4 Known and unknown risks
95. Previous chapters of this Report have considered
known trends and government capacity to plan ahead and deal with
them. We now turn to how the Government addresses known risks,
such as terrorism, and risks not yet envisaged. These are connected.
Climate change is a known trend and the UK faces the known risk
of associated extreme weather events, for example, but when they
will occur is unknown. The unknown risks of the future could materialise
to trigger events such as the collapse of a bank, or a larger,
systemic collapse of the financial system.
SYSTEMIC RISK
96. The advances of recent decades have attendant
risks. Technological advances, for example, bring the risk of
the accidental or deliberate misuse of technology. The possibility
of such damaging consequences requires the machinery of Government
to acquire a deep understanding of these dangers, as the Oxford
Martin Commission for Future Generations concluded:
While the future is full of opportunity arising
from the extraordinary advances of recent decades, it is also
highly uncertain and characterised by growing systemic risks
[226]
A systemic risk is the risk of a breakdown of an
entire system rather than simply the failure of individual parts.
For example, "a threat to the internet increasingly means
a threat to everything."[227]
In a financial context, systemic risk is the risk of a cascading
failure caused by the interdependent nature of the financial system,
resulting in a severe economic downturn.[228]
Professor Ian Goldin, Director of the Oxford Martin School, has
described systemic risk as a process to be managed, not a problem
to be solved.[229]
FORECASTING CAPACITY
97. Forecasts are a tool used to try to anticipate
possible futures. They are predictions based on current data and
assumptions about future influences. Forecasts can be extrapolations
of trends or simulations and more complex modelling of scenarios.
Forecasts that are not fulfilled are not necessarily 'wrong'.
The Government's Chief Medical Officer, Professor Dame Sally Davies,
explained that "the modellers and infectious disease experts
forecast that we will experience intermittent pandemics"
and so a particular outbreak is not a failure of forecasting.[230]
98. High-profile errors, such as those found in the
model used to evaluate the bids in the West Coast mainline franchise
competition in 2012, have prompted greater focus on the quality
and accuracy of government forecasting.[231]
In response, the Treasury commissioned the Macpherson review of
the quality assurance of modelling in Government. There is no
mention of systemic risk or horizon scanning in the review.[232]
A National Audit Office report found that it did not focus on
the systemic factors preventing good forecasting. The report found
that a lack of connection between forecasts by analysts and budgeting
by finance teams creates a risk of failure in how uncertainty
is addressed.[233]
Sir Nicholas Macpherson told us that:
They are very good at forecasting in the
good times, or indeed the bad times, if there is a steady trend.
[…] What forecasters are generally very bad at is forecasting
inflexion points.[234]
As Rear Admiral John Kingwell said, "identifying
trends is not predicting the future".[235]
99. Sir Nicholas argued that the establishment of
the Office for Budget Responsibility was an improvement because
it made the Treasury and Number 10 think less about possible
futures. The OBR's independent forecasts allow more concrete and
less hypothetical discussion, he said:
Now we have to take the forecast as read,
so there is far greater debate about the contents of a Budget.[236]
CULTURE OF THE CIVIL SERVICE
100. A core role of the Civil Service is to look
beyond single Parliaments so that civil servants can provide advice
to the government of the day on the long-term underlying issues
which affect the national interest. As Jon Day's review of government
horizon scanning put it, "it is a Civil Service responsibility
to look beyond the parliamentary term."[237]
However, the Civil Service values of impartiality, integrity,
honesty and objectivity do not include any reference to the longer-term
responsibilities of civil servants to ensure that advice to ministers
provides appropriate challenge about the longer term. [238]
Some ministers have expressed suspicion about what might lie behind
long-term thinking among civil servants. Francis Maude MP has
said that: "the civil service aims not to serve the 'long-term
aims of the department' but the priorities of the government of
the day."[239]
101. Our Report Strategic thinking in Government
asked whether there should be a stronger, perhaps constitutional,
role for the Civil Service in promoting the long-term national
interest, to help counteract the negative, short-term pressures
on ministers.[240]
The Government Response stated:
[Treasury guidance] Managing Public Money
was extended in April 2011 to place a specific duty on Accounting
Officers to establish that new policies are sustainable. […]
It also demands that the Accounting Officer consider whether the
design of the policy is likely to be resilient to foreseeable
developments and shocks.[241]
102. The confidence to challenge orthodox thinking
or established policy is of particular importance for civil servants
engaged in horizon scanning, foresight and contingency planning.
