Finding buried treasure?: Using the balance sheet to drive PFM

Ian Carruthers Chair, CIPFA Standards

Olivia Halliday Head of Balance Sheet Management HM Treasury

Public Finance Live – 9th July 2019

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Finding buried treasure?: Using the balance sheet to drive PFM

Session Overview

● Latest international thinking - 2018 IMF Fiscal Monitor

● HMT Balance Sheet Review:

● Aims and progress to date

● Examples – assets and liabilities

● Balance Sheet Review / Spending Review 2019 plans

● What can you do about it?

● CIPFA Good Practice Framework

I. The Public Sector Balance Sheet

Aggregate PSBS for 38 countries

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities

US$103 Trillion or

216 percent of GDP

195 percent of GDP

3 Source: IMF Public Sector Balance Sheet Database.

GG Debt 94 %

Pension Liabilities

46 %

Others 56 %

Financial Assets 97 %

Infrastructure 71 %

Natural Resources

37 %

Others 11 %

Net Worth 21 %

I. The Public Sector Balance Sheet

Individual country PSBS for 38 countries

4

II. Why does it Matter?

Large Assets → Large Revenue Potential

Potential Revenue Gains from Improved Asset Management (in percent of GDP)

Source: IMF October 2018 Fiscal Monitor.

Distribution of Annual Returns from Public Corporations (Percent Return on Assets)

0

5

10

15

20

25

30

35

40

10

Median = 0.6 percent

0

1

2

3

4

5

6

Non-financial public corporations

Government financial assets

Total

Per

cen

t o

f G

DP

Current returns

Potential Improvement

1

2

3

5 New Zealand case study

II. Why does it Matter?

Stronger balance sheet → lower interest

6

Source: IMF October 2018 Fiscal Monitor.

III. Examples

Evolution since the crisis

Public Sector Balance Sheet (Weighted average of 17 countries, percent of GDP)

Source: IMF Fiscal Monitor, Fall 2018. Note: The data excludes natural resource assets and pension liabilities.

100

110

120

130

140

150

160

170

180

190

200

2000 2002 2004 2006 2008 2010 2012 2014 2016

Assets

Liabilities

0

5

10

15

20

25

30

35

40

45

-65

-60

-55

-50

-45

-40

-35

-30

-25

-20

2000 2002 2004 2006 2008 2010 2012 2014 2016

Net Worth (right scale)

Net Financial Worth (left scale)

Assets and Liabilities

Net (Financial) Worth

III. Examples

UK – Impact of the crisis

-400

-300

-200

-100

0

100

200

300

400

2000 02 04 06 08 10 12 14 16

Other assets

Financial public corporations assets

Financial publiccorporations

liabilities

Pension liabilities

Other liabilities

Net Worth

Assets

Liabilities

UK – Public Sector Balance Sheet (percent of GDP)

8 Source: October 2018 Fiscal Monitor

Evolution since the crisis

Using the balance sheet to drive PFM in the UK:

The Balance Sheet Review

1. Balance Sheet Review:

what it is looking to achieve, its approach and what it has delivered so far

2. Finding buried treasure:

2 examples - Knowledge Assets and DNAR

3. Managing exposure to liabilities:

an example - managing contingent liabilities

4. What next for the BSR?

9

Brian Eno….

10

“I like bureaucrats…

They get a bad deal because they don't look as

glamorous as artists

But actually what they're doing is stabilising

knowledge, keeping things running,

….and sometimes innovating quite radically”

The Balance Sheet Review (BSR)

– what is it looking to achieve?

11

1) Optimise utilisation and value of assets

2) Improve return on assets

3) Reduce cost of liabilities

4) Reduce risk or improve

compensation for bearing risk

System-wide improvements

to balance sheet management

Embed better balance sheet

management in decision

making

Opportunities

translating into

Spending Review

savings

Fiscal sustainability Long-term objectives

Short-term objectives

The BSR was launched in 2017:

“The government holds £1.7 trillion of assets and £3.7 trillion of liabilities on its balance sheet. The government is launching a Balance Sheet Review to make more effective use of these holdings, looking at areas such as estates optimisation, improving the return on investments, and reducing the cost of liabilities. The review will help to release resources for further investment in public services and improve the sustainability of the public finances.”

