to do things that we do not believe are appropriate.
Q66 Mr Djanogly: Do you sometimes make sure the company goes into administration and then deal with it from administration, so that the insolvency procedures are adhered to?
Hannah Gray: It is very rare that we would have the ability to put a company into insolvency. We would need to have a debt into it, and we cannot force that behaviour to happen. I know that on several occasions, which Neil and Gareth can both remember, we have written letters to the directors reminding them of their fiduciary duty to their creditors and to the company as a whole, and to remind them to behave appropriately.
Sir Gareth Rhys Williams: When a company goes into insolvency, the official receiver’s task is to recover as much as they possibly can for the debtors, so by definition, the equity holders have lost everything and the debt holders will get pennies on the pound. In every example that we have done, of course, the OR looks for a buyer, but I am afraid that in all of the cases, because we have been working with these companies when they were still solvent and had not sorted themselves out, no buyers have been found. The situation that you outline has never arisen.
Hannah Gray: British Steel was sold, but that is slightly different.
Sir Gareth Rhys Williams: It is slightly different, yes.
Q67 Sarah Olney: Ms Gray, I wonder if we could talk a bit about exit strategy. There are some really interesting answers there about the types and timing of interventions, but one that obviously is still of great interest to parliamentarians is the bail-out of Royal Bank of Scotland, some time ago now. The taxpayer is still holding a large portion of the shares. I just wonder if you could talk us through what you do, at the point at which you are planning your intervention or deciding what kind of intervention is appropriate, to plan an exit strategy.
Hannah Gray: I am afraid that in respect of NatWest we have a separate shareholder team that work full-time on that. If there are detailed questions, it might be more appropriate to ask them.
Q68 Sarah Olney: Yes. That was an example. What about more generally?
Hannah Gray: The fundamental underlying our interventions—it comes across in figure 4 in the NAO Report—is that we are seeking to provide a bridge, not a pier. You need to have a route across from here to something, not just to be putting cash out endlessly to support something that does not have a resolution. We spend a lot of time in that diligence phase looking at what the future might look like. Is this a blip or is this something structural that therefore needs to be supported through a managed wind-down or a reduction in that methodology? For example, I understand that part of the business case on the Sheffield Forgemasters nationalisation is that that has been done to support it, to help modernise it and to put the capex in, with a route to that being returned to the private sector in due course.
Q69 Olivia Blake: Could I ask Ms Glover and Mr Johnson a bit more about lessons learned, in particular in relation to companies’ resilience right across the economy from the experience of supporting them through covid? What lessons have you learned from that more specifically?
Jess Glover: Let me address that quite widely, but please let me know if I am not being specific enough. We have learned through no-deal preparation. People will have opinions about that whole exercise, but, having been very closely involved with it, it helped us, from a resilience point of view, understand some of the areas where we knew we needed to be more resilient in readiness for having a different trading relationship with the EU. Of course, in the end we had a deal, not no deal, but nevertheless we have a set of trading arrangements now that are different. That was one whole lesson that we had to learn: what was the different shape of the trading arrangements going to be, which was new to us?
Then covid and the energy price spike placed a system shock across the whole economy. What we learned there is the importance of Departments having a good sectoral understanding, understanding the nature of their sectors and things like the composition of their sectors in terms of size of businesses or whether they are capital-heavy or people-heavy or all sorts of characteristics. Departments know much more about the sectors now as a result of having gone through all this.
We also learned the importance of having really good relationships with key parts of those sectors. Previously, it may have been more mixed. The car teams in the then BEIS always had great relationships with the car sector—that was a feature of how they worked—but other sectors did not know their sectors as well. In terms of the overall level of sectoral relationship and understanding, the lesson we learned there was that it was really important to have that kind of intelligence and understanding and the relationships already in place, so that the early warning signals, when they start bleeping, are on our radar, because otherwise we just did not know that these things were going wrong.
To come back to where I started, in terms of what we have learned about supporting sectors and specific companies in distress, having these three central teams with their expertise in special situations, being able to look backwards, forwards and across to help the team that come along with their isolated thing that they have never dealt with before, and to situate that within the overall framework, is also really important.
