We now move on to our second order of business for today—examining how the Department for Culture, Media and Sport, or DCMS, is handling repayments of covid-19 loans. Between October 2020 and March 2022, the Department lent £474 million to 120 borrowers operating in the culture and sport sector to help them to survive the dreadful covid-19 pandemic. This support was provided in the form of loans repayable for up to 25 years and this is the first time that DCMS has managed such a significant loan book. As of October 2024, just under half of borrowers had started repaying their loans and DCMS had achieved £41 million of repayments. Nine borrowers had become insolvent, covering loans of £46 million. Today, therefore, we will examine DCMS’s approach to establishing and managing this loan book, as well as considering what the future emerging risks for the loan book might be. To help us with all that, we are delighted to have with us today the new permanent secretary—well, she is not so new now—Susannah Storey, who was appointed permanent secretary in the Department in June 2023. Welcome, Susannah.

Thank you.

We also have with us Polly Payne, director general for policy at DCMS. Polly became director general for policy at DCMS in a job share with Ruth Hannant in July 2023. I am not quite sure how you tossed the coin to see which of you came today. [Laughter.]

I am the lucky recipient, from my point of view.

You drew the short straw, Polly, I am sure. Finally, we have Nicola Hewer, director of visitor economy, heritage loans and art collections. Nicola is the DCMS loan book senior responsible owner, so we extend a particularly warm welcome to you, Nicola, because it is your first visit to the Committee. Without any further ado, we will move on to the first question, from Chris Kane.

You had to set this whole process up during covid, which was a very chaotic time. You had to make decisions. It must be commended what all of us had to do right back at the start of this. As we go through this process, we will talk about establishing things; we will take you through. But the decision-making process started in a very chaotic place. You have taken decisions and you continue to take decisions that are—I am not going to say “unique”, but there are certainly different paths that you could have taken. Looking back, given how the process started and given you had to make tough decisions, but also given that you then have a knock-on effect of the decisions thereafter, if you had to do this again, what would you do differently? That question is probably to the permanent secretary.

Thank you so much. Chair, just before I answer that question, would you mind if I just reminded the Committee that I have a declared conflict in relation to rugby union? I know that we have talked about it before, but I just wanted to make sure that the Committee know—

That is perfectly in order. Please do that. It is on the record and we are very conscious of the fact that any questions on rugby will not be directed at you; they will be directed at your colleagues.

Thank you so much. Coming back to the question, yes, you are absolutely right. I think that preparing for this hearing and all the work with the NAO—for which many thanks—has reminded us just how it did feel in covid. As you say, at the time, particularly in 2020, in so many of our sectors and right across the country and society, people were facing uncertainty and unknown factors. It was in that context that the Department took the decisions as part of a series of interventions—both, of course, the pan-economy interventions and some sector-specific interventions. The Department took some decisions as part of that to provide some of the support as loans. That, of course, is the subject of this hearing. We have a closed loan book that the NAO has described as having some fairly unique features. I think we reflect that, given the time at which the loans were put in place and the context, in fact the objectives were clear and the decision making has always been clear. As you know, our objectives for the loan book are first the financial objective and secondly the policy objective. We feel that, over time, we have made some improvements. We are in a relatively solid place and, as the Chair said, we have now started to see the first repayments. Of course, hindsight is a wonderful thing. We have tried to build in lessons learned as we have gone through the process. As I said in my letter to the Chair last week, we have just completed some further lessons learned. I guess my hindsight would be that we were perhaps a bit optimistic in the business case about the number of staff in our team looking after the loan book, because it has those relatively unique characteristics. There were one or two places, which the NAO helpfully highlights, where we had some optimism bias in our timelines—for example, we changed the scope of the loan management system. There are one or two things, but overall, it was a helpful intervention. The evaluation published in relation to the CRF and the sport survival package made it clear that they were both broadly effective interventions. As I am sure we will discuss, we were quite careful at the time the loans were given to have some specific due diligence on the borrowers. We knew who they were, and as a result, for example, the evaluation showed that the fraud levels have been relatively low. That is a long way of saying that we have definitely learned some lessons and we have definitely made some improvements as we have codified the process but, with hindsight, it was a relatively solid intervention.

So you would not change much?

Never say never, and over the last year in particular we have tried to clarify our governance, codify our processes and increase the resource on the team—Nicola is now the dedicated SRO. We have really tried to make sure that, with the loan agents, everybody knows clearly what their responsibilities are. It has been a process of consolidation, I would say. We are now in a solid place as we go into the year where, as you know, we will start seeing more and more repayments because the repayment holidays are coming to an end.

I am surprised to hear that, because the Report says all the way through that there is a lot that could have been done differently and that still could be done differently. Is it your assessment that you are quite comfortable that, other than tweaking around the edges, most of the decisions were solid and you would go back and do it again?

It is really hard—isn’t it?—to say exactly what one would do if one did it again, and also what the counterfactual would have been if we had done it differently.

Of course, but I am just asking whether I am hearing what you are saying.

I came to the loan book when I took the accounting officer role in the summer of 2023. Having looked at it then and having continued to look at the changes we have been making, which are consistent with the NAO’s recommendations, I think we are in a solid place. We have a good set of procedures, and, given that these are loans where we need to get the money back, we are in a reasonable position. I absolutely agree with the NAO’s recommendations, and I am looking forward to the recommendations from this Committee and to our discussion today. Of course there are always things that one might do more of, but across the core areas of the objectives of the scheme, its governance and the expertise that we now have, I think we are in a solid place.

I am going to cover specific points, but first, you came in after it had started; hindsight is a wonderful thing, but so is a fresh pair of eyes. You are looking in two years into the process, so are you comfortable that everything was fine and there was nothing you would change? The way you presented the answer is not what comes across in the Report, and I get the impression that is not what you will get from the Committee. Maybe that is an observation rather than a question, so let me ask you a couple of questions. One thing the Report says is that you could have drawn more on the learning from across Government, given the Government’s experience of managing loans during the pandemic. Why didn’t you draw more on the learning of other Departments?

We did draw from other Departments. My understanding is that, at the time, we talked to the Treasury, UKGI and obviously the BBB, because there were some other loan schemes during covid, although they were different in nature. What we have sought to do over time is to make sure we have that external representation in our programmes. On the loans advisory board now, which the DGs chair, we have external expertise, including from the British Business Bank. So we have absolutely sought to do that. Do you want to add anything, Polly?

There are a few things. The big picture, as Susannah said, is that there is no particular characteristic of this loan book that is unique, but it is a unique set of characteristics. As Susannah said, we talked to HMT, UKGI, the British Business Bank and BEIS, which does student loans, which are very different, but represent another loan book. We also talked to Futurebuilders, under which we had run loans within the Department. We give some loans to our museums and galleries anyway, as normal business rather than covid. We learnt from all of those. I am sure we could have done more but, as you will all remember, it was a time where there was so much being done in very new circumstances. I am sure we could have done better, but we talked to those different bodies. The other thing to say is that we discussed with both UKGI and BBB whether they thought they were better placed to do the loan management of the book once we had the book. We agreed with them and they agreed with us that it was better for DCMS to remain looking after and managing the loan book for various reasons, which I can discuss.

Why did you offer such favourable terms—the 2% simple interest rate over the whole loan period—for the loans? It sounds to me as though, on a period of reflection, that could have been done differently. That may be a learning lesson.

First, these loans were deliberately not on commercial terms. They were given to people who could not get commercial loans at the time. We were not approaching it with a commercial lender’s hat on. The 2% was the public works loan board rate at the time, and we felt that a flat rate would give certainty and simplicity of administration. We were also very conscious that a number of our borrowers had not had loans before, especially from Government and of a 25-year nature. We were very keen to make it something that they would feel comfortable with. We also made exceptions. For instance, in particular on CRF, there were two exceptions where we had more commercial borrowers and the rates were more up towards 7%. For all those reasons, we felt that 2% was right.

Permanent secretary, what assessment have you made of the risks of managing this loan book in isolation?

We have sought to ensure that our risk mindset is built into the programme throughout and into our oversight of it as a Department. As Polly said, at the beginning it was a novel thing for the Department to do, so we sought expertise on how to set it up and tried to make sure that we were mindful of that expertise in setting it up. The way we run it now is that there are risk ratings, which Nicola might want to talk through, in all the interface with the borrowers and in the decision making, both when the loan agents are interfacing with the borrowers and when the Department is considering different issues. The loan book itself comes into the departmental risk environment. We have our delivery and risk committee, which is our main oversight committee and reports into my executive board. If Nicola, as SRO, felt that the risk profile was changing for the programme or for a particular issue, she would make sure that that was coming into our governance. We seek to make sure that risk is absolutely integral to everything that we do.

Would it not be more efficient to consolidate the DCMS loan book with others across Government?

