Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, October 25, 2018

Official Report 695KB pdf

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Section 22 Report

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“The 2017/18 audit of the Scottish Public Pensions Agency: Management of PS Pensions project”

Item 3 is the 2017-18 audit of the Scottish Public Pensions Agency. I welcome our witnesses from Audit Scotland: Caroline Gardner, Auditor General for Scotland; Stephen Boyle, assistant director; and Tom Reid, senior audit manager. I invite the Auditor General to make a brief opening statement, in which I believe she will cover the legal status of the report.

Thank you, convener. The purpose of this report is to make Parliament aware of problems with a major new information technology system for the Scottish Public Pensions Agency and the financial implications of the delays. The agency’s main role is to administer and pay pensions for members, deferred members and pensioners of pension schemes of the national health service, teachers, police and firefighters in Scotland.

In October 2015, the agency awarded a £5.6 million contract to Capita Employee Solutions to deliver a bespoke unified pensions administration and payment system. The new system, PS pensions, was to be operational by March 2017. In February 2018, the agency’s chief executive decided to close the project. The agency has spent £6.3 million on the project and has written off £1.6 million in capitalised assets that will no longer be used. The closure of the project means that the agency has not been able to progress its strategic, business and workforce plans as originally intended. It has forecast significant budget gaps and estimates that it requires an additional revenue budget of £9.8 million between 2019-20 and 2022-23. It also needs a total capital allocation of £18.4 million to deliver the replacement project.

The agency has extended contracts with its existing suppliers to ensure that payment of pensions is not affected by the closure of the project. The SPPA is in discussions with Capita to establish whether either party bears responsibility and potential financial liability due to the unsuccessful project implementation. I have, therefore, not commented on arrangements for implementation of the PS pensions project. Once the legal process has concluded in 2019, I intend to prepare a further report that will cover those issues.

As always, we are happy to answer the committee’s questions about the current position and the likely financial implications, but we are unable at this stage to answer questions about the causes of the problem. We will come back to that, as I said, in a report next year.

Thank you very much, Auditor General. Alex Neil will open questioning on the report.

I have two questions. The first one is: who picks up the tab? Clearly, irrespective of the outcome of the negotiations or any legal action, there already has been cost and there is likely to be further cost to the pensions agency, in terms of both administration and the capital budget. I am not aware of the relationship between the Scottish Government and the pensions agency. Who provides funding for the pensions agency’s core running costs and capital costs? Is it provided by the Scottish Government or is it self-administered? Does the agency get a fee from the pensions providers or whatever?

You are right: whatever the outcome of the discussions between SPPA and Capita, there will be financial implications, both revenue and capital. Stephen Boyle will talk you through the current discussions about who will meet those costs.

The SPPA is an executive agency of the Scottish Government, so it is funded by the Government to meet both its revenue and capital requirements in the current year. In its forward planning, it captures its requirements and expectations for revenue and capital into the future.

What we have not set out in the report is the implications of the situation and whether there are any financial penalties for either party. If there were any recoveries from one side or the other, they would need to be captured in forward financial plans, particularly of the SPPA, and they could potentially offset any future capital requirements that the SPPA has.

Whatever cost there is would come from the Scottish Government’s budget.

Yes, that is correct.

So, there is a cost to the taxpayer of this fiasco.

Yes. As I said, the SPPA is an executive agency of the Scottish Government and it is funded directly by the Scottish Government.

Obviously, we do not want to get into who is to blame yet, because that is hopefully going to be resolved by the negotiations and/or legal action, but at some stage you will come back to this committee after you produce your 2019 report, Auditor General.

Absolutely.

The wider issue is that we were given reassurances by the permanent secretary and others in the past year that IT projects were now under much tougher, better management and that there was better control and all the rest of it. Here we have again—irrespective of who did what and who is to blame and irrespective of the outcome of the negotiations—another IT project that has gone badly wrong. Does that mean that, despite the promises that were made, we are still in a position where Government does not seem to be able to get big IT projects right?

I cannot answer that question at this stage. There are discussions under way between SPPA and Capita Employee Solutions about what has happened with the project itself. I do not want to compromise those discussions, but I will report back next year once they are complete.

All right. Did the project predate the commitments that were given to this committee about the introduction of new and allegedly better management of IT projects by Government and its agencies?

The contract was awarded in 2015 and planning would have started well before that.

