2.18 The Government recognises that investing equity in projects means sharing in the risks of related to the performance of the project, as well as the returns. There are several ways in which project risk will be managed in each project in order to minimise public sector exposure.
2.19 During the procurement process, as is the case now, projects will go through the integrated assurance and approval arrangements set out in April 2011 and a business case approval process. Projects will be assessed for affordability, value for money and deliverability at three key stages4. Detailed due diligence will be performed by both the public and private sector equity investors in addition to due diligence undertaken by debt providers, to assess project risks as so inform the basis of their investment decision.
2.20 The director appointed by the Treasury central unit will have board representation with associated voting rights, including on certain matters that will be reserved to a decision by all or a majority of shareholders. However, the Government recognises that there may be circumstances in which it is not appropriate for the public sector to invest in projects. While the assumption is that the public sector will act as a co-investor in all projects, this may not always be the case.
2.21 Establishing a central unit to undertake and manage all the public equity holdings will allow the Government to take a portfolio approach to investment, thereby spreading its risk across a number of projects. For example, if one project suffers impaired performance, another might perform better than anticipated and generate equity returns above those which were forecast. A portfolio approach to investment, therefore, helps to reduce the overall risk to the Exchequer.
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4 Major project approval and assurance guidance (April 2011). http://www.hm-treasury.gov.uk/d/major_projects_approvals_assurance_guidance.PDF