This is one of the things I am sure we will talk about, because the NAO said in its Report that we should do more on the long-term strategic options. That is absolutely something that we are keen to do once the book gets to steady state and everybody is repaying later on this year. My observation would be that it could be more efficient to do that if our loan book and some of the other loan books had sufficient similarity of features that there was an economy of scale or of function. What may play against that, when we come to do the options assessment, is the fact that, as the NAO has said, this closed loan book has some particular features, and the nature of the borrowers; as Polly was saying, for many of these entities at the time, we were the lender of last resort and they are not used to having borrowing in their capital structure. We would need to make sure that, if that option was considered, the benefits outweighed the risks. At this stage, we have been seeking to make sure that we have this thorough oversight. We feel that the risks are being well managed, as the book gets to steady state. There is a helpful chart in the NAO Report that shows, in the early years, as we finish the repayment holiday, we are getting to the point where we are getting interest and, ultimately, capital from all the borrowers. Over time, that profiles down. As you know, some of the loans are for up to 25 years, so it may be that in due course that does make sense, but as at today, I do not think that we think there is another lender in Government where it would neatly slot in. As I say, we will come back to that when we look in more detail. Is there anything you want to add on that, Nicola?

No, I think you have covered everything; it is something to look at in future.

Okay. Lastly from me at the moment, the Report mentions—or looks into—that by managing the loan book in isolation, how it fits in with the Government’s portfolio of financial assets is not quite as clear as it could be. How does the DCMS loan book fit in, from your perspective, as part of the Government’s overall asset portfolio?

From a DCMS perspective, obviously we report on that every year in our report and accounts, and we have the expected credit loss—asset value—which is amortised in our accounts. That is the way that the asset fits into the DCMS accounts, which fit into the wider Government accounts. One of the things that we will want to do when we get to our strategic options appraisal—sorry to give you a window into the future; this is obviously something I will have to come back to you on in due course—when we are thinking about the next spending review and beyond, we will want to make sure that we think about whether there is a better way of doing it, or a better way to classify this asset for the Treasury. At the moment, however, it basically sits with us and on our accounts.

On that point about doing the thinking about where this fits in, can you talk about the timescale? Certainly to me, but also to others, it feels like you should be doing that right now. It feels as though understanding how it fits in strategically is work that should have been done already. So when will it be done? When will we get that sense from you?

We will do a further evaluation in the first quarter of this year, and then look at the strategic options later on this financial year—the one from April 2025 to March 2026. The reason why we have not done that before is, first, that we wanted to be sure that we had this solid operating model and all the procedures, that we had codified what we needed to, and that we had the right capability and capacity in our team doing the oversight. Secondly, this year we will be starting the repayments from all the borrowers who have not yet repaid, and so we expect it to be quite a busy year in that regard. And then, once we have a track record of the borrowers repaying, we think that that is the right time to look at strategic options. Sometimes, as you know, when we are considering complex strategic options, we can do scenario planning, but actually having the track record is the thing that will make that strategic option review more insightful.

For my last question, I want to go back to my first question: if you had to do this all again, based on your answers in the past 10 minutes, is there anything you want to update? Would you do anything differently?

No. As I say, we have always been mindful of the lessons from others. There was a PAC hearing in 2021, at which point it was clear that the Committee had some concerns about the size of our team, so we have increased our team quite significantly, and we now have, I think, 15 people in your team, Nicola. We have also been careful to codify our processes and governance. Given that we had this loan scheme, I feel that we have managed it in a solid and effective way.

Do you acknowledge that at its heart—I think you do—there is a great paradox between the policy objective and the financial objective? The policy objective is that you wanted to ensure the survivability of these institutions, and the financial objective is that you wanted to recoup the capital and interest for the taxpayer. But that means you are constrained in things like how you manage the loan book, as we will come on to. Do you acknowledge that there is a central paradox—or a conflict, a tension—between those two objectives?

In Government, we often find that we have tension between objectives. I think we have been clear about the financial objective being the primary objective, but, as you say, in certain circumstances, we need to consider the policy objective. Those objectives could be in tension, but that is why we try to make sure we have very clear protocols for decision making and escalation, should that be necessary in those kinds of situations. But it is not unusual, in my experience, in different things that the Government do, for those two things to pull in different directions. With my accounting officer hat on, I am very focused on that financial objective, but as you say, at the time, in covid, the Government were trying to ensure that the sectors—these particular sectors—could survive and remain viable. But not every entity in the sector was given a loan or a grant at the time, whether in the sport survival package or from the culture recovery fund.

It is an important admission that you recognise that there is a conflict—

A tension.

Okay. I would have hoped for a greater recognition. That builds on my colleague’s point, that the risk here is that there was a conflict of interest at the heart of the whole scheme. You had this tension between wanting to ensure the survivability of the firms, as well as then running the loan book until its maturity. To give you one final chance, before we move on and get into the substance of the session, looking back, do you feel that there should have been some sort of independence between implementing the design of the loan book, and running the loan book down? Ultimately, if you look back, should you have had an environment where DCMS set the policy and parameters, but another part of Government actually ran the loan book down?

I do not think that that is necessary, so long as the objectives are specific and clear, which in this case they are. In 2020-21, when this was being set up, both the culture recovery fund and the sport survival package had independent boards that considered each case where a loan was granted. As you know, we then consolidated the loan book to ensure that we had one set of decision making with clear objectives. So I think it is manageable. Arts Council England and Sport England, which are the loan agents, have discrete teams to handle the relationships with the borrowers. The NAO notes in its Report that there is of course always a risk of borrower advocacy and, as you say, everything is in a wider environment, but I do not think it is unmanageable. Do you want to add anything, Polly or Nicola, because you live at the frontline of this?

It is worth saying that there was a bit of a shift between when we were giving the loans and grants out—in this case, particularly talking about the loans—and when they had been given out and we were managing the loan book. When they were being given out, that was during covid and, as Susannah said, ensuring the sustainability of the sector at that time was our primary objective, while our secondary objective was doing it at minimum expense to the taxpayer. When we moved to managing the loan book—the loans having been given out, and us not giving out any more—we were very clear that our primary objective was to take the loan book and to maximise its financial return. We were cognisant that there might be a point at which, for the wider sustainability objective that DCMS has always had for the sectors—and this is totally within Ministers’ decision-making options—we might want to, sometimes, with particular decisions, take that tension and do something that was not possibly in the main financial option but which was good from a policy point of view. That actually has not happened. So far, while the option has been there for us to do that, we have run the loan book entirely with Ministers always making decisions where the financial objective has been followed throughout all the decision making.

God forbid that there is ever another pandemic or a situation in which the Department would ever have to loan money out on an emergency basis. But to close this off for now, while I get that money needs to get out the door, would you not in future design a system whereby as soon as the money is out the door, there is then an independent branch of Government to take on the management of the loan book, to minimise the risks of borrower advocacy?

I would not do that, no. If it were more efficient—if we had a hypothetical loan book, but for some reason it was more efficient to run it in another bit of Government—absolutely, we should look at that, and will continue to do so. As Susannah says, in all our careers, we are used to trading off policy and financial objectives and doing things in the best way for the taxpayer. That is an absolutely standard bit of what we do, so I would not say that, by definition, that should be done somewhere else—no.

That is quite a powerful learning for us to discuss. From my perspective, there are lessons learned about a more efficacious model in future scenarios.

Obviously, we are very interested to hear your thoughts as we go through.

I am going to follow up Mr Charters’ excellent question, because I see that you are sensitive about whether there is a conflict of interest or a tension, and I think this—whether it is a tension or a conflict of interest—will get worse, because I suspect that more organisations will go bankrupt and more organisations will not repay their loans at all or on time. Let me give you two specific examples of where there may be a conflict of interest. Whether we are talking about the Arts Council or Sport England, they will have teams that deal with a particular organisation on a day-to-day basis and are desperately keen that that organisation continues. There will be another part of the organisation that deals with the finances of these loans, and when it comes to making very difficult decisions about whether you should alter the terms of the loan, whether they should be pressed harder to repay at a particular point and whether you are going to make them bankrupt—I do not know whether you made any of the nine bankrupt or whether they voluntarily declared themselves insolvent—these are difficult conflict situations. I wonder whether—this is no criticism of the organisations; it is just the situation they find themselves in—both Sport England and the Arts Council have a parti pris. They have a vested interest in this whole matter, and I wonder whether that will affect the long-term management of the covid loan book.

We have not had that sense from them. We have all spent time with them—

They wouldn’t say that, would they?

This goes to Polly’s point, in my experience. The financial objective of maximising the return to the Exchequer is the primary objective for this loan scheme; and for the individuals—in both teams and in our own team—who are responsible for that, it is their day-to-day responsibility. As you say, you never want to see an insolvency, but it is feasible it could happen, in which case we will follow the protocol. In reality, it is difficult in Government, when resources are all limited, to say, “Let’s put this in a different place” or “Let’s get a different third party to do it.” My understanding is that through the pandemic, we did look at alternatives. The decisions were made by Ministers for us to do it, and we do think it is manageable for us to deal with this.