So, it does predate them.

Yes.

Auditor General, I would like to take a little look at the governance of the SPPA. As an executive agency of the Government, I presume that it is subject to the Scottish public finance manual. The project would therefore be a major investment as it is more than £5 million, inclusive of fees and value added tax. Is that correct?

Stephen Boyle, do you know what the position was at the point at which the contract was awarded?

I do not have that in my head, Mr Beattie. I would need to come back to answer your question.

Is the cost of it more than £5 million?

Yes, it is.

As set out in the document that I am looking at, it would therefore fall under major investment.

On 31 May, Colin Cook from the digital directorate wrote to the convener assuring the committee that, since January 2017, the Scottish Government has taken a more interventionist approach. He detailed carefully all the steps that are being taken, all the different processes that would make sure there would be no issues in the future, and that there would be engagement with the corporate assurance providers, internal audit, capability development, project assurance team, and so on. Is there any indication that that has taken place in the project?

Again, I am afraid I have to say that I do not want to comment on the management of the project at this stage because I do not want to compromise the discussions that are under way between SPPA and Capita Employment Solutions. I know that is frustrating for the committee, but the purpose of the report is to make you aware of the issue and of the potential financial implications rather than focusing on where the responsibility for the problems lies.

I appreciate that you have difficulty in commenting on some of these things, but perhaps I can just mention one other thing about the communication of 31 May. It lists all the IT contracts, including the one for the SPPA. You would have to have a considerable degree of perspicacity to work out that, where it says “closure” and, at the same time, that the project delivery date is February 2018, you might infer that that was actually the project delivered. You would then have to work out that where it says “business justification” and so on underneath, “The preparation of variations of existing contract”—

Mr Beattie, I am sorry to interrupt, but the Auditor General has been quite clear on what she can and cannot answer here. You seem to be going down the line of fault. The Auditor General has been clear that we will come back to that next year, so if you are asking about the figures, I will allow you to proceed, but if not, I will move on.

Clearly there is a fair bit of restriction on what we can discuss at this point, which is unfortunate.

That is fair. It is unfortunate, but I think that the Auditor General has been clear and it is for good reason. She will come back to us next year.

In that case, I will leave it at that.

I have three questions, and I will try to keep two of them general so that we do not get drawn into the limitations that you have set, convener.

Alex Neil has referred to some of these so-called fiascos and you probably know, Auditor General, that the projects that have not worked well all come under the public sector umbrella. If staff members are involved in those projects, does their involvement travel with them if they move jobs? If someone in another agency is setting up a project, would they know that somebody has been associated with a project? That was one question.

Secondly, given the huge market for public sector and large organisational systems, why are bespoke solutions required? Are there no off-the-shelf solutions that would be good enough?

Finally, you mentioned that the original contract was for £5.6 million, but £6.3 million has been spent and £1.6 million written off. Where does the £1.6 million come in? Is the write-off not actually more? Could you go through those questions, please?

I will do my best. I will ask Stephen Boyle and Tom Reid to answer the third one for you in terms of the accounting treatment.

The point about the skills question is generally the point that Mr Beattie was making. The Government has recognised that a number of significant IT systems have not delivered as planned or in some cases at all, and it is difficult for public bodies to build up the skills and the expertise that they need to be intelligent purchasers of IT systems or to develop them themselves when they decide to take that route. The Government has been investing in a central information offices team who can provide that support and challenge to projects.

That is one of the things that we will be looking at when we report back next year, once the legal discussions have concluded, but it is made more difficult by the fact that IT skills are in short supply and tend to attract a premium in terms of salary. We will be looking at how well that has worked in practice for the project as well in general through a piece of work we are planning to do on digital transformation in central Government.

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Could somebody move from one problem project to a new job and do the same thing?

The aim is to do exactly the opposite, and take people who have moved from a successful project—and there are successful projects; they do not tend to come to this committee, but they do exist—and to use those skills and expertise on other projects.

You do not think there is a flagging system or some way of knowing that somebody has been associated with such a project.

I do not think that there is necessarily a flagging system, but the Government takes very seriously the need to improve its performance in these areas and is making sure that people who have been responsible for a problem system do not move on to another one. The aim is to do exactly the opposite, and build capacity and expertise. I cannot comment on what has happened with the project, but that is certainly the intention.

