FGN2023-02 SPFM amendments: November 2023
FGN2023/02 SPFM amendments: November 2023
The purpose of this note is to announce recent amendments to the Scottish Public Finance Manual (SPFM), specifically Annex A: Business Investment Framework in the chapter on Borrowing, lending and investment.
Borrowing, lending and investment – annex A
Annex A to the chapter on Borrowing, lending and investment provides additional guidance in respect of investment in private businesses by Scottish Ministers. The existing guidance supplements the guidance contained within the main chapters of the SPFM and provides a clear and appropriate framework for Scottish Government investment.
The guidance contained within this Annex has been strengthened based on recent discussions with Audit Scotland. This Annex represents the Scottish Government’s Business Investment Framework.
1. Key changes
The ‘Business Investment Framework’ addresses key Audit Scotland recommendations set out in previous audit reports and Public Audit Committee appearances, building upon existing guidance within the SPFM.
It distils key steps when Scottish Ministers are considering an initial or follow-on investment in, or financial support to, private businesses. It provides a framework for the development of proposals and advice to Ministers, and a structure for decision-making.
The improvements it makes are:
- addition of Proportionate Due Diligence wording
- expanded guidance regarding Accountable Officer Tests
- additional guidance on Risk Exposure
- Public Bodies duties – note ministerial approval is required to establish any Public Body, further guidance on Saltire
- Monitoring and Management expanded
- evaluation section separated and expanded
- exit arrangements expanded
2. Proportionate Due Diligence
Any support provide by the Scottish Government and its associated public bodies must be contingent upon the satisfactory completion of proportionate due diligence. The extent and depth of the due diligence will depend on the size, risk and nature of the investment being considered. This is a judgement to be considered by the relevant Accountable Officer.
It is critical that appropriate advice is taken both from expert staff within the Scottish Government – including Finance, Legal Subsidy Control, SCAD, Procurement, and policy areas – as well as external financial, commercial and legal advisers at a level that is appropriate to the complexity and sensitivity of the proposed arrangement. Where a policy area is considering the use of external appropriate advisors, the advice of internal specialists must be sought to ensure the Scottish Government is acting as an informed buyer and is delivering value for money.
3. Accountable Officer Tests
The financial accountability and assurance framework and the applicable scheme of delegation in place at the point of investment must be followed and this will determine the appropriate level of Accountable Officer and Ministerial approval required to proceed with the proposed investment.
Investments made by the Scottish Government with are of a size and nature as to be classified as novel and contentious must be approved by the Principal Accountable Officer as well as the appropriate cabinet Secretary and Deputy First Minister/First Minister.
4. Risk exposure
Due to the nature of the investments covered by this guidance, the level of risk is greater than most routine public spending. As such, Scottish Ministers must consider the risks of each investment against prevailing risk statements that have been developed in line with the Risk Management section of the SPFM. It is crucial to document the key risks and their short/long-term implication for Ministers. Corporate risk registers must be updated accordingly and the strategy to mitigate and manage those risks must be clearly documented.
The business case should analyse and quantify the potential risks and expected outcomes as a result of the investment including a cost/benefit analysis of different options.
Scottish Ministers’ maximum potential financial exposure must be estimated. Assumptions should be subject to sensitivity analysis to understand the potential impact of changes to assumptions on the financial viability of the investment as well as the potential financial exposure of the investment.
Public bodies duties
It is important to note that Ministerial approval is required to establish any Public Body. Further guidance on specific considerations is available on the Public Bodies Saltire page.
5. Monitoring and management
Approved investments must be underpinned by a robust monitoring regime to ensure the protection of investment and oversight of the changing nature of the financial risk to which taxpayers are exposed. There should be regular monitoring checks on at least a quarterly basis to ensure that good management arrangements are in place, the business case remains up to date and there is an active plan to secure benefits associated with the intervention. It will be necessary to evaluate the carrying value of the investment using prevailing accounting standards. This is to be led by relevant policy areas and supported by Finance officials.
Every decision to invest must be accompanied by a robust management plan. This will include ensuring there are adequate sponsorship arrangements in place to manage the asset. Where there is any additional investment, the original business case must be revisited to ensure the new requirements meets investment criteria. The business case must be updated to reflect the new position including the financial impacts this may have.
6. Evaluation
Investments must be subject to periodic implementation evaluation. The extent and timing of an evaluation will depend on where the Investment is within the life cycle, the scale of the investment, as well as any unique attributes. The economic impact should be understood and every investment should be subject to a full outcome evaluation in line with HMT’s Magenta Book. The requirement for an evaluation should be reviewed on an annual basis.
7. Exit arrangements
Where possible, potential exit strategies must be identified and subject to periodic review. Officials must ensure there are periodic review points at which the SG and the entity formally review the need for Ministers to hold an investment where there is no defined exit. These review points should consider performance against the initial strategy. In addition as well, timeframes and, if circumstances change, it will be necessary to perform a reappraisal of the investment. Exit strategies should be accompanied by a benefit realisation plan to secure value for money outcomes.