Yes, but that wasn’t quite my question. I understand why you did it at the time. As you say, an awful lot was going on. The question was about the thought going forward—whether this model will actually be effective going forward.

I think we feel reasonably confident about that, having spent the time increasing the capability and capacity of the team, working with the loan agents on all the respective roles and responsibilities and, to your colleague’s question earlier, making sure that risk is built into the way we look at this. I think we feel cautiously optimistic about that. Also—Nicola might want to talk about this—because we are going into this repayment year, we seek to make sure we have a good line of sight to where the borrowers are well before we hit the repayment dates. Of course, as you will know, with all borrowers there are a number of different ways—covenants and other things—in which we get a bit of a line of sight to what is happening; and we do have a good degree of financial information for those borrowers. So I think we feel that the model is sufficiently robust. I don’t know whether you want to add anything, Nicola.

I would say, from my dealings with the loan agents to date, that I think they do understand and have internalised the primacy for us of the financial objective. They do not have a direct funding relationship with all or even necessarily the majority of borrowers in either the sports or the culture portfolio. I think they understand that tension that we are trading off, and they are giving us their best possible advice, but they also recognise, ultimately, that decision making rests with the Department. They are equipped to give us their best advice to help us make that decision.

The point Nicola made at the end is really important. We have put in two safeguards for exactly the problem you have identified, which is about the culture of Sport England and the Arts Council, isn’t it? One safeguard is that we have the discrete teams that Susannah mentioned. Very clearly, we have a discrete team: they are full of chartered accountants and professionals, and it is their job to maximise the return for the taxpayer. The second thing is that we have been absolutely clear in all our documentation, agreements and delegations that any decision where anything is done that is not in pursuit of the financial objectives—if you are in any way going to make a decision that has a policy slant to it—that has to come to the DCMS and it has to go to Ministers. Only Ministers can decide to make that trade-off. We have been very clear throughout—it is in all our documentation—and I think that it is very clear to both our loan agents that that is the case.

Thank you for that clarification. You saw that there was a slight hesitation in my question. Could one of you just clear this up for me? Of those nine organisations that have gone into insolvency and were mentioned in the NAO Report, were they all voluntary insolvencies?

When you say voluntary—

Well, was it your actions that put them into insolvency or was it their actions?

It was not our actions that were primarily the reason that they went into insolvency. With the premier rugby clubs, none of them had even gone into repayment. The three that have gone insolvent had not gone into repayment at the point that they went insolvent, so it was not even a result of them having paid our loans.

If it is clear that they do not have a long-term financial future and they start defaulting on their loans, would you initiate insolvency procedures? Often, taking action sooner rather than later saves a lot of pain.

I do not think we would probably come at it with a blanket rule like that. We would look at any decision where there was a possible insolvency situation and think, “How do we maximise the money for the taxpayer?” That could be by giving organisations a bit of breathing space so they can get back into a sensible position. It could be that we need to absolutely maximise our legal rights. We would take the decision case by case, and I really would not want to prejudge it.

Fair enough. I can see Luke Charters wants to come in.

But ultimately, just to be clear, if it came to it, you would put one of these borrowers into insolvency.

If we thought that that would maximise the financial return, and we had looked at any policy reasons for not doing that, which would probably be not only about the individual organisation, but—

I thought it was ultimately about the financial policy yielding preference. This question is really important, because if you are not willing to put these borrowers into insolvency as a final failsafe to the taxpayer, these are not loans, they are grants. This is of ultimate importance to the Committee.

I completely understand. My answer was that, yes, we would do that, except if there was a policy reason, in which case we would go to Ministers and it would be for Ministers to make that decision. It would basically be for Ministers to decide whether it was a good use of taxpayers’ money—as you say, more like a grant situation—to have that particular organisation continuing. When we gave that advice to Ministers, it would depend on the individual organisation, but also its impact on the wider sport or cultural area that it is involved in. For instance, if you had a cultural organisation which was in an area that was otherwise a cold spot for cultural activities, Ministers might think it a good use of taxpayers’ money to give a subsidy to it, and they would have to make that decision.

I am hearing a bit of fuzziness in that answer. Permanent secretary, your duties are well laid down regarding managing public money. If you felt that the financial obligation was to put somebody into insolvency, but Ministers decided otherwise on policy, on sporting or artistic grounds, would you seek a ministerial direction?

In that conceptual example, maybe I would. It is exactly what I was thinking about when Polly was talking. What we are saying is that when you go through the processes set out in these loans, it is absolutely essential that any of these borrowers, who have the legal undertaking to us as the lender, appreciate that if they were in that situation, we would not hesitate to use all the financial levers we had. As you know, in some cases we have security and so on. I think what Polly is saying is that that is one route—the end of it. There is, as we have already discussed, though, also a policy objective. If we were in this conceptual situation where, notwithstanding all of those primary financial objectives, we then reach the point in the decision tree where there was a decision in relation to policy, it may be in that case that my obligations as accounting officer would require me to do exactly that, and I would not hesitate to do it. But as Polly said, we have not had any of those situations so far. Also, it is important to remember that with both loan books, as originally conceived— of course, the culture recovery fund loans are slightly smaller in number and larger in size, while many of the sports loans are really very small, and some have been repaid early—there is no particular reason to assume that an insolvency event would mean that that policy objective would be triggered. I think it is important to be clear about that.

That wasn’t the question that either of us was asking—about the policy objectives failing. We were asking about the mechanics of whether you would do it. But thank you; you have clarified, for me as Chair, at any rate, and hopefully my colleagues, what course of action you would take.

Ms Hewer, I am looking at figure 12 in the Report, and it appears to show that no costs have been forecast for any financial year after this one. Is that an actual reflection of your expectations, or is there another reason why no costs have been forecast?

In our business case, we did detailed forecasts for the current spending review. We have not yet done the same level of detailed forecasts for subsequent years. In the business case, there was a more sort of technical adjustment so that we could work out the overall cost-benefit ratio of the different models that we were considering, but we expect to do those more-detailed costings as part of the strategic future work that the permanent secretary referred to.

When will we have those forecasts for future years?

We expect to do that work in this coming financial year, so by the end of March 2026 at the latest.

Would you mind if I just clarified one thing? Obviously, as Nicola says, the business case was done a couple of years ago for that spending review. As you know, we are now in a position where we have been given our spending settlement to March 2026, and, in the Department, we are just in the process of undertaking our business planning for the next year. We therefore have an expectation of the costs of running the scheme for the year to March 2026, but, for the years after that, that will have to be part of our spending review settlement to the Treasury. I appreciate that that is a slightly different point from your point about forecasting out, but, in terms of the money, that is something that we will be doing in the spending review.

So far, you have spent £17.3 million. The total expected income from interest on the loans is £78 million, so you have spent 22%, so far, of that expected income. We know that nine organisations have gone insolvent and that a further nine are behind with their repayments, so if you do not yet have an expectation of future costs, how are you modelling the expected balance of costs against income in future years?

There are two things that I would say to that, which colleagues might want to add to. First, we were clear in the original business case that we expected the run rate of oversight costs to be roughly £5 million a year. As you say, the NAO Report talked about £17.3 million, which was our forecast to March 2025. In practice, we have slightly underspent in this year, so I think we will be at £16.7 million—or something like that. We are expecting that the one-off costs for some of the things included in the NAO Report, such as the loan management system, have been slightly higher than they will be going forward. So, as we do our strategic review work, we will be seeking to look at some probably scenario-based run rate for managing this scheme based on the things that I have talked about. As for our capacity and the capability of this team, we are roughly 15 people at the moment, and we know the size of the loan agent teams. We will have a track record of experience with the loan management system, so we will have the costs of that, and that is how we will project forward. Your point about how our costs relate to the interest income that we are getting is a slightly different point, because, as your colleague was saying, that was set at a flat rate of 2%. We need to be able to do both, if you see what I mean, to work out what we think our costs will be. We cannot simply choose not to oversee this loan book properly, just because of the costs, but we need to make sure that we can model it, and then we will be talking to the Treasury about how we get the right level of cost cover from them.

But you have not done it yet?

No.

Okay. Do you think there is a point at which it becomes more cost effective to make these loans into grants? How will you know? What will be the factors that will decide that?

I think this is part of the strategic options work that we want to do, which involves thinking about different scenarios. As your colleagues have said, one scenario is obviously that we continue to manage it; we will become more efficient and the loan book will be less time-consuming, and, therefore, the fixed costs and variable costs will go down over time. We can compare that with the expected income, which, each year, will change based on our latest view of the borrowers, because only some of those factors are in our control. Clearly, if we had had a variable interest rate—a different flavour of loan book—we might have had more capacity to do different things, but we actually had relatively fixed parameters in this case. We know what the interest income will be, and we can then overlay our expected scenarios in relation to those borrowers. We will have a good ability to estimate our own costs going forward, now that we have started to have a proper track record.