Neil Johnson: I would agree with everything Jess said. In terms of things we have learned, we have to understand our supply chains. We have got much better at that. You never quite know when there is a tiny chemical that a small company produces here that is going to be absolutely critical to some part of the NHS or the energy system, so getting a picture is really important.
In terms of the system shocks, we thought they were once every 10 years; they have not been. They have been once every year, so being better able to forecast and see where those shocks might be coming and where they might ripple through the economy has been really important. It is about getting the early warning indicators as such, so that we can flag up to Jess’s team that we think there is a problem here and we need to react.
Regarding commercial expertise in the teams, we have got a lot better at getting people with commercial negotiation experience and financial experience, the people who are used to talking to company CEOs day in and day out. A couple of years ago, we probably had less of that, certainly in my team. It is about the ability, thankfully, to see whether a company is coming to you and not quite telling you the truth, either saying it is all rosy when it is not or saying it is about to go under when it is just trying to get money out of us. Building those skills and the team, and training the pipeline of people, has been really important.
Finally, as Jess said, we knew some sectors fantastically well, but we frankly did not know some almost at all. All the sector teams across Government now are going out and talking to their companies day in and day out. They are building those relationships, because the most important thing is that, when something goes wrong, we have the relationships with the companies and across Government so that we can react quickly.
Q70 Olivia Blake: I am talking mainly in reference to paragraph 3.1 about the audit framework; the NAO highlights that that is a really important thing for collating and sharing evaluation findings and lessons learned across Government. How robust do you think that sharing is at the moment across different Departments? Do you think that is an area of weakness or one that you are quite happy with?
Jess Glover: This is a really important area that the Report highlights, which we can probably be a bit more systematic on. We obviously all follow our audit frameworks that we need to follow. The individuals who carry out particular interventions would evaluate those as a matter of course. The Treasury is due to write to this Committee within the next period of months, for example, on all the evaluation we have done on the covid support business grant schemes. That is an example of one systemic evaluation that is taking place right now.
Nevertheless, we do not systematically evaluate, intervention by intervention or non-intervention by non-intervention, what we did or did not do and why in a way that would add to the body of knowledge and understanding across Government. I am really grateful to the Report for highlighting that, and I would agree that that is something that we need to look at doing more of.
Q71 Olivia Blake: Moving on slightly, do you have any examples of what learning has been shared from the special administration of Bulb to other regulated sectors with similar regimes? I should say that I was a Bulb customer. I know we mentioned Ofwat. Do you have any examples where you have shared the learning from that experience?
Jess Glover: We have obviously done an awful lot of learning in sector on Bulb, and the Department for Energy Security and Net Zero has done that. It is a very widely publicised incident or event—whatever the right word is—which other Departments have also shown a lot of interest in. I am afraid I cannot point to a particular learning exercise, but I know that an awful lot of attention has been paid to whether the structure of the market is right and whether the pricing structure is right. Ofgem is now doing the work it is doing in order to put forward proposals for the development of the retail market.
Q72 Olivia Blake:. Do you think there would be benefit from doing that?
Jess Glover: I absolutely do. I should say that I do not know that it is not happening either. I just do not know of an event where that has been specifically—
Chair: We looked a lot at Bulb in a separate report, so we have covered that. The special administration regime was there, prepared to kick in when it was needed. That was an example of pre-empting an intervention.
Q73 Sir Geoffrey Clifton-Brown: Sir Gareth, I will start with you on this question. Taking us back to Carillion, at that time these big services companies were bidding with each other, and for each contract they were bidding for, they were getting wafer-thin profit margins. Their balance sheets were extremely weak. If I remember rightly, it was not one of the UK Government contracts that brought Carillion down, but a Middle East prison-building programme, because its balance sheet was so weak. Has that whole services sector been able to rebuild its balance sheets so that we are not likely to get another Carillion?
Sir Gareth Rhys Williams: That is a great question. I think what brought Carillion down was not prisons but hospitals. It had a number of hospital builds, two of which the Chair touched on earlier—I think one in Canada and a couple in the Middle East—where it had a systemic failure. It had mis-estimated those or it had mis‑reported those internally. We shall see. There are inquiries ongoing there.
