Case studies

We found in 2013 that the Department for Culture, Media & Sport did not model the contractual risks of its rural broadband contract to decide whether the price paid for the balance of risk was reasonable. It transferred much of the downside risk to the supplier, such as increased costs and lower revenues, but also the upside risk of the supplier getting larger volumes than expected. Similarly, in the shared service centres programme departments were able to delay their moves as long as they were able to maintain their legacy systems. The Cabinet Office argued that it had transferred the financial risk of delays to the programme through its contracts. However, neither the contractor nor the Cabinet Office had the power to prevent delays, so this risk could not reasonably reside solely with the contractor.

In our 2012 report on the first carbon capture and storage competition, we found that the Department of Energy & Climate Change did not have a clear strategy to address commercial risks. The Department requested frequent external reviews which advised of significant risks. However, it continued without fully considering the cost implications because the potential strategic benefits outweighed its costs. We found that as expected costs increased the project became unaffordable, and negotiations with the one remaining bidder were ended by the government.

In 2008, the Ministry of Defence contracted a supplier to develop and manage a new approach to military flying training (2015 report). The provider was responsible for providing aircraft and simulators for training, running training courses, and training an agreed number of aircrew each year. The Department retained responsibility for some aspects of the core training, which undermined its ability to fully hold the supplier to account for the activities it sought to transfer out. The risk to UK military capability of not training enough aircrew to meet military needs ultimately rests with the Department and cannot be transferred.

The ultimate risk (beyond whatever financial or reputational harm a company takes) rests with government. In 2002, we reported that the Ministry of Defence, in relation to its nuclear submarine facilities at Devonport, considered that it had transferred the risk of cost overruns to the private sector. However, the Department ultimately funded the cost overruns as it had nowhere else to go and needed to ensure the supplier remained viable.

The franchising of Hinchingbrooke Health Care NHS Trust (2012 report) transferred demand risk and up to £5 million of financial risk to the provider. The NHS East of England Strategic Health Authority provided incentives for bidders to include guaranteed payments by double-weighting these in the financial assessment. However, it made no other changes to bidders' projected savings to account for risk. This approach may have encouraged bidders to make overly-optimistic savings projections.