Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, January 24, 2019

Official Report 746KB pdf

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Major Capital Projects (Progress Update)

Item 3 is on major capital projects. I welcome our witnesses to the meeting. I have just counted—there are seven of you and seven of us, so that is a good match. From the Scottish Government, we have Alyson Stafford, who is the director general of the Scottish exchequer; Rachel Gwyon who is the deputy director of infrastructure and investment; and Alan Morrison, who is the capital accounting and policy manager in health, finance and infrastructure. From Transport Scotland, we have Bill Reeve, who is the director of rail, and Michelle Rennie, who is the director of major transport infrastructure projects. From the Scottish Futures Trust, we have Peter Reekie, who is the chief executive, and Kerry Alexander, who is the investment programmes director.

I understand that Alyson Stafford will make a brief opening statement.

Yes—thank you very much, convener. Good morning, and thank you for inviting me to attend to assist the committee’s scrutiny of the latest report on the Scottish Government’s major capital projects, which we submitted to the committee on 2 November 2018 and published on our website.

As the convener said when she introduced us, I am joined by a number of colleagues. Michelle Rennie and Bill Reeve will be able to respond to questions on rail and to transport questions more broadly. Peter Reekie and Kerry Alexander are here to support the committee’s inquiries on the non-profit distribution hub and the schools programme. Alan Morrison is here to help with the committee’s health inquiries. Those are the three areas that the committee flagged up as being of particular interest.

The committee might be interested to hear that the current format of our reports was the product of a tripartite consideration involving the then Public Audit Committee, Audit Scotland and the Scottish Government. The format of the reports has stood us in good stead over many years and has evolved to include further information on infrastructure investment, including major infrastructure programmes as well as projects.

The autumn report, which came out in November, gives a six-monthly update on major projects that cost more than £20 million, including the local economic benefit that is attracted and generated by each project.

The spring reports—one came out in 2018—regularly provide information from the annual infrastructure investment plan progress report, and last year’s report, in addition, included an overview report in response to the interest that the committee had shown in infrastructure investment more broadly. We are responding to the committee’s inquiries and are providing information that will help with its review.

The overview report contained details of capital spend beyond what was invested by the Scottish Government; details of private sector investment that was leveraged into our infrastructure investment programmes; an overview of financial transactions; and a breakdown of the total investment in our project pipeline by year, sector and funding. It also included the revenue commitment position on our 5 per cent affordability cap and the profile of revenue spend for the non-profit distributing model and hub projects, including the associated net present values. There is a wealth of information in the report.

To put the reports in context, they are a collection of projects and programmes that will make a step-change difference to our inclusive economic growth. The projects and programmes are led by organisations across the breadth of the public sector. The responsibility for the delivery of individual capital projects and programmes remains with the relevant accountable officers.

Given the span of infrastructure projects, if the committee has a detailed inquiry from a sector that is not represented this morning, I will endeavour to write with additional information, where that is deemed necessary.

That is a brief introduction. Before handing back to the convener, I will pass over to a couple of colleagues who need to declare non-financial interests with regard to the committee’s business this morning.

I am the chief executive of the Scottish Futures Trust. I need to declare a non-financial interest as a director of Aberdeen Roads Ltd, the NPD company that was established to deliver the Aberdeen western peripheral route project.

I, too, have a non-financial interest to declare in relation to Galliford Try Equitix Inverness Ltd, which is the special purpose vehicle that runs the Inverness College NPD project.

Thank you. I ask Colin Beattie to open the questioning for the committee.

Obviously, the main objective of such projects is to maximise the value of our infrastructure to the economy. Can the panel comment on the overall affordability of privately financed public sector infrastructure?

On affordability, the infrastructure investment plan sets the context for all investment that takes place following the decisions that are made, ultimately, by Scottish ministers in their budget proposals each year. As the committee knows, our budget is made up of a range of ways of financing infrastructure investment.

Colin Beattie asks specifically about privately financed projects, which the Government pays towards on a revenue finance basis over a number of years, as he recognises. The method that the Scottish Government has adopted to ensure that it maintains an affordable level of investment in revenue finance is to voluntarily put in place a cap on the revenue finance elements, year on year, which is set at 5 per cent. The committee will know, from the budget that was introduced to Parliament in December, that the basis for the cap has been revised so that we keep it absolutely in step with affordability and with the changing nature of what is captured by the cap.