On bespoke systems, sometimes there are bespoke systems, sometimes there are not. We expect to see that in the planning and the business plan option appraisal for any particular system. Again, I cannot comment on this one at this stage. There has often been reluctance to look at whether you can get 90 per cent of what you want from a commercially available system rather than running the risk of the likely extra costs of a bespoke one. The central information office is trying to develop expertise around that.

Is it actually looking at that particular aspect?

For the SPPA project?

No, I mean generally.

In general, yes. I think looking at the make or buy question is central to what it is trying to do and will be part of what it will do in the planned piece of work on digital and central Government next year.

Stephen Boyle or Tom Reid can pick up on your third question about the £6.3 million and £1.6 million.

As we say in paragraph 9 of the report, the £6.3 million covers all the costs associated with the project, including the costs and the money paid to Capita as well as staff costs, hardware and other elements.

In terms of the £1.6 million over the development of the contract, the hardware and elements of the software development were capitalised and recorded in the annual accounts. The £1.6 million represents what was written off in the agency’s annual accounts.

Is that in addition to the £6.3 million?

It is part of the £6.3 million. We just highlight it separately because, as I said, that is an amount that has been written off within the agency’s accounts.

You can spend whatever £6.3 million minus £1.6 million is and it brings no value to the business and it is not capitalised. That surprises me slightly.

No, the £1.6 million has been capitalised. It is also to do with the timing of the closure of the project. Costs were incurred within the year that would not have reached the point at which they were capitalised.

If the project had been going ahead, that would have been capitalised.

Elements of it would have been capitalised.

I know that there are accounting rules, but if you are spending that amount of money on what does not seem to be going to be an asset, I have to wonder what the project is actually all about.

Auditor General, can you clarify that?

Stephen Boyle will be able to do that.

We can expand on that more fully in the report that we plan to bring back to the committee next year.

Super.

Convener, I think that it is probably wise not to investigate the project any further and put the Auditor General in a difficult position. I would like to ask a number of questions about software procurement and methodology, but they can wait.

Can they wait until next year’s report?

I think so.

That is very good of you, Mr Coffey, thank you. Liam Kerr, do you feel the same or do you have a question?

Willie Coffey is right. It would be interesting to explore an awful lot of this.

I have one question that I will try to phrase correctly. It might be interesting looking forward. The original contract was £5.6 million. Tom Reid has just talked about there being a spend of £6.3 million, but the total capital allocation required in the SPPA estimates going forward for five years will be £18.4 million, which is a considerable difference from the original estimate. Do you have any information on why the cost of delivering the replacement system—the £18.4 million system—is going to be that much higher?

That is the complete capital budget for the agency over that period of time, so it does not just reflect the costs of the project itself. It covers the extension to the incumbent supplier, and the agency is budgeting £6 million for that element. It represents the costs of a new procurement and implementation. The agreement that the agency has entered into with the incumbent supplier goes to 2024. They will need to look at a longer-term solution going forward, so an element of the budget covers the longer-term solution. The final element is miscellaneous capital, which covers areas such as existing information and communication technology and existing capital works on the agency’s headquarters.

I see. I just want to check that I have got this. A significant element of the £18 million is what Alex Neil was exploring—the run-on of where we are at the moment, just to make sure that everything stays in place and nothing goes wrong in the meantime. Can you isolate how much of that £18 million is the cost of a new package, such that we can say, “Okay, it is comparable to the £5.6 million that was originally projected” or not?

There are two elements—or three, in effect—to the approach that the agency has taken. It has extended the contracts with their existing suppliers to ensure that it can continue to pay pensions. It has entered into a contract extension with one of the incumbent suppliers and, as part of that agreement, it is looking to develop the system so that it can start to develop a unified, bespoke system. That takes the agency to 2024. It is aware that, beyond that, it will have to look at a more long-term solution and this gives it time to do that. It is currently budgeting £7.4 million for a new procurement and implementation of a further system. As I said, that is just what it has budgeted at the moment. It is a longer-term approach, so the costs are not as certain as they will come to be.

I understand that. Again, just to be clear, about £7.4 million is the comparable figure to the £5.6 million that was budgeted for back in 2012, or something like that?

Yes.

Thank you very much. We look forward to coming back to this, Auditor General, with some more questions once you report again in 2019. I thank you and your team for your evidence this morning. I now close the public part of today’s meeting. Thank you.

10:07 Meeting continued in private until 10:30.