They must be able to challenge assumptions and conventional thinking
on expected futures. However, Jon Day's review of government horizon
scanning found that "there is a belief that horizon scanning
is ignored when the strategic level is not open to challenge."[242]
Trust is essential. We concluded in Truth to power: how Civil
Service reform can succeed, that strong relationships between
civil servants and ministers are based on shared understanding
of purpose, mutual dependence, and openness and trust.[243]
103. Government acknowledges that collective leadership
could be improved. The Civil Service Reform Progress Report (2014)
stated that it was a priority to develop and improve the collective
leadership of the Civil Service so that leaders have a shared
vision.[244] This,
we heard, is achieved very well in some areas, such as counter-terrorism,
where planning and implementation are effective. Major General
Shaw said it is clear that in relation to counter-terrorism it
is the Home Office which is in charge. This, he told us, empowers
the Home Office and clarifies responsibility.[245]
RADICAL UNCERTAINTY
104. Many future challenges are unknown unknowns,
as Rt Hon Oliver Letwin MP, Minister for Government Policy, recognised
in his evidence to us: "we are frequently—and will
continue to be, as human beings—taken by surprise."[246]
We have previously expressed concern that the increase of horizon
scanning can give politicians and officials a false sense of security;
that they are prepared for all eventualities.[247]
We recommended that the Government should not be afraid to acknowledge
that uncertainty exists and to promote an open discussion about
risk and uncertainty in policy-making.
105. The Government is better at dealing with known
risks and trends than with uncertain possible risks and challenges.
For example, the Government has set up a nanotechnology strategy
forum (see Box 5), but future technological change may come instead
from unforeseen developments. The Cabinet Secretary acknowledged
to us that there had been less co-ordination, "and therefore
more risk of things falling between cracks", in the more
uncertain areas.[248]
He explained that identifying any inconsistencies or gaps was
the aim of the small horizon scanning programme team in the Cabinet
Office. He took responsibility for the success of this work, saying
one of his jobs was to think about the contents of the in-tray
in 10 years' time, in order to "get ahead of these issues
rather than just waiting for them to hit us in the face."[249]
However, he denied responsibility when this task was put to him
in a different way:
Chair: Who in the Government has overall
responsibility for cross-departmental systemic risk and radical
uncertainty?
Sir Jeremy Heywood: I do not think there
is one person responsible for such a broad scope of things as
that.[250]
Box 5: Nanotechnology
| Nanotechnology is engineering at the 1 billionth of a metre scale, to create structures and devices.[251] Nanomaterials are used in sunscreens and computer chip transistors, for example.[252] The most anticipated applications are in healthcare: the tiny scale allows nanomaterials to pass through biological barriers without triggering the immune system. Due to the potential for major technological breakthroughs, nanomaterials have been identified as a key enabling technology. However, risks have been identified, such as possible environmental and health impacts. A nanotechnology strategy forum chaired by ministers in the Department for Business, Innovation and Skills and the Department for Environment, Food and Rural Affairs has met once a year since 2012 to promote discussion between Government and key stakeholders on the development of nanotechnology industries in the UK.[253]
|
106. The evidence we heard differed on the Government's
record on horizon scanning. Rear Admiral Kingwell identified occasions
when his work at the Ministry of Defence's Development, Concepts
and Doctrine Centre had got it right:
In 2001 we were stressing the future of autonomous
and automatic systems on the battle space [… and] we highlighted
the role of social media in undermining certain autocratic regimes.[254]
Dr Campbell McCafferty, Director of the Cabinet Office's
Civil Contingencies Secretariat, also identified a horizon scanning
success story in the field of civil contingencies. He contrasted
the costs of the foot and mouth disease outbreak in 2007 to that
in 2001. The costs of the later outbreak, he said, were much more
contained.[255] However,
Major General Shaw disagreed:
I don't think we do have an impressive record
on futurology. Black swans appear all over the place. The Arab
Spring came out of a clear blue sky.[256]
We heard on our visit to Washington D.C. that governments
should also concern themselves more with 'grey swans', which can
be defined as future challenges you should have thought about,
such as energy storage (see Box 6).[257]
Box 6: Energy storage
| Energy storage technologies absorb energy and store it for a period of time, helping to manage variation in power generation, due to the weather (in the case of solar and wind energy) or events such as a power plant breaking down. These technologies include batteries and pumping water uphill for later release.[258] The cost of storage, including large up-front costs, is the main obstacle to large-scale development of electricity storage. Uncertainty about how much storage will be needed in the future is another barrier to investment.