One big trigger for the revision was the different treatment, due to classification changes, of the regulated asset base for the rail network. That required us to look at the basis of the cap. We keep those policies under review.

The 5 per cent cap is the method that we have used for testing and ensuring affordability. The trajectory is set out in our budget document, which we have published for a number of years, so that there is transparency around that.

It is important to maintain a certain level of infrastructure investment. What will be the impact of the NPD model being—I presume—discontinued?

You are right. Again because of classification changes, the NPD model no longer gives us additionality. It was extremely useful, particularly in response to the crash of 2008-09. The programme that followed the crash was essential for maintaining and contributing to economic growth at a really tricky time for Scotland. However, the NPD model is now discontinued.

As you will see from the published documents, our investment budget for next year is more than £5 billion. We continue to use a range of other financial tools. We have at our disposal not just traditional capital grants, but a range of other financial instruments that underpin the commitments that we set out in the budget for next year. There is also some work that is looking at what other models are suitable. That is essential as part of the ambition for the national infrastructure mission that the First Minister set out in the programme for government in September.

If you want to know the details, Peter Reekie will be able to say a little bit more about the models that we are looking at.

It would be interesting to hear what we are looking at.

As Alyson Stafford said, the forms of private financing of infrastructure—or any sort of financing of infrastructure that we can use to deliver additionality—require a private classification under the Eurostat rules. We have talked about those rules before. The latest version of the rule book, which is 150 pages long, was published jointly by Eurostat and the European Investment Bank in 2016, and it sets out a relatively narrow track of structures that can be put in place.

The Welsh Government was going to adopt the Scottish non-profit distributing model to deliver the same sort of additionality, and it was planning a programme. However, the rules changed and it had to evolve its model to be a profit-sharing model, which it calls the mutual investment model. That model has been assessed by the Office for National Statistics and Eurostat under the latest rule book and has been given a private classification.

We are exploring opportunities to use a similar model, to see whether there can be a version that works in Scotland. It is likely to be very similar to the mutual investment model that the Welsh Government has adopted. It is important that the model is able to gain private classification; that it is suitable to deliver the projects that we want to use it for; that the industry responds positively to it, tenders for it and is able to offer good value to us; and that it is able to deliver sustainable business for the construction industry.

We are undertaking a little bit of engagement with the marketplace at the moment, to understand the acceptability of those arrangements to the market. We are engaging mainly the construction market, but we are also engaging financiers. We are looking in detail at the structure of the Welsh mutual investment model.

I will come at the issue from a slightly different angle. I have been looking at the weighted average cost to capital and the internal rate of return, and I wonder why you use the internal rate of return as opposed to the modified internal rate of return. It seems to me that the modified internal rate might be more accurate.

There are quite a lot of different ways of measuring the cost of capital on individual projects, and we have used the weighted average cost of capital and an internal rate of return. A modified internal rate of return is not widely used in the sector; it is not something that the financial models that the consortia put together and the financial advisers on individual projects look to.

But is it not more accurate?

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I am not able to run a discussion with you just now about a modified internal rate of return versus an internal rate of return. The factors that we have used are weighted average costs of capital and internal rates of return, both of which have been published. The phasing of the different sorts of finance in projects—the junior debt and the senior debt—and the difference in the weighting can affect the differences between those two variables, but I am not in a position to comment on whether a modified internal rate of return would be a more accurate measure than an internal rate of return.

On that last point, there is the debate being led on one side by the Cuthberts and on the other by the SFT is about how one measures the effectiveness of NPD. We cannot go into the detail of that today, but an important point is that we need to be sure that we end up with a proper reflection of the best way of funding any successor programmes.

I want to go back to the change in rules, the impact of which is pretty fundamental. You have said that the rules come from Eurostat. As a matter of interest, will we still have to abide by those rules if and when we get Brexit?

Eurostat produces the “Manual on Government Debt and Deficit”, which sets out the rules that create our context. However, it does not invent the context for its rules; those rules are set at a much higher level and actually originate from the United Nations. If we respect the UN principles with regard to national statistics, which the UN sets out as guiding principles for any nation on the globe that is part of its thinking, they need to be considered. They set the parameters for how Governments are seen to be competent and how they do business in this space.