The Balance Sheet Review approach

12

What has it achieved so far? Cross-cutting announcements

13

BSR Update

Budget

2018

Intangible assets

Controlling contingent liabilities

Retiring PFI

Reducing inflation

exposure

Balance Sheet

Statistical Reporting

Debt owed to Govt

Asset sales

and loans

Property

• Stricter new controls over

issuances of guarantees & CLs

• Exploring options to improve

incentives & compensation on

insurance to the private sector

• No more PFI

• new centre of best practice

in DHSC

• PUBLISHED in 2019: Stricter

disclosure requirements for

asset sales

• Revised budgetary treatment

for financial transactions

• new debt management targets and

measures on overdue debt, debt

management strategies and risk to

be implemented in 2019-20 CBG

• continued use of DMI

• reduce the proportion of index-

linked gilt issuance

• Interest on Index-linked

Savings Certificates from May

2019 based on CPI rather than

RPI

• First-ever geo-spatial Digital

National Asset Register

• Whitehall estate on single

balance sheet within 5 years

• Report: Getting Smarter about IP and other IA in the Public Sector

• Estimated £150bn could be recognised

The Treasury looked into intellectual property and intangible

assets in the public sector and published a report

14

Management

Value

Barriers

Context

Recommendations

SPINTAN estimates: £150bn

£150bn

£34bn

Returns on investment

@ 3%+ p.a.

Recommendations Valuation

Protection Reporting

Guidance

Investment

Incentives

Central support

Network

Recognition

Data (Cross-cutting)

Examples of Knowledge Assets:

under-recorded and under-exploited

WGA Accounting estimate: £36bn SPINTAN estimate: £150bn

• Less likely to be recognised under

accounting definitions

Software

licences

Patents • Know-how

• Skills

• Ideas

• Innovation

• Training

Methodologies &

standards

Trademarks &

brands

Data &

Analytics

Development

costs

• More likely to be recognised under

accounting definitions

Identification Insight Infrastructure Incentives Investment

Report identified 5 barriers to better management of knowledge assets:

+

5 offices

around the

world

Unlocking the potential of Knowledge Assets

16

Cross-government team, with expert input from Dr Andrew Mackintosh, are conducting a

study looking at how to implement the recommendations made at Budget 2018 looking

at:

Guidance Establish good

practice

Reporting Highlight good

practice, drive

progress

Investment Use of private

sector, can be

risky and long-

term

Central

support Provide access

to right expertise

Valuation To identify

opportunities and

support

management

Network Build capability

and facilitate

links

Incentives How do you get

public sector to

engage – orgs

and individuals

Protection Particularly

where

commercial

potential

Recognition Consistent and

networked

Data Look at impact of

open data

presumption

Look out for: Knowledge Assets report to be published later this year

Finding buried treasure in property:

the Digital National Asset Register (DNAR)

17

• a ‘digital estate’ – a complete and secure public data record of property assets

• joining up local and national public estate data, and socio-economic data

• providing a strategic view of all public estate and data to inform policy

• using geospatial analytics

• bringing forward registration of all publicly owned land to 2022

Aims

• More productive use of Estate data to maximise value and create jobs and growth

• More strategic asset management across public sector bodies

• Better collaboration across the public sector, releasing more opportunities across

a wider portfolio across more organisations

• Easier to identify and evaluate opportunities - finding land for development and

assessing cost, utilisation and environmental performance

• Helping to deliver public services where they are needed most

OGP to make future announcements regarding implementation and launch

Managing exposure to liabilities: A new approval framework for

contingent liabilities (for PS bodies reporting to parliament)

18

Contingent Liabilities

Approval Regime

1.Rationale

2.Exposure

3.Risk & return

4.Mitigation & management

5.Affordability

Profile of UK Government

Contingent Liabilities

Remote

contingent

liabilities

Probability of

occurrence:

≤ 10%

Non-

remote

contingent

liabilities

Probability of

occurrence:

10% - 49%

Provisions

Probability of

occurrence:

≥ 50%

% GDP

Source: Whole of Government Accounts, 2016 to 2017

Managing exposure to liabilities: Each new contingent liability

goes through a checklist composed of 5 key elements

Contingent Liabilities Approval Regime

• Why govt intervention necessary?

• Why a contingent liability?

• What alternatives explored? 1.Rationale

• What is the size?

• What is the maturity?

• What is govt’s exit strategy? 2.Exposure

• What are triggers for crystallisation?

• What is likelihood of crystallisation?

• What is expected loss vs. return? 3.Risk & Return

• Who is managing the risk?

• What risk mitigation tools are in place?

• Is the taxpayer adequately compensated?

4.Mitigation & Management

• Can the dept’s budget absorb the risk?

• What is the residual fiscal exposure?

