While not without challenges and controversy, partnerships with the private sector still present huge benefits to the public sector. They bring the right expertise and resources that wouldn’t otherwise be available.
Suitable private sector partners can help accelerate the delivery of ambitious projects for the public sector. These include local and regional place-based economic regenerations, Levelling Up projects, and housing schemes, as well as projects delivering ESG benefits and transitioning the UK to a net-zero emissions economy.
The public sector has a duty to manage resources responsibly and achieve value for money. When public sector organisations are considering proposals from potential private sector partners, undertaking robust and sufficient due diligence is crucial. Due diligence should not be viewed as a ‘tick box’ exercise. It is an important process to ensure informed decisions are made and any red flags, concerns and risks are identified, considered and appropriately mitigated to protect taxpayers’ money.
The Government’s recent local government finance policy statement demonstrates the difficulties facing local authorities, as well as the pressures facing central government departments when it comes to making investment and spending decisions. Tough choices are being made across the board, maintaining a need and desire to invest in service delivery, economic regeneration and housing projects. The tight state of national finances, alongside wider economic volatility, means opportunities for risk must be managed as these projects are developed.
Due diligence should always be risk-based and proportionate. The scope and depth of diligence should reflect the value and risk profile of the projects, as well as the profile and background of the delivery partners being evaluated.
There are six recommended areas:
1 Financial stability – before the project begins, tailored financial due diligence is needed to fact-check the delivery partner’s financial history (ie, profitability, liquidity and solvency position) to assess its financial standing, how it is being funded operationally and the risk of the entity failing to deliver due to a lack of financial resources.
2 Reputational risk (red flag checks) – the suitability and reputation of the delivery partner as an organisation in the public domain and its directors and beneficial owners should be considered (ie, adverse media coverage, allegations of corruption or wrongdoing, or inclusion on sanctions and watch lists). Knowing who you are working with is fundamental, especially in a world of heightened awareness through social media.
3 Business plan and proposal (deliverability) – the business plan for the project that is being proposed will need to be considered to assess the delivery risk. Does it stack up or still have gaps? Assess the associated financial forecasts so that the numbers are backed up by supporting assumptions and evidence, and perform stress testing and sensitivity analysis.
4 Governance and controls – understanding how the delivery partner is structured, governed and its level of internal controls will ensure it can deliver the project. This will also show how it operates generally and manages risk.
5 Funding structure (of the public sector investment) – public sector organisations should understand the features and risks associated with the delivery structure proposed by private sector partners. This determines the risk and reward of the project, as these differ depending on the funding type (such as equity investment or debt funding).
6 Subsidy control – in situations where public money is going to the private sector, such financial intervention by the public sector organisations must comply with the relevant UK subsidy control regulations in a post-Brexit world.
Are you in the public sector and looking to partner or contract with private sector organisations (UK and abroad) to deliver publicly funded projects or transactions – and hope to answer some of the areas considered above?
If you would like to discuss due diligence for the public sector, get in touch with Brian Ng.