The Office for National Statistics, which is the United Kingdom-wide body—we come under the ONS, because there is no specific statistics body in Scotland—will fulfil a role. As far as we can see, it will take and interpret what comes from the UN and see how it applies to classification issues for anything that is managed under public finances for the UK.

The short answer is that I cannot say, “With one bound, we are free.” Peter Reekie might have something to add, because he works closely with those organisations.

What Alyson Stafford has said is exactly right. We need to have a set of rules and, as Ms Stafford has outlined, those rules have an international hierarchy. I cannot see any very quick change happening with regard to the detail of the rules that we have to apply.

Alyson Stafford has explained the issue to the committee before and I was aware of the situation that she has described, but I just want to check whether the specific changes fall into the UN category or whether they relate purely to Eurostat. Some things are purely Eurostat and others are informed by UN rules. Is this particular change informed by the UN changes?

The UN—or something at that level—sets a series of principles that are worked through in detail by the different statistical authorities. You are right to say that the detailed guidebook that we referred to is published by Eurostat, but it only embodies the principles that have been set. We have no information to suggest that the ONS would seek to embody those principles in a different way through any changes.

Okay. I do not want to dwell on this too much.

As a final point, it is fair to say that the system relies on experts in the various statistical authorities, whether at European or UK level, taking what comes from the UN and interpreting it. As we have seen, how those interpretations are captured in the “Manual on Government Debt and Deficit” and other such publications, and even how those are interpreted, is a skill and a science—perhaps even an art form—all of its own. The only fair answer that I can give is that we will have to wait and see.

Moving to a wider subject, I am obviously interested in how we achieve the national infrastructure mission, and you have provided an answer to that in general terms. However, I would like to clarify where we stand with regard to the national investment bank. When can we expect it to start raising money for infrastructure projects, and what will be the relationship between the Scottish Futures Trust and the bank—and, indeed, Scottish Enterprise? I would have thought that there was an element of overlap across the board, particularly in relation to lending to or investing in businesses.

I will start, and I will bring in Rachel Gwyon and Peter Reekie as necessary.

Early this year, a bill will be introduced to establish and set the financial arrangements for the Scottish national investment bank so that, from 2020, the bank will be investing in our businesses and communities. As for the relationship with the Scottish Futures Trust, the headline is that each body will operate with a different clientele. In terms of its establishment, the Scottish investment bank will use financial transactions, and the requirement for that particular use of our budget is that it has to be applied to organisations that are outside the public sector boundary—that is, private sector bodies.

The Scottish Futures Trust supports a tremendous amount of our infrastructure delivery through public sector areas of activity. In terms of the current landscape of other activities, discussions are taking place on the areas that would fit more readily within the scope of the Scottish national investment bank, and I know that Scottish Enterprise is having constructive conversations with those establishing the bank to work through that issue.

My colleagues might have something specific to add. Peter Reekie can talk about the relationship between the Scottish national investment bank and the Scottish Futures Trust, and the space of activities between the two.

To build on Alyson Stafford’s comments, I point out that the Scottish Futures Trust does not operate as a provider of finance. Instead, it operates with public sector bodies across Scotland and interfaces with the private sector to innovate and deliver structures that are capable of being financed and to manage programmes of activity through the delivery of infrastructure. The Scottish national investment bank will be a provider of finance, and, as Alyson Stafford has said, it can work across a range of areas in which finance is provided to private sector entities.

Our work involves coming up with ways and means of financing projects. It might be that some of those ways will be suitable for the SNIB to provide finance to, and we would work closely with it in those cases, However, with a lot of the work that we do with public bodies, it will not be possible for the SNIB to provide that finance.

There is definitely no overlap, but there are great synergies with regard to how the areas will complement each other.

The thrust of your question was about where the arrangements fit within the national infrastructure mission and how that is financed. The legislation that will set up the powers of the national investment bank will go through Parliament this year, and that will help you see the context and the types of products and finance that it will look to provide. However, I would point out that the consultation, which has already begun, has made it clear that the bank will be more independent in relation to its ability to choose the products that it provides. The budget sets out the money that is being made available. For example, £340 million—I think—is being made available before the end of this session of Parliament, and the £2 billion capitalisation is allowed for in the plans.