In the UK, only a small amount of electricity storage capacity has been built since the 1980s.[259] There are a number of publicly funded electricity and heat storage development programmes, involving the Engineering and Physical Sciences Research Council, the Energy Technologies Institute, Ofgem, the Department of Energy and Climate Change, and Innovate UK. In 2013, public sector energy storage spending on research and development was £9 million.
There is high potential for a major breakthrough in this field, for example, using ammonia for energy storage and transportation, where scientific innovation could create a whole new market for the UK.[260] The Government lists energy storage as one of eight 'great technologies' in which it expects the UK to become a global leader.[261]
|
HM TREASURY
107. Financial risks such as a banking crisis are not included
in the Government's National Risk Register, which is produced
by the Cabinet Office's Civil Contingencies Secretariat.[262]
The Treasury's business plan cites "reforming the regulatory
framework for the financial sector to avoid future financial crises"
as one of three Government priorities for the department.[263]
Sir Nicholas Macpherson disclaimed any responsibility for input
into the register. When we asked why it does not contain anything
about financial and economic emergencies, he replied:
You probably have to ask the people who produced the plan.[264]
108. Sir Nicholas's priorities and objectives for 2014/15 do not
mention risk or horizon scanning or crisis planning or response.[265]
The Treasury's 2012 review of its response to the global financial
crisis review recommended further progress on a number of issues,
including horizon scanning:
The Treasury should […] consider whether the UK has
in place appropriate and proportionate 'horizon scanning' capabilities
in relation to domestic and international financial stability
so that the Government is best placed to spot, plan for and mitigate
risks that might develop.[266]
109. A number of commentators have highlighted the possibility
of high impact financial risks manifesting, such as the size of
asset management firms compared to the size of the economies in
which they operate. As the BBC's Robert Peston put it, "the
decisions of just a few of them can cause boom or bust for entire
economies."[267]
The Prudential Regulation Authority lists the principal risks
to the UK banking system as including "potential sharp upward
movements in long-term interest rates and credit spreads, current
and potential stress in the euro area and the threat of cyber
attack."[268]
110. Andrew Haldane, the Bank of England's Chief
Economist, said in November 2014 that it was "too soon to
tell whether any collective blind-spots remain. But compared with
the pre-crisis period, the Bank today has two extra pairs of policy
eyes", the Prudential Regulation Authority and the Financial
Policy Committee.[269]
Joint meetings between the Bank's Monetary Policy Committee and
these two, Andrew Haldane argued, "help strengthen the committees'
peripheral vision and are a safeguard against groupthink."[270]
111. Sir Nicholas told us that the Treasury is not
complacent. He rejected "the idea that the Treasury can have
all these matters under control when there are so many forces
at work that are so manifestly beyond our control."[271]
Indeed: "There are massive risks like banks collapsing, but
where the Treasury tends to get surprised is with the more peripheral
things that it tends to think are all under control but then is
appalled to find out it does not have under control at all."[272]
To reassure us that he was not complacent, Sir Nicholas cited
a standard, well understood risk-the failure of a bank:
We did a lot of analysis and contingency
planning around the impact of a banking collapse on Britain. When
one of the Cypriot banks got into difficulties, we basically put
into practice that contingency plan. There are a lot of Cypriots
living in this country and it worked pretty well.[273]
Sir Nicholas confirmed that the Treasury is the lead
Government Department for managing financial and economic crises
and said that "in the end, especially in a crisis, the really
big issues come back to the Treasury."[274]
112. In April 2013 the Bank of England, not the Treasury,
took on "enormous" new powers and responsibilities,
including the responsibility for prudential regulation.[275]
The Prudential Regulation Authority, part of the Bank of England,
regulates banks, building societies, credit unions, insurers and
major investment firms, focusing on the harm that firms can cause
to the stability of the UK financial system.[276]
It is the Bank of England, not the Treasury, which is now responsible
for monetary, macro-prudential and micro-prudential policy.[277]