When we looked at the service contracts that we had, they were all profitable. There were 430 or so—something like that. A short handful—five, six, seven, or something like that—were not profitable. The rest were profitable. It is a very good question whether they were adequately profitable. We do now put a lot of time and effort in to make sure that companies are making a fair return for their sector. Facilities management companies will make less than pharmaceutical companies. IT companies are somewhere in the middle. I do not mean “fair” as in large; I mean “fair” as in sector-appropriate.
We do check for abnormally low bids. If a winning bid is 10% off the median, we will call that in centrally. We are just talking about price here. Someone may well win with a higher price because they are delivering better quality, but where there is a potential winner whose price is 10% below the median, we will call that in and scrub that again. It is entirely possible they have misunderstood our ask, or it is possible that they are right and they have come up with some clever way that makes the contract deliverable profitably and sustainably much cheaper, in which case we should grasp it. We are here to buy things at the right quality and in the most efficient way for the taxpayer.
We do look at that. We look at margins across each vendor. It is something that we are much more mature about discussing. It is in our interest to buy efficiently, but it is not in our interest for companies to lose money on a contract, because they will slice their costs or reduce the service that the taxpayer is expecting, obviously depending on what it is, in order to get back to break-even. If we are looking for a service for taxpayers, that is not what we want. We spend a lot of time on that. There is plenty of guidance. The NAO Report calls out some of that. We have been training people on that to make sure that we are getting that pricing correct.
Q74 Sir Geoffrey Clifton-Brown: We did see a certain amount of information at the time when Carillion went under that indicated that it was not just Carillion; there were other companies in there, quite well-known companies, with pretty thin balance sheets. Back to the core question, are you confident that, for that sector as a whole, it is unlikely that we are going to get another Carillion?
Sir Gareth Rhys Williams: Never say never. As I say, the sector to perhaps be more worried about, with today’s set of economics, is construction, but the playbooks that we touched on—the sourcing playbook, particularly—have defined how we go to market in those areas.
I mentioned earlier what we call complex outsourcing, where we are the only customer. There, it is particularly important that we really understand the economics for the supplier and whether the gain share and pain share mechanisms are appropriate. We have spent a lot more time thinking about that recently.
For either critical contracts or complex outsourcing contracts, we ask for a living will statement. We ask the vendor to confirm every year to the contracting authority—the Home Office, the Ministry of Defence or whatever it is—that they would still pass the entry test. At contract entry, we have a number of financial ratios that we expect to be met. They are different sector by sector, but we ask, for those two types of contracts, for the vendor to confirm to the customer—the contracting authority—that they still pass those financial tests. The danger that we have is that someone passes the tests at the beginning of, let us say, a 10-year contract, but then, through the life of their contract, speaking hypothetically, they go on an acquisition spree, destroy their balance sheet and then they cannot sustain the contract that we depend on.
That annual reporting point, which I think is in a financial distress handbook that the NAO referred to, is to nail that point. Never say never, unfortunately, but I think we have done a lot to defend against it.
Q75 Chair: Can I just pick up on the gain share? I mentioned earlier that Ms Gray had moved from one role in the private sector to the public sector. You talked a bit about gain share. We touched on it. Have we seen an improvement? Sir Geoffrey and I have been on the Committee long enough to know that sometimes a company has done very well, but the taxpayer has not benefited from that uplift, but the company has partly done well because it had a Government contract. How are we writing in better to get a gain for the taxpayer when a company does well partly as a result of a Government contract?
Sir Gareth Rhys Williams: As I discussed earlier, we publish KPIs. Post October, we will be publishing thousands more so taxpayers can see whether the contract is delivering. The bigger problem with gain share and pain share is where we have not tested the market. Let us take the example of probationary rehabilitation in the prison service. When that was launched three or four years ago, we had not tested the market. We had not run pilots to see whether, under a variety of different scenarios, the vendor would either, on the downside, survive or, on the upside, make undeserved profits.