What worries me, permanent secretary, is that I think you are getting into a period in which the costs will go up, because people will default on their first payments and there will, no doubt, be negotiations with them. They may want to change the basis of the loan and the repayments and so on, and your costs might therefore go up. Is there a scenario, as Ms Olney has hinted at, where the actual interest you get in does not pay for the costs of running the whole thing?

There are always, as you describe, downside scenarios, where our costs go up and the fixed-interest income does not offset them. Obviously, when we look at our scenario work, we need to look at that. I would say, just to calibrate your concerns, that we have spent a lot of time with the loan agents, and they have spent a lot of time with the borrowers, and I think, because of the interest payment holidays, we have a really good sense of where the borrowers are because they have known for some time—up to four years in some cases—that this is the year in which they would start to have to repay. We have a fairly good sense of where they are, and we know from our risk reporting what they are likely to do. Of course, I would never rule it out, and, like you, I know from commercial situations that unexpected things sometimes happen. There could be another cost of living crisis or, god forbid, another pandemic, so you can never rule that out, but the most sensible thing for us to do is, on the basis of a solid track record that we will have from this year, to then do that scenario work. Of course, we will be more than happy to come back and talk to you about it when we have done it. Is there anything you want to add, Nicola or Polly?

The only thing I would add is to do with your point about what might drive our costs. Actually, what we are seeing is that managing that very limited number of cases where a borrower may seek a reprofile is actually quite a small proportion of the work we are doing in casework within the team, so there is an awful lot that is relatively stable, that we expect to be quite stable and that is much more routine. Consent matters. There is much more routine monitoring and reporting, so although more borrowers coming into repayment is an inflection point and does drive risk—and we will monitor whether it is driving increased cases and costs—we have seen over this period that by far the majority of the work is irrespective of whether borrowers are in repayment.

I suppose the benchmark of all benchmarks, if you look at paragraph 18 in the NAO Report on page 12, is an outright sale of the loan book. That was not one of the scenarios that you mentioned, permanent secretary, but the whole raison d'être of you continuing to manage is if you actually sold it off and got a sum of money earlier than you would otherwise expect, and the Treasury did all of their calculations, in the interests of value for money for the public purse, that is the benchmark you always ought to keep in mind, isn’t it?

I am keen, when we do our strategic options, to look at as many scenarios as we can think of. On the point earlier, interest rates have moved quite materially from where they were at the time these loans were given out, with a broadly fixed 2% interest rate. There is obviously a different backdrop that we are assessing it in. We would absolutely look at a sale of the book, amongst other things. I suppose it is worth saying—I am in no way an expert on this—that with things like student loans and some of the other loan books in Government, there have often been all sorts of thoughts about what one might do. It can sometimes be quite hard to do in practice. This is quite an unusual closed loan book, but, if there was a way in which a third party could find value from it in a way that we could not, that could absolutely be a sensible thing to do and we would not rule it out. We have no particular desire to stay here until 2045—

The financial institutions are doing this all the time.

Absolutely.

They are assessing their loan books, often in many thousands of loans rather than 120, so it is a relatively simple thing to do

It is probably worth saying that in 2021 and into 2022, PwC gave us advice on all our options, which was behind our decision that the way we would manage the loan book was with our loan agents and our LMS. One of the options it looked at was sale, and in the business case in 2022, which was agreed both by our finance committee and the Treasury, there was a cost-benefit analysis done of various options, including the sale of the loan book at that point. Susannah is completely right, when we do our strategic analysis next year, we will revisit that and look at it again.

In that previous analysis, did you get an indicative price of what somebody would pay you for an outright sale, because otherwise, how did you do the evaluation properly?

Gosh, you are testing my memory of years ago. We must have. I think the price was very much a range and very indicative.

Okay.

Would you be willing to make a commitment to the Committee that all remaining borrowers will have made their first repayment by September 2025?

Yes, that is our current expectation. Obviously, some have already repaid ahead of schedule.

Would you therefore put on record to the Committee that you are not willing to extend any more repayment holidays?

No, I do not think that would be a particularly sensible thing for me to say. My central assumption is—and as the NAO Report says—that we expect that all of the borrowers who are not already repaying will be repaying this financial year. As you know, we have two repayment moments: March and September. That is our current assumption. Obviously, if something happened that I cannot currently predict between now and September, maybe that assumption would not hold. I am not sure that this is particularly helpful to the Committee, but I will say it is my essential assumption.

It is also worth saying that it may be that giving a repayment holiday actually maximises the financial return in the long term. In the kind of hypothetical situation that I was talking about before, if you had a borrower who had a particular issue in the very short term, but you felt that the analysis showed that there was a good long-term future, it might be better to give them a little breathing space or a little ability to make an investment such that they could make a commercial return. That would be the kind of situation where it might be best to give a little bit of an extra holiday.

In that situation there is no doubt that any private sector organisation—a commercial organisation managing its own book—would need to issue repayment holidays to maximise the commercial return. But, as you have gathered, this Committee is concerned that ultimately there is a softening of the loan book and that there is an extending of payment terms ad infinitum or that there may be more favourable renegotiations on the repayment of the loans. There has to be a final line in the sand at which—in your own words—you turn and move past that inflection point. Is there a line in the sand where you say, “That is it, we are not going to reflect any further on these repayment terms or repayment holidays”?

I think it is really important that all of our borrowers understand—as they do today—their obligations to us and our expectations that they will repay when their repayment holiday ends. That is the central assumption. That is absolutely where I am.

To reassure the Committee, so far less than 5% of borrowers have been granted reprofiles of their repayment. I am not going to go into the exact number because it gets into such small numbers that people can start trying to—

Coming from a private sector organisation, one would generally expect that September 2025 is the date on which many are expected to start repaying and that, actually, you will get a call in August—at the last minute—and at that point borrowers come back again to extend their payment holidays. Could you use this as a vehicle, as a deterrent effect to those borrowers, to say that you are not going to budge and that this is going to end, and you are going to start recouping the money for the taxpayers?

Absolutely. It is one of the things that the NAO highlights. There is always a risk of borrower advocacy, of people thinking that something will happen, because every individual organisation thinks it is important for X, Y and Z reasons. From the perspective of the DCMS and this loan book, that is our central intention.

Moving on to insolvency, paragraph 2.20 of the NAO Report says that the “DCMS expected 5% of borrowers to fail in the first three years of the loans, with a further 4% to 9% failing by 10 years.” Paragraph 2.21 mentions “£46.1 million to the nine borrowers which had become insolvent, almost 10% of the £474 million issued across all the loans”. We are already there, by your own assumptions. You underestimated the volume of insolvencies, didn’t you?

I think in the original business case we said 5% in three years, and up to 14% in 10 years, and we are at 7.5%. This is by number.

I think it is critical to look at it by value, in terms of taxpayer money.

To some extent, as colleagues have said, the situations that have meant that some borrowers in this book have gone insolvent have been outside our control. We are recording the fact of where we are.

I was just looking for an acknowledgment that you underestimated at the time the value of insolvency in the loan book.

You are right that it was £46.1 million, which is around 10%. However, it is worth saying that we have recouped £10.1 million of that £46.1 million, so that will be less than 10%. On top of that, we expect to recover a further £7.3 million to £11.1 million, because we are still going through proceedings. I think that 10% is starker than the reality.

The final thing I would add is that the business case talked about the percentage of borrowers. I think the variability in the size of loan within our portfolio is quite significant, so that is why we chose to talk about the percentage of borrowers. Predicting the percentage of the value of the loan book is much more difficult, because it is so variable by which borrowers have those moments.

Therein lies my hypothesis that, at least when it came to forecasting insolvency, DCMS at the time did not have the skills in the Department to properly outline good estimates.

I do not know if you can conclude that it is because of that, or if it was because there were a lot of exogenous and other factors. Even though we did have reasonable financial due diligence on each of these borrowers at the time—more, I think, than some other Government lending schemes did—it is always a complicated thing. I am not sure if it was just about the capability of DCMS and its advisers, but I understand your point: you think that if third party commercial organisations were running this loan book, it might be different. Set against that is the fact that the insights we have on these borrowers from Sport England and Arts Council England, as loan agents, has been invaluable in helping us to understand them, perhaps more than if it had been a high street bank or—insert commercial entity here. They might find it even harder. One thing I have observed is that in the expected credit loss model—it is an accounting standards thing, which obviously the NAO know all about—even trying to get credit ratings for some of these organisations is actually very hard. As a counter-perspective, it might well be that the qualitative overlay that Arts Council England and Sport England can give us is of real value in this instance.

I turn to the question of fraud, as noted in paragraph 2.22 on page 41 of the NAO Report. I invite you, as the Department, to give an update on the two identified possible instances of fraud, totalling up to £2.2 million. If there has been fraud in the loan book, would you apologise to our taxpayers as MPs on this Committee?

Speaking for myself and I think any accounting officer, when you are giving out grants, loans or any other form of money, you are deeply, deeply concerned about fraud. I greatly regret if there has ever been any loss to the taxpayer because of fraud. As you will know from the evaluation, the fraud in these schemes has been relatively low, but we are in no way complacent. I am sure Nicola will want to talk to that small number of cases.