RESILIENCE
113. Resilience is the capacity to recover from shocks.
The practice of armies maintaining reserves is a form of resilience,
and London has demonstrated resilience by surviving fire, war
and pestilence. Professor Ian Goldin argues that 'just in time'
management and supply chains lead to brittle rather than resilient
systems.[278] One solution
is to avoid over-reliance on single processes, and competition
policy has a role to play in reducing systemic risk by ensuring
that no one firm is too big to fail.[279]
Resilience can also be increased through diversity, on company
boards and in societies enriched through immigration.[280]
Professor Jonathan Boston of the Victoria University of Wellington
has suggested that, in organisations, some level of redundancy
is needed for resilience, in the form, for example, of flexible
staff.[281]
114. Given incomplete knowledge, one should consider
what is not known and act in ways that take this into account.
The Government Office for Science gave an example of this in its
report on high impact but low probability risks. In the event
of an earthquake, the height and damage from a resulting tsunami
wave are uncertain. In respect of the 2011 meltdown at Fukushima
Daiichi Nuclear Plant, which was triggered by a tsunami:
If the cooling systems for the fuel rods
had failed to a passively safe mode of operation such as convective
heat transfer to the adjacent Pacific then the system could have
been much less vulnerable to what occurred.[282]
This is an example of designing a system to make
it more resilient.
115. There are trade-offs to resilience which mean
some level of risk must be tolerated.[283]
Jennifer Cole of the Royal United Services Institute explained
that "making the London Underground network completely resilient
to terrorist attacks of the kind carried out on 7 July 2005, for
example, would require the introduction of security scanners for
passengers and luggage […] Measurements of resilience need
to consider what is practical, as well as what is possible, to
enable honesty about the points at which realistically practical
measures are likely to fail."[284]
116. Mark Carney, Governor of the Bank of England,
intends that firms are able to fail without threatening the stability
of the system as a whole: "firms should face the discipline
of the market and consequences of their actions. We do not operate
a zero failure regime."[285]
117. A key conclusion of our predecessor Committee's
Report, Governing the future, was that the Government's
assessment of likely future challenges should be as open as possible,
to enable counter views to be articulated, and ensure that debate
is as wide as possible.[286]
The Government Office for Science published a review of High Impact
Low Probability Risks, such as severe space weather, in 2012.
The key over-arching factor in its recommendations was the need
for the inclusion of external experts and readiness to consider
unlikely risks.[287]
Yet contacts between Whitehall and outside sources of knowledge
and analysis are inadequate, according to written evidence from
the Academy of Social Sciences:
By its very nature, foresight is 'open book':
it demands access to the widest sources. 'Blue skies' are unlikely
to be imagined in closed rooms.[288]
118. A
core role of the Civil Service is to look beyond single Parliaments
to the long-term. Its leadership must look beyond managing and
controlling risks we already understand to systemic risks and
uncertainty. The Civil Service value of impartiality implies a
responsibility to provide advice about the longer term. Civil
servants should not block or subvert ministerial decisions, but
they should ensure their advice reflects a frank and honest assessment
of the impact of ministers' decisions on the long-term aims of
Government.
119. The Treasury
acknowledges 'massive risks like banks collapsing' but has not
absorbed the key lesson of the 2007-08 financial crash on the
interconnectedness of financial uncertainty with wider uncertainty.
This leaves the UK exposed to the risk of another adverse event
on the same scale as the 2007-08 financial crash. Financial and
economic risks are ever present but not included in the National
Risk Register. The Treasury does not therefore consider financial
risks alongside other, non-financial risks, such as pandemic flu.
The division of responsibilities has changed but the Treasury
retains its overall accountability for financial crises.
120. Resilience
depends on informed challenge and putting in place sufficient
resources to provide a buffer of redundant capacity. This is harder
to justify at times of austerity but it is all the more essential
to plan carefully if cuts are being made. Independent advice is
key given that group-think contributed to the financial crisis:
'challenge' is not about contesting the authority of ministers,
it is robust information and advice to help ministers make their
decisions. There is not enough challenge to Government horizon
scanning, either from external views or from nurturing dissenting
voices within the Civil Service.
