Strategic commercial interventions: assurance playbook

Introduction

Background and Purpose

The Strategic Commercial Assets Division (SCAD) was created to ensure the effective governance and stewardship of assets where the Scottish Government (SG) has a financial stake and/or provides a sponsorship function. As well as managing SG’s shareholder interests, the division provides a coordinated response to companies in distress in close collaboration with Enterprise Agencies and working with cross-portfolio policy colleagues to support ministerial engagement with businesses. We continue to develop and improve our approach to assurance across the current portfolio of assets of Ferguson Marine (Port Glasgow), the GFG Lochaber Guarantee, Glasgow Prestwick Airport and the ongoing administration of Burntisland Fabrications Ltd. The approach to interventions are considered as part of the annual review of SG’s consolidated accounts by Audit Scotland and we are committed to upholding the principle of transparency whilst also protecting commercial interests in line with Freedom of Information legislation.

As part of the drive for continuous improvement and to take a portfolio approach to managing these assets, SCAD has developed specific and targeted operating procedures, detailed guidance and signposting to existing best practice as reference documents for those who are managing interventions and providing advice to Ministers. Although primarily targeted towards dealing with distressed businesses, the commercial principles will have a wider application and will be of interest to the wider public sector.

The Playbook sits underneath and supports the Scottish Public Finance Manual (SPFM) (including the Business Investment Framework) and the HMT Green Book. It will act as a central repository for targeted information, guidance and templates to support the business intervention lifecycle from acquisition through to asset management and ultimately divestment. The Playbook serves as a comprehensive toolkit and ‘one stop shop’ for operational policy.

Intervention Lifecycle

The Playbook is structured to mirror the lifecycle of an intervention which fall into three main phases; Investment, Management and Divestment. The workstreams that make up the Playbook can sit neatly into one distinct phase (such as the Stand-up Process) or span multiple phases of the lifecycle (e.g. Commercial Due Diligence Guidance) depending on the breadth and intended application of the guidance included within them.

Whilst the workstreams look to address and guide officials through each phase of the intervention lifecycle, many workstreams do overlap and will be utilised across the intervention lifecycle. Figure 1 below shows the various workstreams which make up the playbook and when they may be used in the intervention lifecycle:

An overview of each phase of the intervention lifecycle is set out below:

1. Investment

SG is a lender of last resort but stands ready to consider financial support mechanisms for businesses facing difficulties that cannot be addressed by a market response, and the business is considered critical to the economy or is a long-term strategic asset.

The Investment phase of the intervention lifecycle typically involves gaining an understanding of the issues facing a business in distress, assessing available options, considering all potential risks and providing a recommendation to Ministers regarding the provision of financial support to a business.

Such financial support could comprise, for instance a loan, financial guarantee or the purchasing of a company’s assets, which could result in taking a business into public ownership. Each type of intervention presents both risks and opportunities. Our Enterprise Agencies are the main point of contact for businesses in distress and they assist hundreds of businesses annually.

The Scottish National Investment Bank can also provide finance to businesses on commercial terms. It is only on rare occasions and very specific circumstances where SG would choose to intervene to support a strategic business. The rationale for SG to intervene is likely to achieve strategic economic objectives for the country and/or to protect jobs.

2. Management

During the management phase of the lifecycle, SG has provided the initial financial support to a business. This phase will determine the return on the initial investment made by the taxpayer. SG actively monitors all strategic interventions where it has a financial stake. Distressed businesses are, by their nature, challenging to turn-around. Some of the levers that SG has to maximise the chances of a successful intervention include; ensuring there are good governance arrangements, clear roles and responsibilities and agreed strategic objectives for the business.

As part of the Management phase of the intervention lifecycle, officials monitor SG’s strategic assets from three main perspectives; management delivery, asset performance, and assurance, by setting and tracking asset-specific KPIs. This ensures more effective monitoring of asset performance and tracking progress against objectives. The management phase involves embedding continuous improvement through business processes and risk management. There may also be additional requests for financial support which should be considered as part of the wider business case.

3. Divestment

It is not always the intention for SG to become a permanent investor in private enterprise and we should seek to consider divestment opportunities when appropriate conditions are met. This phase of the intervention lifecycle therefore predominantly centres around the consideration and application of the exit strategy for each asset. The exit phase follows the management phase where control points have been agreed to consider the appropriate timing of divestment of the asset, subject to certain pre-agreed criteria being met, such as performance of the business and whether intervention objectives have been achieved. It is important that any exit strategy revolves around maximising value and ensuring a smooth transition for the business where applicable.

For businesses in public ownership there may be approaches to acquire an asset which may prompt a market testing and divestment exercise. It is crucial in any such exercise that procurement and subsidy control law is adhered to, and specialist input is likely to be required. The Playbook is structured around this asset lifecycle, although in reality each case will be slightly different and may diverge from this structure. It is anticipated though that the operational policy outlined in the Playbook will be applicable to most scenarios and will be a useful starting point to navigate the complex commercial decisions that are required.