NAO: The government’s new Financial Transaction Control Framework needs strengthening
The National Audit Office’s new report assesses whether the government’s new Financial Transaction Control Framework offers value for money to the taxpayer, says Rachel Fenn
The government plans to increasingly use financial transactions (FTs) – such as loans to businesses or equity investments – to pursue its policy goals. As at March 2024, the government’s portfolio of FTs was valued at £203bn, covering interventions in areas such as clean energy, housing and business support. As the scale of these investments grow, so too does the importance of managing them well.
Alongside the Autumn 2024 Budget, the Treasury introduced the Financial Transaction Control Framework with the aim of enhancing how these investments are managed, as even small losses on investments of this scale can have meaningful consequences, which makes the benefits of stronger management clearer.
Now that the government measures national debt on a Public Sector Net Financial Liabilities basis, borrowing to fund a FT does not immediately increase debt. But this only holds if the investment generates a return at least equal to the government’s cost of borrowing.
Our new report assesses whether the Framework is well-designed and whether it is being implemented effectively. We found encouraging progress, alongside clear opportunities to strengthen it further.
The Framework sets out requirements for approving, managing and reporting on FTs. It also introduces the concept of “public financial institutions” – organisations with the specialist expertise and structures to deliver most new, large-scale FTs on behalf of the government. The Treasury has designated five such bodies so far and, together with UK Government Investments and Whitehall departments, has started to apply the Framework’s core principles. Full and consistent implementation is still developing, with further progress possible as organisations embed the Framework.
The Treasury has not carried out a formal assessment of the main risks inherent in using FTs. Without this, it is harder to focus actions on the issues that matter most – such as whether departments are taking on too many lower-quality investments that may not deliver returns high enough to cover borrowing costs, or whether the government has enough visibility over the financial risks and returns these investments create.
Clarity and guidance
Implementation of the Framework’s key principles also varies, with only some embedded across organisations. Departments and public financial institutions told us that they need clearer, more practical guidance on how to work together on technical issues, such as setting risk-adjusted rates of return.
When the original public financial institutions were designated, three did not fully meet the Framework’s criteria and the designation process still lacks transparency and minimum standards. Strengthening designation arrangements would help ensure that investment activity is concentrated in organisations with appropriate expertise and governance. There is scope to strengthen oversight arrangements. The Treasury has no measurable objectives for the Framework and responsibilities for monitoring compliance remains unclear. UK Government Investments has improved transparency by publishing the first consolidated view of the government’s FT portfolio, but data limitations remain.
The government plans to spend £23.8bn on FTs over the Spending Review period to 2029-30. Without strong controls, clear accountability and reliable data, the scale and complexity of these investments create risks to value for money.
To help maximise the benefits of the Framework, we recommend that the Treasury:
- Sets out a delivery plan for fully implementing the Framework
- Works with relevant risk-control experts to strengthen the Framework
- Establishes a clear and proportionate system for monitoring compliance with the Framework
- Provides more consistent, centrally coordinated guidance to support effective implementation of the Framework
- Ensures that UK government Investments collects proportionate and accurate data on the government’s FT portfolio
- Formalises its process for designating public financial institutions
The Framework is an important step towards stronger management of the government’s growing investment activity. But the government must build on this to realise the Framework’s full value. Effective implementation presents opportunities to support better investment decisions, help safeguard public money and support fiscal sustainability.
Rachel Fenn is senior audit manager (value for money) at the National Audit Office