To zoom in on that, do you think it has been low in terms of the size of the loan book? I would think that it is probably quite high compared to the private sector.

I suppose I was thinking in terms of covid loans. If you look at the bounce back loan scheme, for example, which I know was a different nature of scheme—it was given out very fast and at a much higher volume—the sample-based evidence of fraud was considerably higher. But as you say, any pound of fraud or error is something that I deeply regret and I am sorry about, so it is absolutely something that we are very focused on. With Sport England and those two cases, there is a lot of active focus, isn’t there, Nicola?

Yes.

It is perplexing to me given that a moment ago, permanent secretary, you were preaching the benefits of the close relationships you have with some of those larger organisations. Therefore, it is even more bewildering that fraud was uncovered, given that you have, in your own words, those levels of relationships with those organisations.

I do not know whether you want to talk about any of the specifics, but I suppose we think of fraud and error under one category. It might be that because they are unfamiliar borrowers, for example—I am talking conceptually here, not specifically—they could make a technical error about onward granting a piece of security that has already been granted to us as security. It is not necessarily the case that a third party who said they were one party entered into the agreement with us and turned out to be somebody else. Do you want to say anything about the specifics, Nicola?

It is difficult for me to get any more specific than the permanent secretary has outlined, but it is exactly that. These have not been instances, as far as we can tell at this stage, of the original loan being obtained on a fraudulent basis. It has been other issues and events that have happened.

We also did a fraud risk assessment in 2020, and we have updated that. More generally, across the Department, it will not surprise you to know that fraud is something that I am always very concerned about. We have been doing a lot of work, including with Arts Council England and Sport England, on upskilling their fraud capabilities, because obviously we do give a lot of money as grant. You are absolutely right to highlight it as an area that we remain vigilant about.

Are you working with the Public Sector Fraud Authority at the moment?

Absolutely.

For the record, that same paragraph 2.22 on page 41, which Mr Charters has kindly drawn the Committee’s attention to, says that you have split the fraud risk assessments into two—one was due to report in October ’24 and one in December ’24. Are those now all complete? If so, do they show anything that this Committee should be concerned about?

I do not think they have shown anything particularly different from what we had before, have they, Nicola?

No. We have worked really closely with the Public Sector Fraud Authority to produce those updated assessments. The sport survival package one is in place and is complete. The one on the CRF is in the final stages of being completed. With the input of the PSFA, they have identified and sought to get agreement on the particular areas that we think are now, in this post-event post-award stage, at most risk. We have sought to get agreement on whether our mitigations around those risks are appropriate and proportionate and so on. As I understand it, on the one that we have agreed on the SSP, we have reached a good place where we feel there is clarity about the main areas of risk and our main areas of mitigation. That is what we are finalising on the CRF side.

When do you expect that to be finalised?

I do not have a date for that, but as soon as possible. We are in the very final stages, so I would hope in the next month or two. We can come back to you.

If there is anything untoward, will you update the Committee? That would be very helpful.

Absolutely.

Ms Hewer, why has it been so difficult to get a memorandum of understanding agreed between you and Arts Council England for their collection of the loans?

I would say two things by way of starting on this, then others may wish to add. First, throughout the time that they have been acting as our loan agent, they have been operating under an administration agreement, so there has been an agreement in place to govern that work. Secondly, we are pleased that we have now signed that MOU, and that is in place. I think it is fair to say that it has been about where our collective focus has been at certain points of the process. We have been working very closely with loan agents and with Arts Council England, but it was really just that it took us longer to codify those relationships into a written document than we wanted.

What were the specific challenges around that?

We were developing with both loan agents an overview of our service level expectations and key performance indicators. Some of that took time for us to develop and iterate as to where we wanted those to be and to focus. There were no particular obstacles; if I am honest, it was just one of those areas in which, looking back, we did not pay enough attention to the codification and writing down of what we were doing, and we would have sought to do that earlier. But we are pleased with it, as now in place.

You have described to us how you thought the arrangement with the Arts Council and Sport England was the right one because they understood the organisations that were going to receive the loans, and that was the best way to manage this process. At some point, however, you probably thought, “No, it is not working as well as we imagined, so we need a managed service provider.” Why that change of heart?

The NAO Report sets out the chronology helpfully. At the beginning, it was about meeting the objectives and getting the money out to the third party. Then, as my colleagues have said, we sought to bring the loan book together and run it in as orderly a way as we could, given the original objectives and where we are now. The managed service provider and the loan management system give us this interface, which is so helpful with the data and analytics. The borrowers can put their information in and get certain information back. The loan agents can also use that system, and we can as well. It was a hybrid approach that PwC originally recommended that we went with. Over time, we have sought to make sure it is as clear as possible what the Department does, what the managed service provider does, what the loan agents do and, of course, underneath that, what the borrowers do. It evolved over time, but I do think the loan management system is incredibly useful. That is one of the reasons why we extended its scope, which, as the NAO points out, is one of the reasons why we missed one of our own deadlines from the original business case. That was one of those difficult choices. I think it would have been the wrong choice not to extend the scope when we thought it was the right thing to do. Even though it meant we missed a deadline, it was the right thing to do.

So you needed additional specialist help?

It was really about the system, and trying to make sure it had the right functionality. At the beginning, we did need additional specialist help, which was why we had PwC both on options analysis and then helping us with the way we approached the loan book.

Did you conclude that you needed additional specialist help?

Yes.

But PwC are not specialists in loan management, are they?

PwC across the group do a lot of different things, including, probably, some loans. We engaged them originally as a professional service provider, giving us some assistance on the overall process that we found ourselves in in 2020 of seeking to provide the loans and then work out how best to manage them.

Does that not sound a bit cosy? They are helping you to design the system and then, “Oh, we are going to give you some more work to help to manage it.”

At the time, each thing went through its stage. When we did the procurement, they won at that point. In the future, it could well be somebody else.

How was the procurement done?

Do you mean in the future?

With PwC. How was the procurement done for them to provide this service?

They gave us the original advice on the different ways of running the scheme and then, when we came to do the loan management system, there was an open procurement and they were the winning party.

So they devised the scheme that they then tendered for?

I do not think it was exactly that simple, in the sense that other people also could have bid for it. Obviously, anybody who was the winning bidder would have to meet the required criteria.

What has been achieved by this involvement of PwC apart from, apparently, improvements to consistency across the loan book? Is that all? Has it even achieved that?

The loan management system, on which all the data and interface between the different parties rests, as I have just described, has been brought together by PwC. During the period, they have actually provided a helpful service. Nicola might want to give some day-to-day colour on it.

But you do accept that they are not specialists in this business?

We are not using them as a loan provider. We use them as a professional services provider.

As a loan agent. There are organisations that are expert in managing this situation, where you are trying to recover and get payback of loans. There are specialists in this area. PwC has got no specialism, has it?

As I have tried to describe, the process has gone through a number of phases. At the beginning, when we were in set-up, they were giving us professional services advice.

At that stage, but the role that they are performing now—

They bid for the pulling together and establishment of the loan management system. It is a technical role for this data system, if I can call it that, which enables the borrowers to upload their financial information and see certain information. It enables the loan agents to get certain automated services—for example, on interest rates and so on. It enables my team—I am simplifying—to see trend analysis. In effect, they were doing the technical pulling together of that system, and I think they did have the right expertise to do that. As I say, in the future it is perfectly possible that we could procure a different party to provide that system, and that is the way it has been set up. Their contract will run out, and then we could get a different third party.

With all this expertise that they have, after they were appointed, spreadsheets were still being used by the loan agents to cobble together the information. So you paid for this system, it went up in price about 50% and it didn’t work.

The way I would describe it is that in the beginning, in covid, as in so many situations, the loan agents were using spreadsheets—certainly, Arts Council England was using spreadsheets. Sport England had a formative loan management system—some kind of software solution. PwC integrated that, and that became our loan management system. [Interruption.] Until that went live in its new scope that met our criteria in 2024, there were still some spreadsheets being used. That is not unusual. It is obviously much better now we have this system. The thing to be clear about is that, as the NAO says, at no point did it affect the money that we were getting in or the underlying processes working. It is obviously better to have the system, and that is what we have now got. It did evolve, and then in June ’24 the loan management system went live.

Don’t you think you might have expected your two loan agents to make a relatively simple system like this for information about what had been paid and when it should be paid?

In the beginning, each of the loan agents was, like us, responding quickly to the situation in covid and making sure they hit the key parameters. Neither of the loan agents at the time had a loan management system that was suitable for the whole loan book when brought together. PwC brought together the Sport England system and overlaid the additional functionality that the Department wanted.

Thank you very much. I have lots of people bidding for questions, and I am going to get Nesil in first.

I must apologise to our witnesses for the musical accompaniment, which is nothing to do with the quality or otherwise of your answers; it is to do with the farmers protesting on their tractors.