Alyson Stafford and Peter Reekie have already given you a pile of information, but people need to be alive to the fact that, with this use of financial transactions, the national investment bank will need to invest in the private sector in a way that does not affect the classification of any projects that are invested in and does not, as a result, bring them back onto the balance sheet. I raise that simply because, as you and I are aware, Common Weal and others have put out papers suggesting what might or might not happen, and those papers have perhaps not been able to draw out that flavour. The infrastructure commission has a role in looking at future delivery in this landscape.

Last year, our leading industrialist, Jim McColl, told the Economy, Energy and Fair Work Committee that he is very supportive of the national investment bank, particularly in relation to export finance and the like, as well as investment. However, other investment banks in Europe—for example, the German national investment bank—are not constrained by state-aid rules to any great extent, and Jim McColl’s concern is that state aids might limit the ambitions and potential of Scotland’s national investment bank. Have you considered talking to Jim McColl about his concerns? Given his track record as the most successful industrialist in Scotland, we should be listening to what he is saying.

The best thing for me to do is to reflect those points back to the programme board. The Scottish national investment bank has a programme for its delivery, and I know that the board is very much alive to the issues of state aid. I have not spoken to Mr McColl about that, although I have done so on other matters, but I am very happy to ensure that those points are reflected back to the programme board.

Great. Thank you.

We are quite lucky in this committee in that we have been able to look right across the public sector landscape over the years, and from time to time, we have picked up common issues and threads in capital project delivery. I am particularly interested in how we can learn any good practice lessons. Colleagues will no doubt highlight examples of where attention needs to be paid to the delivery of some projects, but there are a number of successes that we can highlight, too. How can we gather and share such examples of good practice? For a number of years now, the committee has said that one of its wishes was to see evidence of the sharing of good practice, but how do we do that in practice? We are talking about quite a broad range of projects, most of which are, I suppose, to do with roads, rail and schools. How do we gather that kind of intelligence, and how do we quality assure across the board to improve the delivery of projects like this for Scotland?

You are absolutely right to say that this is a very broad span of projects. I have had the benefit of working in this space for a number of years, for example, in establishing the infrastructure investment board for the Scottish Government in 2010. Part of the early work of that board was to respond to areas that the predecessor of this committee flagged up, as well as reports from Audit Scotland, with the key aim of building capacity and capability and getting a sustained programme of delivery. As you have said, not everything works perfectly in this world, but if you look at the most recent report that we brought out, you will see that the majority of projects come in on time and on budget. An important part of that journey has been to learn lessons.

Something that is now systematically in place is gateway reviews for our major projects, and there are also specific reviews through the work of SFT. Those reviews happen in real time, as programmes and projects take place, and they are carried out to ensure that those who are responsible can get some third-party input on testing and reviewing. As a result of that work, there is a centre of excellence in the Scottish Government that captures not only the findings of the gateway reviews on major projects as they take place but the conclusions that emerge after the last gateway review. There are ways in which that information is shared, and there are written documents that capture all that, but we find that there is nothing more powerful than getting the people who are leading these projects together. At particular times, we match people who have done projects before with people who might be doing them for the first time.

Those are some of the key systematic ways in which we are addressing the issue. However, specific things will happen in specific sectors, so Kerry Alexander will say a bit about what has happened with the schools programme. I will also ask Michelle Rennie to comment, given that transport is our biggest area of capital investment spend. Michelle will be able to talk about the learning that we do there and how we ensure that we get the benefits that we expect from the investments that are made.

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In relation to the Scottish schools for the future programme, there are two elements to highlight: first, real-time assurance as you go along and secondly, learning lessons from what has already happened. As far as real-time assurance is concerned, it is a case of engaging regularly with local authorities on what they are doing in their projects, passing that information on and discussing it with the various project teams that you work with on those projects. That should be done in each of the assurance reviews, with those recommendations being fed back when our team and the Scottish Government work with other local authorities.

There is a reflective element to that. Once they are in facilities, local authorities carry out post-project reviews and post-occupancy evaluations, which involve thinking back to what happened and looking at how the project went and what could be done differently in the future. With regard to the schools programme, an interim report has been published on what has gone well so far and what we can build on for the future, which the team, on the back of the additional investment in schools that was announced just before Christmas, will use to determine what lessons can be learned and how those can be applied in the future.