• What is the impact on borrowing & debt? 5.Affordability

What next for the BSR?

20

• Building on BSR departmental reviews, BSR will continue to look at how

to improve the management of department’s individual balance sheets

and inform the Spending Review

• Continuing cross-cutting workstreams and building Government’s

capability to manage its assets and liabilities

• Further strengthening balance sheet risk management

• HM Treasury will publish the final conclusions from the BSR at Spending

Review 2019, setting out a strategy for the responsible management of

public sector wealth.

Reflecting on the BSR:

what we have learnt that might help you find buried treasure

• Importance of data

• (what gets measured gets managed) Data

• Identified capability gaps (such as the management of contingent liabilities, knowledge assets)

Capability

• The importance of establishing the right incentives for those responsible for managing assets and liabilities

Incentives

• The benefit of taking a whole of government approach to understand risks/opportunities across assets and liabilities at a holistic level

A holistic approach

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Balance Sheet Management in the Public Services: 2017 Good Practice Framework

Balance sheet management: Definition

‘The active assessment and management of all the

organisational, operational and financial activities and

transactions that determine or influence balance sheet values

to promote effective stewardship of public money and value for money in use of

resources’

Balance sheet management categories

Governance Risk & Controls

Accounting & External Reporting

FM & Decision Making

Operational Management

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Balance sheet management categories (1): Governance, Risk and Controls

GRC1 In organisational culture, appropriate emphasis is placed on balance sheet management activities and considerations

GRC2 Balance sheet management requirements are addressed coherently and comprehensively across all relevant strategies and plans

GRC3 Balance sheet management responsibilities are identified and assigned to appropriate people

GRC4 The organisation’s decision-making framework is effective and requires appropriate consideration of balance sheet implications

GRC5 Appropriate levels of assurance are provided over all aspects of balance sheet management

GRC6 Financial and operational risk management activity pays due regard to balance sheet drivers and impacts

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Balance sheet management categories (2): Accounting and External Reporting

AER1 The relevant accounting framework is understood and applied correctly

AER2 Accounting systems and processes, including related feeder systems, are fit for purpose

AER3 Complex accounting areas are considered and addressed

AER4 Judgemental areas are underpinned by appropriate analysis and management review

AER5 Accruals and prepayments are calculated on a timely and appropriate basis

AER6 Provisions for liabilities and charges, contingent liabilities and commitments are identified and treated correctly

AER7 All balance sheet external reporting requirements are identified and addressed

AER8 Audit trails and evidence are accurately recorded and maintained

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Balance sheet management categories (3): FM and Decision Making

FMD1 Balance sheet considerations are properly addressed in financial planning and budgeting

FMD2 In-year management accounting properly considers balance sheet impacts in determining current position and forecast outturn

FMD3 Internal reporting properly reflects balance sheet impacts and issues

FMD4 Activity analysis and costing consider balance sheet impacts

FMD5 Financial support to decision making includes appropriate consideration of balance sheet issues and impacts

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Balance sheet management categories (4): Operational Management

OM1 Asset management is effective in supporting the delivery of the organisation’s outputs

OM2 Stock management is effective in supporting delivery of the organisation’s outputs

OM3 Debt management processes are effective

OM4 Creditor and liability management processes are effective

OM5 Provisions for liabilities and charges are properly managed

OM6 Treasury management processes are effective

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Improving balance sheet management: Understanding your balance sheet

Component Value (£k)

Materiality: Balance sheet

Materiality: Operating costs impact

Criticality to delivery

Past experience

External scrutiny

Judgement area

Tangible assets XXX

Intangible assets XXX

Investments XXX

Stocks XXX

Debtors XXX

Bank and cash XXX

Creditors XXX

Provisions XXX

Reserves XXX

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Improving balance sheet management: CIPFA Self-Assessment Tool

● Designed to help you review and assess balance sheet practices and activities operating in your organisation

● Series of ‘characteristics’ supporting all Good Practice Statements for each of the four overall balance management categories

● Assess using same four-point assessment scale as used in CIPFA FM Model:

1. Hardly

2. Somewhat

3. Mostly

4. Strongly

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CIPFA Self-Assessment Tool: Realising the benefits

1. Confirm the material and significant balance sheet areas

2. Consider the results of self-assessment

3. Identify areas of focus for improvement

4. Develop the improvement action plan

5. Implement the improvement action plan

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Ian Carruthers Chair, CIPFA Standards

ian.carruthers@cipfa.org

Questions and discussion

mailto:ian.carruthers@cipfa.org