Yes. The first thing to say is that in a previous career, before I was in the civil service, I worked in an investment bank as a professional service provider, so I absolutely agree with your healthy scepticism about why a third party might say they need something. The costs need to be carefully scrutinised, and that is the mindset we brought to this. It is worth saying that we increased the scope, and therefore the time became longer and the cost went up. I do not think it is just that PwC said, “Increase the scope.” I think that as we got our track record of understanding this loan book from the standing start in 2020, we wanted greater functionality. Nicola might want to add something, but my understanding is that that functionality is integral to our ability to manage this book in as professional a way as we can. You are right that it was increased, but we were active in asking for that greater scope, which then cost more money and took more time. It was not just PwC.

When we look at business cases, there are often optimism biases. We try to challenge for that as they go through our finance committee. This one obviously went through all its stages. I am sure my colleagues at the time were scrutinising for that kind of thing. We have acknowledged, as the NAO has, that there was some optimism bias on the timeline and ultimately the scope. I am neither agreeing nor disagreeing with you. It is one of those things that you have to watch for. I think we were cautious and thoughtful in the way that we did it, but in the end it did take longer, and we did expand the scope.

Yes, I am because that was for the increased scope. Obviously, as we said earlier in response to your colleagues, going forward we want to ensure that, now that those fixed costs have been implemented, we can manage as efficiently as possible. Hopefully, over time we can bring the costs of this book down, because we have this system. It should bring not only some efficiencies but some data analytics benefits to us because of its scope. We are very keen to see that trend data over time, and see the way in which the system can be used to our benefit.

Unfortunately, it is sometimes the case, when new systems are launched, that there is a learning and testing period. I think that is what happened, and it is helpful that the NAO has set that out. We obviously want to ensure, now the system is running, the borrowers are more familiar with it and that it is functioning, that we minimise those kind of things.

In all major programmes one would always want that; that you do not have the optimism bias, you do not have the mission creep, and you get to the right outcome as soon as possible. We have tried to be reflective and still will be in this programme. The thing we have been trying to ensure is that, for its particular features, we have the right team capacity, capability and functionality in this system. I am not sure that there would have been a bespoke, off-the-shelf loan management system for this loan book. Obviously, now we have got it and the taxpayer has spent the cost of getting it, one thing we want to ensure in the strategic options is that if there is a way to leverage that fixed cost better, we do it.

I would like to build on the line of questioning taken by my two colleagues—Ms Caliskan and Mr Betts. Would you view it as good practice that the date—the timing—for setting up the loan management system moved? I appreciate that the scope widened, but do you think it is a success story for the Department that it moved from March 2023 to September 2023, and then all the way to June 2024?

I certainly would not describe it as a success for the Department. I would say that it was a lived reality of this programme, both as we tackled what was probably some optimism bias in the original business case and as we changed the scope. In a way, these things are always regrettable and my preference would always be that the business case exactly predicted what should happen and it didn’t in this case. So, it definitely was not a success. However, I think it was the right decision to expand the scope, given the learning from this programme when we got to that point.

Given that it was delayed by more than a year, what lessons had been learned, considering that when it did go live, as Nesil has pointed out, there were a number of issues with the system?

What we have tried to do throughout this programme is to make sure that we are looking at lessons from as many perspectives as possible, and I know that the programme board has taken a number of lessons learned exercises with all parties, so that we can try to internalise that. I suppose that my lesson is that when we look at that particular business case, we need to make sure going forward that as we try to predict the fixed costs of running this scheme— vis-à-vis the income that it will get—but also the capability that we need, we think forward, as this Committee has said, about all possible scenarios in a wide sense. So, we will be reflective on that—absolutely. I think that the most difficult technical part of this process was that loan management system.

Again, with the system, in reading the NAO Report my main concern was that, some time further on, it is still not really clear who is ultimately responsible for its day-to-day operations. Of course it is with PwC, but parts of this work are being replicated by Arts Council England or Sport England, with them keeping their own spreadsheets. I suppose that responsibility does sit with PwC, but do you not see it as very counterproductive that you have two other bodies also carrying out some of the work when it comes to running a loan management system?

We have sought to be as clear as possible. And as Nicola has said, as SRO she has been keen to codify things about exactly who is doing what, so that we minimise or eliminate any duplication. In terms of the system, my understanding was that some of the spreadsheet-keeping was when the system itself was not fully functioning and/or operational, but now that it is there should not be that kind of duplication.

So you are confident that the SROs are happy that PwC is in charge when it is working and that these other bodies, like the Arts Council and Sport England, are picking up the slack when the system fails? Is that what you are saying?

No, I am not. I mean, the SRO is here, so you can ask her how confident she feels. What I am saying, and it is set out in the NAO’s Report, is that each party in this loan book management has specific responsibilities. So, the loan agents are undertaking the interface with the borrowers, and so on. They get some of that information and it goes straight into the system. PwC’s role is to manage the system until such a point as potentially a new procurement happens, and then another third party manages it. So, I think it is clear, but do you want to add anything, Nicola?

I would add that around the loan management system I think we are now moving towards a place where part of what we are doing through this phase is building that confidence in that being a single version of the truth, so that all parties can rely upon it and so that we will remove the need for local records and duplication.

We took the decision that in order to get it to go live in June, we should agree, which we did, with our loan agents what the most essential functionalities were, and get on and deliver version 1. Then there have been an agreed set of additional functionalities that are in version 2, which is due to—

No, sorry. I was just about to say that we are in the process of implementing that second version.

It has now been agreed, and it is under way.

Yes.

There has been a small additional further cost for that further functionality.

It was £300,000. The loan management system itself will still—

Just to be clear, that is the point that I was trying to get at. If this system has not been fully operational for most of its lifetime and there has been flaws in it, when are other bodies such as the Arts Council, Sports England or indeed the Department actually picking up the slack of a system that is not actually working all the time? What is the additional cost of that, if there is this duplication of work?

I do not think I would characterise it currently in version one as flawed and not working. There are additional functionalities that we are adding, like the ability to—

The Report does say there are flaws. The Report does quite clearly stress that there are things that borrowers could not do and could not get access to.

Yes, and those were relatively short-lived periods and those have been rectified.

I am sorry if I gave you the impression that that was to avoid the use of spreadsheets. It will provide additional functionality on top around automatic reprofiling and the way that allocations of payments happen to interest versus capital first. We should already be in a place where we—

There was additional functionality.

Yes.

Looking ahead, are you confident that the loan management system will be able to cope as we see an increased number of borrowers start to make their first repayments?

Yes, I am confident. All borrowers, whether they were in repayment or not, have been given the opportunity to test the system now and to ensure that they are ready. We have sent out proactive comms to all of the borrowers about to come on stream in March, and we will replicate that ahead of September. We are now confident of that operation.

I think it is worth saying that this is a 25-year loan book. When we were looking at our loan management system and thinking about the different versions, the functionality and the scope, the thing we were really focused on at all points was having the fully functioning system in place by September ’25, when all the repayments would come on track. We had hoped to do it earlier, and yes, you are right, there was a delay, but we did have that September ’25 date very firmly in our heads and we are very confident that we will have version two with all the upgrades done well before that date. You talked about the lifetime of this loan management system. We think it will be a number of years. On whether it will still be the same system in 2046 by the end of the loan book, I think we probably will have needed to do some upgrades by then—who knows what AI will be able to do by then?—but I am confident that we will be using it for many years.

My last question is on the current contract with PwC, which is going to expire next month. What will you do to make sure that, whatever contracting decision you make, you do not repeat the mistakes you have made so far and that we do have good value for money for the taxpayer? Building on the points that Nesil has made, we have seen a little bit of mission creep: PwC has got more and more money from the taxpayer and yet it has not really delivered the best service in return. As we have seen, there have been mistakes, so how will you make sure that, if we do make a decision to go with PwC in the future, it will actually provide good value for money and not a flawed system?

A lesson we definitely learned is that we did not have expertise in DDaT—digital, data and technology—embedded in our loans team. We now do have that embedded. Susannah was saying that one of our learnings right at the beginning was that we probably had underestimated some of the capacity and capability, and that was probably one element of that. It was also probably partly because—I remember this painfully—we were going through a machinery of Government change in 2023, which was just when we needed that. There was a lot of things that our poor DDaT team had to be doing. When you take a Department and split it out, there is a lot of, as you can imagine, digital and data requirements. With hindsight, that is a lesson we have learned. We have now got that DDaT capability embedded in the team, and I think that will be really helpful for the future.

Also, every time you do a procurement the second time around, you have extraordinarily useful and very current learning. So rest assured that we will be bringing that learning when we do it. Q84 [1]Chair: Government projects are often dynamic—they evolve over time. Lloyd clearly pointed out to us that the break clause is in a month’s time. But as the Committee so often hears, Government Departments of all sorts commission systems but they do not retain the IP, so when it comes to retendering, they have an awful problem. Have you retained the IP on this loan management system?