With roads projects, Transport Scotland has, as well as undertaking the assurance reviews, instigated a more formal process in which, at the end of each phase of a project development, we stop and reflect, speak to our supply chain and our various stakeholders and try to record any lessons at that point in time. That means that we do not have to wait until the project has been completed to build those lessons into our project pipeline.

As I have said, we do that in consultation with our supply chain and with stakeholders. We have meetings on at least a biannual basis with organisations such as the Civil Engineering Contractors Association, and we also pick up a lot of lessons from the regular engagement that we have on our road schemes with communities up and down the country. We have a lessons-learned register and we offer support with informal learning for our project managers and project directors throughout the project delivery phases.

Thank you for that feedback. I have a brief follow-up question.

As the convener will remember, the committee used to be told fairly regularly that sufficient time was not put into the planning phase of projects, which had serious consequences. That was true regardless of the type of project. In addition, there was a lack of attention at the end of a project—I am talking about post-project evaluation and review and so on. The committee always cried out for evidence of that taking place, because some of us felt that that was the key to future successful delivery. Would you say that that has been the main change? Are you seeing more attention being paid in the public sector to the post-project delivery phase so that lessons can be fed back in? Are we giving the project managers of these wonderful projects the time to design them in such a way that there is a better chance of successful delivery?

Some good examples have already been given of the post-project reflections that have taken place. With regard to the committee’s observation about investing enough time in planning, it is the case that those projects that perform well have had that investment. The trajectory has been improving when it comes to putting more time into that. There might still be areas where it can be better, but there has been some improvement.

There are still things that come along that impact on projects. Sadly, where there are delays, that can be to do with factors that are outwith the normal pattern of things, whether that is bad weather, contractors who are no longer able to supply what we expect or discoveries that are made on routes. Actually, some of it is just responding to local communities. One thing in the planning phase that is likely to result in some variability is when local authorities rightly consult their communities about, for example, the location of a school. Different sites are discussed and debated. However, overall, we are seeing improvements in those areas in the way that you have highlighted.

I take on board Willie Coffey’s points about the learning outcomes. In that regard, I want to ask about some specific issues in the north-east. The first is the AWPR, so I am addressing these comments to Peter Reekie or Michelle Rennie. The AWPR has been significantly delayed. In December, two basic reasons seemed to be floating around for that. One was a contractual issue: the contractual nexus between the various parties had not been sufficiently bottomed out to allow the handover to take place and the road to be opened. Will you explain to me and, perhaps more importantly, to those watching what the contractual issue was? How did it arise and how do we ensure that it does not happen with future infrastructure projects?

The contractor has said that the delays on the AWPR are primarily related to weather, the programming of certain utility works and, more recently, defects that have been identified on the Don crossing.

I do not disagree with what you say, but there were contractual issues. Specifically on that issue, what went wrong, why did it go wrong, at whose door should we lay it and how do we ensure that it does not happen again?

I wanted to set out the basis of the delays in the first instance.

The contract did not envisage that we would have defects on the Don crossing. That reflects most contracts, which are not necessarily structured to facilitate defects, although there is a mechanism in the contract for dealing with defects. The contractual mechanism to which I think you are referring was discussed at the Rural Economy and Connectivity Committee and was to allow the phase between Stonehaven and Charleston to open. That phase was identified as a variation to the contract because, originally, the whole section, including the Don crossing, was to open up as one phase. The mechanism was used to split out that 31.5km section as a sub-phase, if you like. That had to be agreed between us and the contractor and between the contractor and its lenders as a variation to the original contract.

How do we ensure that the issue does not happen again? To me, as a lawyer who has dealt with such contracts, that sort of thing can be planned in. People watching are struggling to understand why it was not planned in. How do we ensure that such issues are planned in for future infrastructure projects?

It is not possible to plan in every possible scenario on a 58km scheme. The scheme was planned to be opened in phases so that the benefits of each phase could be delivered once it was complete. For instance, the Balmedie to Tipperty phase was opened in August. That is a normal part of the planning for such jobs.

And of the contracts for them.

Indeed.