226 Oxford Martin School, Now for the Long Term: The Report of the Oxford Martin Commission for Future Generations,
October 2013 Back
227
World Economic Forum, Global Risks 2014, January 2014 Back
228
'Systemic risk', London School of Economics Systemic Risk Centre,
undated Back
229
Preface, The Butterfly Defect, 2014 Back
230
Q 152 Back
231
National Audit Office, Forecasting in government to achieve value for money,
HC 969, January 2014 Back
232
HM Treasury, Review of quality assurance of Government analytical models: Interim Report,
December 2012, and HM Treasury, Review of quality assurance of government models: final report,
March 2013 Back
233
As above Back
234
Q 205 Back
235
Q 130 Back
236
Q 210 Back
237
Cabinet Office, Review of cross-government horizon scanning, January
2013 Back
238
Institute for Government, Accountability at the top, December
2013 Back
239
'Francis Maude attacks civil service over job document', BBC
News, 7 July 2014 Back
240
Public Administration Select Committee, Twenty-Fourth Report of
Session 2010-12, Strategic thinking in Government: without National Strategy, can viable Government strategy emerge?,
HC 1625, April 2012 Back
241
Government Response to the Twenty Fourth Report of the Public
Administration Select Committee, Strategic thinking in Government: without National Strategy, can viable Government strategy emerge?,
Session 2010-12, HC 1625 Back
242
Cabinet Office, Review of cross-government horizon scanning, January
2013 Back
243
Public Administration Select Committee, Eighth Report of Session
2013-14, Truth to power: how Civil Service reform can succeed,
HC 74 [incorporating HC 664-i-x, Session 2012-13], paragraphs
76, 80, 121 Back
244
Cabinet Office (WFC12) Back
245
Q 216 Back
246
Q 464 Back
247
Public Administration Select Committee, Twenty-Fourth Report of
Session 2010-12, Strategic thinking in Government: without National Strategy, can viable Government strategy emerge?,
HC 1625, April 2012 Back
248
Q 408 Back
249
As above Back
250
Q 416 Back
251
Royal Society, Nanotechnology, undated Back
252
European Commission, Research in nanosciences & technologies policy issues,
undated Back
253
Gov.uk, Nanotechnology Strategy Forum, undated Back
254
Q 130 Back
255
Q 131 Back
256
Q 233 Back
257
Committee visit to North America, November 2014 Back
258
Institution of Mechanical Engineers, Energy Storage: The Missing Link in the UK's Energy Commitments,
April 2014 Back
259
House of Commons Library Standard Note, Energy Storage R&D,
July 2014 Back
260
"Hydrogen Production from Ammonia using sodium amide"
William I F David et al Journal of the American Chemical Society,
2 June 2014 Back
261
Policy Exchange, Tomorrow's World: Eight great technologies with David Willetts,
24 January 2013 Back
262
Cabinet Office, National Risk Register of Civil Emergencies, 2013 Back
263
HM Treasury, Business Plan 2012-2015, May 2012 Back
264
Q 211 Back
265
Cabinet Office, Permanent Secretaries' objectives 2014 to 2015,
July 2014 Back
266
HM Treasury, Review of HM Treasury's management response to the financial crisis,
March 2012 Back
267
'The next financial crisis?', BBC News, 2 July 2014 Back
268
Foreword by the Chief Executive Andrew Bailey, Prudential Regulation Authority Annual Report and Accounts 2014,
June 2014 Back
269
Bank of England, Central bank psychology - speech by Andrew Haldane,
November 2014 Back
270
As above Back
271
Q 217 Back
272
Q 224 Back
273
Q 227 Back
274
Q 207, Q 235 Back
275
Bank of England, Prudential Regulation Authority Annual Report and Accounts 2014,
June 2014 Back
276
Bank of England, Prudential Regulation Authority, undated Back
277
Bank of England, Central bank psychology - speech by Andrew Haldane,
November 2014 Back
278
Ian Goldin and Mike Mariathasan, The Butterfly Defect,
2014 Back
279
As above Back
280
As above Back
281
Committee visit to North America, November 2014 Back
282
Government Office for Science, Blackett Review of High Impact Low Probability Risks,
January 2012 Back
283
Science & Technology Facilities Council, Proceedings of the Conference Measuring the Resilience of Cities: The Role of Big Data,
25 October 2013 Back
284
As above Back
285
Foreword, Prudential Regulation Authority Annual Report and Accounts 2014,
June 2014 Back
286
Public Administration Select Committee, Second Report of Session
2006-07, Governing the future, HC 123i, March 2007 Back
287
Government Office for Science, Blackett Review of High Impact Low Probability Risks,
January 2012 Back
288
Academy of Social Sciences (WFC4) Back
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