Yes, we have talked about that—that was one of my first questions. We have an ability to extend the current contract by up to 12 months, but obviously when we reprocure it may not go to the same party.

One thing they do—as the Report makes clear on page 32, in the table under figure 7—is monitor borrowers for fraud and financial risk. They should have been helping you with the fraud issue that we questioned you about earlier. But I am particularly interested in the financial risk, because I suggest that what you need is very up-to-date and accurate credit management risk. Who is actually responsible for the credit management risk? Is it PwC or is it the two loan bodies, Sport England and the Arts Council? Who has ultimate responsibility to report to the Department on the latest situation with credit management risks?

Our loan agents maintain an overview of the risk of each borrower, and they report those to us. Those are updated twice a year. We use PwC to give us check and challenge on those ratings, but we then seek to ensure that all parties have agreed those risk ratings.

I thought the whole basis of using Sport England and the Arts Council was that they talk to all these various borrowers on a regular basis and obtain the most up-to-date information. Are we getting two lots of people asking the borrowers for the same information?

No. One set of information is submitted on to the loan management system and is available to all parties. It is one set of information, which is analysed predominantly by our loan agents. With PwC we will use a bit of check and challenge on those ratings, but ultimately we will look to our loan agents to give us that view as to the current risk rating of our borrowers, based on their financial information and what they know more broadly about both the borrower and the sector.

In my experience in financial analysis, it is sometimes a bit of quantitative analysis and sometimes an overlay of all sorts of qualitative judgments. As Nicola is saying, there will be some quantitative things we get, but sometimes it will also come down to a qualitative set of views from the loan agent and the conversations they have been having. We have tried to ensure through our risk matrices for the different types of oversight and ultimately decision making, should it come to it, that we are getting the best information from all of those sources. I genuinely think, having spoken to both Arts Council England and Sport England, that they have been really trying to ensure that they understand these borrowers, and that they are bringing us that qualitative information. That is the insight that is invaluable.

Is that information regularly reported to your DCMS board?

It will come to the programme board, and then it will escalate up should it need to. Our DRC, which is our delivery and risk committee, regularly looks at the loan book. That is part of the portfolio of projects that it reports on every time it meets. The analysis or issues come to our executive board, should that be needed—if it hits a certain risk threshold or so on. On things like the strategic analysis we have been talking about, that will definitely come to our executive board, because that is a critical set of decisions that will ultimately go to Ministers for decision making.

I am not quite getting from that answer what level of change in the loan management book would go from the risk management committee to the main board.

The main board of DCMS?

Yes.

I think it would depend on what the particular set of issues was. Regular reporting comes to the programme board, and there is also regular reporting at the Department’s delivery and risk committee, which is a sub-committee of my executive board. Then, if there was a set of decisions—as Polly has described—that might go through to Ministers, but reporting itself would not routinely come to my board, except when looking at the DRC’s portfolio.

Given that this is one of the bigger items in your whole management portfolio of the Department, how quickly would you personally be apprised of a material change?

Very quickly. One of the benefits of DCMS being a relatively small Department is that it is hard to find anything that does not come quickly, if it needs to. I feel very confident that if there was any issue outside the areas where I am conflicted, I would know about it.

Just so we are absolutely clear, on the area where you are conflicted—rugby, which is one of the more difficult areas—which of your two colleagues ultimately takes decisions on that?

We have divided it up so that I am responsible for the decisions, but Sam Lister, our other DG, who is responsible for the finance side, had an accounting officer hat on. He has moved on, so he is currently being replaced, but whoever replaces him will be responsible for looking at the accounting officer assessment and doing that kind of double-check. But I will be responsible for basic decisions and the advice to Ministers.

In the meantime, our finance director is taking that role, so there is no gap—just to be clear. We have been very careful about that.

That is useful for the record; thank you very much.

May I return to our previous discussion on the future risks to the loan book and borrower insolvency forecasting? Would you share my view, as I touched on previously, that you were slightly over-optimistic about the borrower default rate? My secondary question looks at value or volume. When you were doing that initial modelling, were you looking at the clubs on an individualised basis, or did you also do a wider analysis as to the sustainability of the sector and the sport itself ? It is no good looking at just individual premiership rugby clubs because they are all interconnected. Did you look at not only the individual financial sustainability assessments, but the sector as a whole when thinking about your insolvency projections?

In rugby, absolutely. When we have been thinking about likely insolvencies and the financial strength of the individual clubs, we have also thought about the financial situation of the premier league, in particular, as a whole. That sounds a bit passive, and we have not only been taking account of it but using the Government’s convening power to try and help with the financial sustainability of that. In summer 2023, we appointed two consultants, Ralph Rimmer and Chris Pilling, who are experts. The Department paid for them to do some work, and they worked with the Rugby Football Union, the rugby premier league, us and CVC, which owns a significant proportion of the rugby premier league assets. We got them to do a consultation, so we take this very seriously.

A recent independent report from the University of Portsmouth reveals that seven premiership rugby clubs are in the red. There is a concern about the overall financial sustainability of this. Did you get this right when you were modelling insolvency at the time? Given that three have already defaulted, can I use this as an opportunity to invite you to update your assumptions on the likely projections you have for insolvency across the loan book as a whole?

There are two questions there. When we were giving the loans, I suppose we knew that we wanted to support rugby union, as we did other sports, through covid—a very difficult time. So I suppose there were three options, weren’t there? They were to do nothing, which we wouldn’t have wanted to do, because we wanted to support; and then there was, do you give them grants or loans? I suppose the alternative would have been grants, and our judgment at the time was that it was reasonable to ask them to take on the burden of repayment. That was the judgment at the time. More recently, yes, we obviously have been saddened to watch the troubles that they have been through. We are talking about insolvencies of rugby clubs, which are very important to—obviously—players, and to fans and communities. So this is something we really care very deeply about—and not only about getting our money back on the loan book. There are much wider reasons for caring, and for DCMS—for the Government—to have a role.

I suppose my question was around updating your forecasts—whether there are going to be, very sadly, any more insolvencies in the sector. We have had three. We are already effectively veering on the worst-case scenario relative to your initial forecast. Are you optimistic or pessimistic about the propensity for more insolvencies in elite rugby?

We are absolutely reviewing and updating our forecasts. Are we more or less pessimistic than we were at the time we gave the loans? With everything that has gone on in the sport, I think we probably are more pessimistic than we were then. However, I would like to point to the professional game partnership, which was signed in September 2024. It is an eight-year deal. That was part of what came out of our consultants’ work. That made us more positive, so, you know, it changes, and we keep an eye on it and we talk all the time to the clubs. So absolutely, we keep it under review and we really, really care about it.

Do you think there are at least some clubs that do have a high risk of default?

It is such small numbers, I just wouldn’t want to get into talking about our individual borrowers. We have really strong confidentiality agreements with them and it is such small numbers that if I said anything, I am sure it would get speculated about.

We understand that. We will now transfer to Clive Betts, who has a series of questions on rugby.

Do you think it was appropriate to give a quarter of the money that you had available to one sport—professional rugby union? It is professional, and it is not a sport that is desperately hard up. It is a professional game with wealthy benefactors and well-paid players, and you gave a quarter of your money to them.

When the SSP board looked at what money was given out, they looked at everything on a case-by-case basis, and there were basically the same requirements on all applicants. They had to be financially solvent before covid; they had to be important for the sustainability of their sector; and to give them a loan, we had to think that they were able to repay a loan and they had exhausted all other commercial support. It wasn’t that there was any special treatment, and we didn’t think about it sport by sport. I think it is worth saying that the envelope of spending we could have spent was underspent. So by giving more loans to, as you say, professional rugby union, it wasn’t that other sports lost out in any way—if that was the concern.

Are you saying that you looked initially at the position of the clubs you were lending to and the sport to see whether there were any financial problems? There were. Everyone knew that rugby had got financial problems. Were you not effectively giving them money, under the guise of covid loans, to help them through what were already serious financial difficulties?

In order to get a loan, they had to be assessed to be financially solvent before covid, so that would have been the assessment.

It does not seem as though that was a very strong assessment, given that some clubs have gone over completely. Some large clubs, such as Wasps and Worcester, have fallen over without having paid a penny of the covid loans back, have they not?

But I think the assessment undertaken was that before covid—so before March 2020—they were financially solvent.

You are saying that with a straight face to us now, are you?

Yes, I am.

I think a lot of people in the industry, business and the media would probably have a lot of questions about that.

That was the assessment of the board at the time, with its chair in Cheshire and representatives—

The board? Which board, sorry?

The SSP had a board, and that board looked at all the loans.

Both the culture recovery fund and the sport survival package, in 2020 and 2021, had a board, including external members, who assessed the loans.

So rugby told you it was all okay to give rugby money?

I think it was more than that. I think all lenders had to give financial details and those were assessed. They had expert assessments.

But it did not take very long for them to fall over and all those assessments to be wrong, did it?

Unfortunately, within the next three years, yes, that is what happened.

