Leadership for the long term: Whitehall's capacity to address future challenges - Public Administration Contents

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.


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]


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]


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]


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]


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]


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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Prepared 9 March 2015