Strategic commercial interventions: assurance playbook

Commercial Due Diligence Guidance

What is it?

Commercial due diligence guidance has been developed to support Scottish Government (SG) colleagues when approaches are made to SG from companies seeking financial support. Each case is unique and complex, they should be considered on their own merit. Notwithstanding the need to take a flexible approach based on the time scale that a decision is required, and the nature of the intervention sought, there are some common principles that should be followed to maximise the chance of a successful intervention and mitigate against any unforeseen risks.

Undertaking appropriate due diligence is a critical part of any decision-making process and should always be undertaken as soon as possible when considering an intervention. The process allows SG officials to better understand the business, the benefits and risks, and crucially any gaps in information before options or a recommendation is put in front of Ministers.

The guidance outlines the strategic and policy considerations before highlighting more detailed due diligence required with the professional assistance of external advisers as part of a two-stage process. The guidance sets out how to complete a business case with specific considerations for strategic commercial interventions.

Three stage intervention assessment process.

Stage One

Due Diligence

Undertaking appropriate due diligence includes gathering relevant information, understanding that data and outlining the possible impacts which will need to be considered.

Stage Two

Business Case

The business case draws from this information using the HMT 5 case model (strategic, economic, commercial, financial and management) to set out options.

Stage Three

Decision Making

The completed business case then forms part of the decision-making process between officials, the accountable officer and Scottish Ministers.

The contents of the guidance cover:

Preliminary Checks

• Reputational due diligence to check for issues such as human rights abuses.
• Considerations for creating a public body.
• International trade to ensure compliance with international trade rules as set out by the World Trade Organisation.
• Fair Work with considerations such as the real living wage, gender pay gap and zero hours contracts.
• The wider policy landscape as set out in the National Strategy for Economic Transformation.

Detailed checks

The guidance details the following to aspects to consider for detailed checks:

• Contingent liabilities
• Appointing commercial advisors
• Commercial and financial considerations
• Subsidy control
• Technical

What is its purpose?

Due diligence is a crucial first stage assessment in any intervention process that a business case would then draw from. It should be seen as an information gathering exercise to ensure SG has all the necessary information at its disposal (financial, legal, commercial, subsidy control technical etc) and that it has carried out all the necessary checks prior to a decision being made. Given the nature of these strategic interventions and the more pressing timescales (compared with other SG investments) there will be varying levels of detail depending on the case.

Due diligence is one of the key tools in SG’s overall risk management framework helping to identify and manage risks that could threaten the effective use of public funds. It is a mandatory control point in the project management cycle designed to provide additional information that will assist delivery of an intervention and inform related decision making in relation to any such intervention.

This guidance is designed to obtain a sufficient level of assurance of a potential project prior to entering into a formal agreement. It allows SG policy teams, Accountable Officers (AOs) and Scottish Ministers to develop a deep understanding of the potential intervention, to identify and understand the potential risks, liabilities and consequences of entering into the transaction and what controls may be needed to mitigate any risks. It also gives Ministers sufficient assurance that funds will be protected and used effectively and allows for informed decisions to be made.

There is a risk that without robust and timely due diligence, Scottish Ministers may not be presented with the full set of information to determine delivery and reputational risk. Undertaking appropriate due diligence early in a process provides a solid base for future decision making by highlighting risks which merit more detailed examination. This guidance ensures best practice is followed by officials in relation to undertaking due diligence in consideration of any SG financial support or intervention.

The due diligence guidance is intended to assist officials approach the early stages of any potential intervention by:

• providing direction on how and when to carry out due diligence;
• signposting to what elements need to be considered;
• highlighting information that needs to be sought from a variety of sources;
• indicating who needs to be engaged (internally and externally); and
• setting out how this can all be used to inform the business case for intervention.

The guidance is in an accessible format and is intended to be used in conjunction with the Scottish Public Finance Manual’s Business Investment Framework.

When should it be used?

The guidance has been developed to support officials undertaking due diligence and to make a judgement as to the suitability of a business seeking SG financial assistance. The information gathered and assessed can be used both on a standalone basis to help assess the inherent risks of a potential intervention. It can also be used to inform the associated business case and AO assessment, and ultimately the decision-making process by AOs.

Useful Resources

Subsidy Guidance