I think you have to question the information that was given to you then, if not your assessment of it.

If you are implying that there was wrong information, misinformation or fraudulent information, we would obviously have to look at that.

I am not going to use the word fraudulent; I am just going to say that it was inaccurate.

I have no reason to believe that the information given at the time was inaccurate.

Right. So now, in getting the money that is still owed repaid from the rugby clubs, are you taking a hard line? Again, it is a professional sport with large salaries and wealthy owners. Are you making sure that they pay up what they owe you?

We are taking exactly the same test as we do with all our loans, which is that the financial objective is paramount. We will assess them against that. We will do whatever we need to do to get the maximum of taxpayers’ money back, except if there was a policy objective, and then it would be a ministerial decision. So far, Ministers have not made any of those decisions.

I will come on to the other sport that clearly has some issues and problems—basketball. I have been approached by Sheffield Sharks, a basketball team in my constituency. In fact, their new arena is just across the road from my office, so I see them operate. They are saying that the way the Department has allowed the British Basketball Federation to basically franchise out the running of the league has now put at risk the loans that you are owed from some clubs. Indeed, I understand that Leicester and Newcastle may now be signalling that they will have difficulty repaying the loans, because of the worsened financial situation in basketball. I have asked questions about this, but you seem quite content that this franchising out to people who have no history of running a sport before is okay.

I know that you asked a question to our Minister for Sport, Stephanie Peacock. I think our position is the same as her answer at the time, which is that it is a matter for the basketball governing body how it wants to take forward these commercial decisions. It is a slightly separate point about the implication for the loan book.

I think it is very important, given that that is what we are talking about today. Given that basketball was proposing to do something fundamental to the running of its league, which could affect its finances, did you do any impact assessment on what that decision could mean for the repayment of the loans you are owed?

As I understand it, the commercial decision making by the British Basketball Federation is something they are doing at the moment. As we have said, the financial objectives mean that we will look at any borrowers under the terms of their agreement with us. They are slightly separate things. It is not for us, the Government, to intervene in their commercial decision making. Nicola, is there anything about basketball that you want to say?

No, I do not think so. Obviously, any borrower who was to feel that they were unable to service their loan can approach their loan agent to discuss that. We would expect that Sport England is working very closely with the clubs to understand their latest view.

It does not feel like this is the real world. The real world is that the Government is owed money by organisations—clubs—that are part of a league. The British Basketball Federation, the governing body, is looking to franchise out the running of that league, which could affect the possibility of paying you back the loans. Surely there is a connection there that you have to make.

In a way, it is a version of what we were discussing before. There is a set of issues, parameters or exogenous factors that will affect all these sports at different times and in different ways. Some of those factors might be affected by legitimate commercial decisions made by the governing bodies. In this case, this is a set of decisions for that governing body. Separately, we need to consider the position of the borrower, but I do not think we can conflate the two things. As the Minister for Sport said, this is a commercial matter for that governing body.

Conflating the two things is not the phrase that I would use, but I would have thought that linking the two things might be a good idea.

It may be that, in due course, the loan agents and/or the team look at the specific position of some of the basketball borrowers. There are factors that you have described that affect it, but I think our position in relation to the commercial decision making of that governing body is that it is for them to make.

I have a few questions. So you might look at it afterwards when the damage is done and the loans are not repaid. You might then ask why they have not been repaid, rather than looking at it in advance to stop a situation where they might not be repaid.

I think, as we have said, the structures and processes that we have, and the risk-based way in which we approach it mean that we should always have a line of sight to what is going on with an individual borrower. If there were financial issues for any number of reasons, we should know about that. I do not think that is the same as saying that if we thought that a borrower had an issue because of a certain thing in a certain sector, the Government should then cut across the commercial obligations of that national governing body.

Are you asking Sport England to have any oversight, do any investigations or show any interest in this? They are your agents in this; you are employing them because they are the experts who know the sports and the clubs there.

In relation to basketball?

Yes.

I do not actually know what Sport England are doing in relation to basketball—

They will continue to liaise with those particular borrowers in the normal way.

But have they been asked to do anything in particular about this issue?

I think it is worth saying two things. First, of the 11 clubs who had loans, seven have repaid them in full. There are still four clubs left.

Including Sheffield Sharks.

Absolutely. It is also worth saying that Sport England have an ongoing relationship with British Basketball, and indeed, in November 2024, additional funding was given to the British Basketball Federation. That was both from UK Sport, because of the Olympics coming up in LA, but also through Sport England. There is an ongoing relationship, and they are interested. We—they—are interested without the loans, but we would not want to give special treatment because of the loans.

But of course, Sport England, as an interested and important body, surely have an interest in the governance of basketball in order to give it any money.

Sport England give, as you will know, money to many of our—

Yes, but they normally take an interest in how the sports are governed.

I think they would absolutely be very unhappy if the sports were not being governed according to the code, but they would not—

So they are quite happy for a sport to be franchised out then.

I think there are clear roles. If the governance is not properly done in line with the code, that is a difficulty, but they would not get involved in very detailed commercial negotiations.

Okay. I think it might be helpful to have a note about exactly what is going on and what Sport England, as your agents in this and as an important body in your relationships with sport, think is happening here or whether they have no interest in it at all.

We can definitely come back to you with a bit more colour. I do not think we will be able to get into the commercial situation.

It would be helpful to know whether you think that is important or not.

Ms Payne, I am going to ask you a very important question and I do not mind if you do not answer today, but I would like a really accurate answer. In relation to your earlier answer about knowing the financial status of rugby clubs before you gave the grant, I understand that CVC Capital were giving £200 million to PRL clubs back in 2019 to keep clubs going in return for a 27% stake. It seems that it was well out there that certain clubs were in financial difficulties well before covid. You were saying that you gave them grants only on the basis that you had information that they were solvent. The two things seem to be in total conflict with each other.

I think we need to write to you. My understanding was that the CVC investment was a commercial investment made to get returns, as you would expect from such a company. Before we go any further on that, I think we need to write to you.

If you could, because that is quite a serious matter. If they were already in financial trouble, to then go and give them another loan seems as if the due diligence was not done properly, but let’s wait for your supply. I think Luke Charters has a question.

On the letter, could you also include what the metrics were for assessing financial viability at the time?

Absolutely.

We can do that.

That is really helpful.

We can also give information on who made the assessment.

Following on from that, and given that you are likely to have to look at some of these organisations that may well either default on their loans or go into insolvency, who actually is responsible for those negotiations?

Which negotiations?

I will not name any organisations on the arts, rugby or sport side of things, but if you get information that suggests that they will default on their loan agreements, or worse, are likely to go into insolvency, who actually carries out the negotiations on your behalf?

It is a combination of individuals from Sport England and the Department. There have been discussions between individual clubs and DCMS officials. That is for us to understand fully and hear representations on before any decisions are made.

That answer worries me, because I cannot imagine that either the Department or Sport England would have sufficiently qualified insolvency and debt management practitioners. If anybody was going to do this, I would expect you to tell me it is PwC insolvency experts.

Sorry, I should have clarified. It is DCMS and Sport England, with external advisers as required.

Who would the external advisers be? Would they be PwC or an insolvency practitioner?

They could be PwC. They could also be lawyers that we bring in where needed, especially to tell us about our rights. We would bring in whatever other experts we needed.

And that has happened in the nine cases of those organisations that have already gone into insolvency?

I don’t know exactly what experts were brought in in those cases, but we can—

We can certainly look.

It would be really helpful if you could include in the note exactly how you are negotiating, who is negotiating and what qualifications they have with loan defaults and insolvency.

I think we can give you some generic answers, because I do not want to talk about the particular cases.

No, no; I am not asking for specific cases.

And obviously the different individual cases have very different requirements depending on how much it is, because our loans range so much.

Understood. You could say, “Generically, these insolvency practitioners were involved in three others, and we involved senior counsel in four”—whatever it happens to be.

We take the point, and it is an important one. I think what you are saying is that if we find ourselves in these difficult situations, we need to make sure we have the best professional expertise advising the taxpayer. We absolutely take that point and are happy to provide that colour, Chair.

Given that these things can happen very quickly, is there a mechanism to report them very quickly if you need to, given the distinction that you have now made twice between strictly financial transactions and the need to change policy? Is there a mechanism to rapidly escalate that to Ministers if necessary?

Yes.

If no one has any more questions, it only remains for me to thank you very much. It has been quite a testing session, so I thank our witnesses very much for attending. The uncorrected transcript from our hearing will be published on the Committee’s website in the coming days. The Committee will consider evidence provided from DCMS and our witnesses and produce a report with recommendations in due course. [1] Witnesses later confirmed that: DCMS owns the customer data (namely, all data that belongs to DCMS, loan agents or borrowers that has been uploaded, or results from processing this data). The intellectual property rights to the underlying software system are owned by Singlify. As noted in the response to the question, the activities of the MSP could be provided by another supplier. DCMS has the ability to extend the current MSP contract by up to 24 months.