That led to a lot of problems when volumes sank in that sector. There were a number of prisoners being put through the probation system. With the structure of the market, where we had more vendors than had been initially envisaged, frankly, the cost did not cover their overheads and a number of them went bust. That resulted in a lot of that being insourced.
Chair: We remember it well.
Sir Gareth Rhys Williams: The message there is we must think carefully about the payment mechanisms to make sure that we are not being overly generous on the upside and that people are not getting a free run, and neither is the scheme so punitive on the downside for things that are outside of the vendor’s control.
Q76 Chair: Do you think piloting is part of the answer to that?
Sir Gareth Rhys Williams: You must, for those sorts of critical outsources where there is no external market.
Q77 Chair: How are you driving that through for the commercial function? We hear it talked about a bit more, but I think it is fair to say that there may be a natural political impatience just to get on with something, which obviously drives what you all have to do. As you say, pushing for a pilot is the right thing to do, but how much success are you having?
Sir Gareth Rhys Williams: I would be interested in colleagues’ views on this, but there is a balance point on outsourcing. Where does it make sense? Where is there an economic gain? Where can we get a better service, or the same service, cheaper, leveraging private sector expertise? It is not correct to think that everything should be outsourced, but neither is it correct to think that everything should be insourced. We are trying to find that balance point. The pendulum perhaps has swung either side of where it should be over the years. There is a different piece of guidance, which I do not think is called out in this paper, called the delivery model assessment, or DMA. Think of it as a long word for a make-or-buy assessment. Should we buying this service, or should we be doing it?
Q78 Chair: What about piloting?
Sir Gareth Rhys Williams: It has been a while since I have seen a large DMA that has then called for a new outsource in an area that was previously insourced. Now you have prompted me, I will think of one, but they are relatively rare, and the presumption is that we will pilot it.
If you take a different example that is ongoing at the moment, health assessments in DWP, they are moving from a structure called FAS to a structure called HAAS. They are busy piloting that. I forget which region in the country they are running the pilot in. They are absolutely stress testing that before they think to roll it out nationwide.
Q79 Sir Geoffrey Clifton-Brown: Sir Gareth, we tend to see where things go wrong with the taxpayer’s pound. Often the things that go wrong the most are where you have innovative or new ways of doing things involving new technology. I am thinking particularly of electronic tagging and the emergency services network. Is there any part of the system that would advise a Department thinking about going into one of these innovative contracts, “This is what you need to be careful of before you enter that contract”?
Sir Gareth Rhys Williams: You should perhaps talk to my colleague, Mike Potter, who runs the CDDO. He has my role for digital and data, which is probably where most of the examples that you are thinking of, Sir Geoffrey, have arisen. He and his team have built out the same controls and assurance mechanism that the commercial function and other functions have. Things of that nature get called into the Cabinet Office, and we look at them.
When we are discussing, for example, ESMCP, the radios project in the Home Office, there is absolutely a commercial look at that. Equally, there is a digital look at that, as there is a Treasury look at that. That would be typical. There was the recent example of the federated data platform in health that was announced a couple of months ago. I do not wish to speak for my digital colleagues, but they were heavily involved in assessing that programme, as well as the digital colleagues, in that case, in health.
Q80 Sir Geoffrey Clifton-Brown: Ms Gray, going back to your answers on the exemplary intervention in Silicon Valley Bank, when you are considering this range of options, is your first priority a market option and your last priority a part or complete nationalisation?
Hannah Gray: It will depend on the individual circumstances. We would lay out the full range of everything under the Green Book, throw everything on the table, assess what are the most valid options and what “do nothing” looks like, and then go with the ones that are most likely and focus our efforts there. In an ideal world, you have everything there, and you start to tick them off as quickly as you can.
Neil will remember me insisting on this at various points, but we will tend to get the teams together with Treasury and departmental colleagues, to have a workshop session to work through that with everybody, from the policy and technical angles, in one room, together, as well as, potentially, colleagues from the Insolvency Service, to make sure that, when we are assessing and deciding which to go through as our preferred options, we have the right ones, and we are assessing them against the right things.