Had the work on the Don crossing not suffered quality issues, the whole phase would have opened up as one without any difficulty. The fact that the contract had a mechanism to create a change to allow the Stonehaven to Charleston section to open shows that it had the flexibility that it needed. We can never control the speed at which each organisation manages that process through its governance.

But you can control some things. I want to look at the issue with the Don crossing, which is apparently delaying the entire section. I have no particular knowledge of bridge construction. However, constituents have made representations to me and I understand that, in the case of this particular bridge, basically, you turn up, you pour it, you put it in place and you move on. [Laughter.] I accept that it is an enormous—and very good—project but, fundamentally, it is about putting a bridge in place. How come it has gone wrong? At whose door does that lie? How do we ensure that it does not happen again?

I am interested in your representation of the simplicity of the construction of the bridge—

I did not use the word “simplicity”. However, how do we ensure that it does not happen again?

The contractor would not see it like that. The fact that the defects have been picked up is a function of the robust quality management process that is in place on the bridge. They were picked up prior to the opening of the bridge and during construction, and they will be remedied at no cost to the taxpayer.

The remainder of the road that can be opened has been opened, which has delivered significant benefits. In the feedback that we have had on the section that is already open, one road user said that it is the closest thing to time travel that he has experienced, because of the journey time savings that he is making on a daily basis. Therefore, we have shown that we are able to deliver significant benefits at the earliest possible opportunity, that the contracts that we have in place make facility for dealing with any defects—at no cost to the taxpayer—and that the quality management system that we have in place is robust and picks up defects on time, before the road is open.

I want to press you on the costs to the taxpayer. Yesterday, my colleague Jamie Greene asked about the costs of the project, which I think are now projected to be—give or take—£750 million or £745 million.

It is £745 million.

Jamie Greene asked the Cabinet Secretary for Transport, Infrastructure and Connectivity about the costs and I was not convinced by his answer, which was not particularly clear. I wonder, therefore, if I might press you on that issue. The cabinet secretary said that there will be no cost overrun. However, he also said that that was because the contractor has not yet provided evidence of why an extra amount would be needed—I am paraphrasing, but that is what I heard. If it is right that there being no cost overrun is subject to no such evidence being provided, is it not possible that there could be a cost overrun on the project?

Each of the contracts makes provision for the contractor to make claims in limited circumstances. There is a mechanism for the contractor to make a claim and the contractor needs to provide details to substantiate that claim. That is not particular to this form of contract; it is a normal risk-sharing device and this contract is no different.

The contractor has submitted substantial claims, as has been discussed at the Rural Economy and Connectivity Committee. We are discussing those claims with the contractor and examining the detail. However, we have not yet been provided with sufficient substantiation to allow us to take those claims forward. That is why the estimate is currently at £745 million.

Thank you.

I have two further questions, which move from road to rail. I suspect that Mr Reeve will answer them. I will be as brief as I can, because time is running short.

I believe that there are plans to upgrade four stations in Scotland. Those stations might include Inverness, and I see from the report that work on Aberdeen station has already started. There is a desperate need to upgrade Montrose station, up in the north-east, which has nothing like the facilities that the above stations already have. In fact, Montrose lags the rest of the stations on that section of the east coast main line. Will Transport Scotland be upgrading Montrose station any time soon?

I am pleased to say that there are plans to improve the facilities at Montrose station. ScotRail is currently developing those plans and I can write to the committee subsequently with more details, if that is of interest. The increase in service level on that railway line is in no small measure the reason for the upgrade. That increase is a very good thing, but it creates more interchange between passengers who are getting off the stopping services and on to the fast services. It is becoming a more important interchange and I appreciate and share the view of stakeholders that an improvement in the facilities at Montrose is appropriate.

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Fantastic. When you write to tell the committee what is going to happen, will you be able to give some concrete timescales? That is what people need.

I am certainly content to give you the timescales that we have.

I would be very grateful for that. Thank you.

My other question is also for Mr Reeve. The update talks about the £200 million to improve the north-east main line. In 2016, there was a promise that that £200 million would shave 20 minutes off the journey time down to the central belt, and it would be used in the north-east between Aberdeen and Dundee. Since the update has been sent to the committee, the Arup report has been published. I think that it says that there are various options; that if you invest £200 million, you will shave two minutes off that journey time; and that six of the projects will happen south of Dundee.

Prior to the 2016 announcement, what planning was done with Transport Scotland such that when the cabinet secretary said that the £200 million will save 20 minutes and be spent in the north-east, there was a robust basis for that? Given that, according to the documents that we have, the remit of the projects is to deliver economic growth and encourage people to use things such as rail, how will the £200 million improve journey times sufficiently and improve the customer experience enough to be considered value for money?

There is quite a lot going on there, so I will take it a step at a time.

The £200 million is additional to the other extensive investments already being made in the north-east of Scotland. For example, a £330 million project to upgrade capacity to the west of Aberdeen is being delivered as we speak; it is going very well, I am pleased to say.

The purpose of the £200 million is to improve journey times and the capacity for frequency on the railway between Aberdeen and the central belt. The Aberdeen-central belt reference group, which has representation from Tayside, Aberdeen and across the rail industry, is working to establish the best way of using that £200 million to improve journey times. It is not the only investment that is contributing to that improvement. There is a separate improvement to the signalling capacity just south of Aberdeen, where there is a long distance between signals, which means long times between trains. We have also started to introduce new high-speed trains on the Aberdeen to central belt services. Given their superior performance, they are also contributing to the improvement in journey times.

I do not recognise that the £200 million is specifically for a 20-minute improvement in isolation. We have been given the task of finding the best possible investment and the best return for passengers and freight customers that we can get from that £200 million, treating the railway as a system that includes the infrastructure, the track, the signalling that is controlling the trains, the capability of the trains themselves, and the timetable. The iteration of those things leads to the right outcome.

The report to which you referred was commissioned by the reference group and is part of the process of development. It focused on the potential that could be achieved just through upgrading the track—line speed improvements and specific things such as redoubling some bridges. We were not entirely surprised that that report concluded that that would not give a particularly good-value return.

Separately, in parallel with that report, work is going on with colleagues to look at issues such as signalling capacity. At this stage, without that work having been completed, my judgment is that that is likely to be a more fruitful area for investment because we have a quite old-fashioned signalling system between Dundee and Aberdeen.

Turning to your final point about where the works will be located, the railway is a system and the objective is improvement of journey times, capacity and freight capacity between Aberdeen and the central belt. It is sometimes the case that the best way of improving the train to Aberdeen is to invest in one of the key junctions further south. For example, we have some single-track sections between Dundee and Perth that we are looking at. However, I expect that most of that money will be spent towards the north end of the line because we have some other projects under development. Mr Coffey made an observation about the importance of studying something carefully before one commits the funds; that is exactly what we are doing.

The commitment was that this money should be spent over the 10-year period of the Aberdeen city region deal, and we are a couple of years into that. I think that we are making good progress towards meeting that commitment in a prudent development process, but I would also point you to all the other investment in that route at the moment.

I am not quite sure which one of you deals with items that are not in the report. You say that the Forth replacement crossing—which I take to mean the Queensferry crossing—is no longer included in the report because, as at April 2018, the project was completed.

I have raised this before as a regular user of the road—when you are bumping across at night on the hard shoulder at 30 miles an hour, it does not seem completed. I think that the cabinet secretary said that work would go on until the end of this year. Can you please explain why the crossing is listed as a completed project?

The Queensferry crossing is completed in the sense that it is operational. Finishing and snagging works are still under way. Most of those that require traffic management take place at times during the night and when traffic volumes are minimised.

You have probably seen the queues because of works in the evening shown on social media—it is not overnight.

I appreciate that there is still traffic, but we are trying to do the work at times of the day when there is less traffic; we are not doing it at peak times.

My point is that in the real world, “completed” means finished—not signed off on a contract or some such thing. Can you give us an update on that and perhaps put the project back in the “live” category so we know what is happening and when it will happen?

As I said, some finishing and snagging works remain. The contractor has suffered delays as a result of the failure of the subcontractors—

I do not ask you to be an apologist for the contractors.

—and an inability to identify specialist resources in time. The current estimate is that the works will be complete by October this year.

Can you put the crossing back into the report so that we can monitor it?

By all means, we can add something that covers this issue to the covering material that we give you.

It just does not seem completed to me.