Jess Glover: I would add, from a Treasury point of view, that the default is definitely against intervention and spending taxpayers’ money. We consider the individual cases through the prism of the framework and the principles that I laid out. Those very high bars need to be met in order for it even to be considered. Once the company is on our radar, to that extent, then the process that Hannah laid out then takes place.
Q81 Sir Geoffrey Clifton-Brown: My last question was going to be on the radar. You will not be able to give us examples, but are there examples, without you telling us what they are, where you have come up with a solution that has actually never got into the public domain because you have come in with an intervention?
Hannah Gray: My team’s KPI is that there are no surprises and you see nothing.
Q82 Chair: I know what you mean, but it sounds very untransparent.
Hannah Gray: We work very hard to ensure that there are interventions happening, which are not financial interventions but along the lines of the things that Sir Gareth has discussed, or perhaps through variations to our contracts and our procurement, which help make sure that the company survives and the right elements are protected, but that we are not taking taxpayers’ money and doing something there. It is a vanishingly small number of cases that hit the threshold to come through the Treasury.
Q83 Chair: Can you give us a range or proportion, roughly? There is that very useful annex that I highlighted earlier, figure 8, which is interventions since 2001. This is for the last 22 or 23 years. I cannot see the total of those, but you are saying that is a small percentage.
Hannah Gray: In the last six years since I have done this job, we have been involved in over 200 cases. These are companies about which Departments have come to us, wanting to talk about options. You can see from the Report the number of financial interventions that have happened.
Q84 Sir Geoffrey Clifton-Brown: I have one more question for Sir Gareth. We are great proponents in this Committee of transparency. We think that sunshine is the best form of disinfectant. What is the tension, in letting a big public contract, between commercial in confidence and publishing the details of that contract?
Sir Gareth Rhys Williams: May I quickly build on what has been said, and then I will come to that? As a comparative number for Hannah, I think we have had 82 corporate resolution plans since 2021, and four, five or six insolvencies. That is the nature of our iceberg.
To your question, for pretty much every contract, except those that are regarded as secret, which is usually a national security wrapper, there will be a contract award notice posted. It depends whether it is a central Government contract or a wider public sector contract. The thresholds are slightly different. The actual detailed contract will also be published. It may well be redacted. What needs to be redacted will be discussed with the company during the negotiation of the contract. Every now and then, the NAO has a look at that.
Going forward, in the new Procurement Act, we are harmonising those thresholds. The number of smaller contracts that need to have the contracts published is reducing, because the burden was quite heavy on smaller contracting authorities who are spending not very much. Everyone still needs to do their contract notice. What is different under the new Procurement Act is that there are many more notices at different stages of the procurement journey. The citizen will be able to see, on the same database that they currently would look to, or a company like Tussell, which does analysis, many more of the procurement stages as things move through and progress.
The key difference that enhances transparency is on modifications and extensions. At the moment, if you modify a contract, you do not necessarily have to republish the contract. It is hard to track what the modification has been. That has been fixed with the new Procurement Act.
Similarly, at the moment, there are contract award notices for frameworks. You can see those, and you can see the contracts that are let, but it is not necessarily easy to make the link in terms of which contract came from which framework. Both are there. In the future, they will be hardwired together, so anyone will be able to see how many contracts, at what price, and so on, have flowed from each contract. That is the subject of the transforming public procurement IT programme that we are beavering away at. The target is to get the statutory amount of that up and running by October.
That is where we have talked to you before. The transparency has dramatically improved over—
Chair: Yes, we have talked to you about this for at least a decade or so. It has certainly got better, but, as you acknowledge, there is still some progress to be made. It is all taxpayers’ money being spent by the private sector, but it is nevertheless taxpayers’ money, and it is delivering public services. The more transparency that is possible, the better.
Can I thank our witnesses very much indeed? It has been a very interesting discussion. We have gone through some of these things in detail in individual cases. Ms Gray, you set it in context that roughly 10% of the cases that you are dealing with actually lead to Government intervention. It has been very interesting to hear what you are doing to prevent that having to happen.
The transcript of this session will be available on the website uncorrected in the next couple of days. We will be producing a report on this, probably before the Easter recess. Thank you very much indeed.