We are happy to provide you with regular updates if you wish.

I would like to raise the issue of the new Edinburgh children’s hospital. It is a £150 million hospital, which is badly needed, as anyone who has used the old sick kids hospital, which is in my constituency, will attest to.

If you Google the Edinburgh children’s hospital and you go to the NHS Lothian website that deals with the details, it says that the hospital will be open in 2017; if you go to the project page, it says that it will be open by 2018. I think that we can agree that this is not a project that is on time.

On the budget, back in July 2018, according to NHS Lothian board papers, the health board made provision of an £11.6 million loan for working capital to Integrated Health Solutions Lothian, which is the contractor leading the project. That amount against a project worth £150 million seems like a very large working capital loan, and it begs the question whether the project is delivering value for money.

On top of that loan, the board also agreed to pay a rental fee to IHSL so that it could get early access to install equipment in a hospital which, as I alluded to earlier, should already have been open.

Is the project delivering value for money? Frankly, given the litany of errors, such as the failures of contractors, the clear issues with the finance, the fact that the external verifier refused to sign off the building in the autumn and, indeed, the video clips that did the rounds, showing floods of hot water in the building itself, it is not going right at all, is it?

I will direct that question to Alan Morrison, who is in charge of health. Is value for money being delivered?

The figures that Daniel Johnson referenced relate to a settlement agreement, which NHS Lothian is discussing with the special purpose vehicle, about how to resolve the issues that he mentioned. The purpose of the negotiations, which have not concluded and are subject to commercial terms being agreed, is to resolve the issues that have been identified before the hospital can be completed and opened. We feel that the important point is ensuring that the facility is ready and fit for purpose before patients are transferred to it.

It is obviously disappointing that completion of the hospital is behind schedule, but we receive good feedback that the clinical services that are being delivered on the existing site are high quality and provide good patient care. In the meantime, NHS Lothian continues to work with the SPV and the contractor on the issues that need to be resolved before completion of the hospital.

A delay of more than two years is more than disappointing. Is it common practice for a loan of the size of £11.6 million to be necessary? If NPD deals are about risk transfer, it seems odd that the public sector is bailing out failures by the private contractor.

As far as I am aware, it is the only health project that has involved the arrangements that I have mentioned. I do not know whether anyone else wants to comment on the wider point about NPD programmes.

The loan was given principally because there was a dispute in a number of areas and it was seen as the best way forward to get the hospital open as soon as possible. The SPV and NHS Lothian had different interpretations of whether the problem in the design or in the construction of some parts of the hospital. Rather than have a court case, which would add further delay and risk, depending on the outcome, it was agreed that the loan was a sensible way forward.

The agreement is still being negotiated, and NHS Lothian needs to confirm that what the money will be used for is legitimate and reasonable. The fact that there has not been agreement yet shows NHS Lothian’s diligence in ensuring that the money will be used appropriately in delivering what it is intended for.

Can I confirm that the £11.6 million will be loaned on a commercial basis, at a commercial rate of interest?

That has not been confirmed, because it is part of the negotiations. Within the parameters of the agreement, £11.6 million is available, but NHS Lothian needs to be content that what it will get for that sum delivers value for money.

Given that there has been a failure with the contractors, that there have been major disputes regarding what has been agreed to, as you have said, and that almost 10 per cent over and above the contract value has been required to be spent, it strikes me that there must have been significant failures in the way in which the project was scoped, the contractors were selected and the contract was designed. Is that assessment correct? What are the failures that have led to this situation?

That is still to be determined. We will need to review the circumstances and see whether any lessons can be learned.

Surely, one would hope, there are lessons to be learned.

Such projects are complex and we recognise that there will be occasions when things will not go according to plan. We need to understand where the problem lies—whether it is in the design of the hospital or in the interaction with the contractor and the SPV—and whether lessons can be applied more generally across the health sector.

My final question is a simple one: do we have any idea when the hospital will open?

We do not have a definite time at the moment.

That is not very good, is it?

Do you have any further questions, Mr Johnson?

No.

Alyson Stafford looks like she wants to add something.

No—the matter has been well explored.

As members do not have any further questions, I thank all the witnesses very much indeed for their evidence.

10:45 Meeting continued in private until 11:10.