Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, November 29, 2018

Official Report 773KB pdf

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Section 22 Report

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“The 2017/18 audit of the Scottish Government Consolidated Accounts”

Item 2 is consideration of the section 22 report “The 2017/18 audit of the Scottish Government Consolidated Accounts”. I welcome from the Scottish Government Leslie Evans, permanent secretary; Gordon Wales, chief financial officer; Alyson Stafford, director general Scottish exchequer; and David Rogers, director, constitution and Cabinet. I ask the permanent secretary to make a brief opening statement.

Thank you for the opportunity to provide evidence on the Scottish Government’s consolidated accounts for 2017-18. I am pleased that the Auditor General’s opinion is unqualified for the 13th year, especially given the significant additional complexity in the Government’s finances that the Scotland Act 2016 has brought about, and I am encouraged that the Scottish Government has been recognised for its good record of financial management and reporting.

Borrowing, the Scottish reserve and significant tax-raising powers and their associated block-grant adjustments for the devolved and assigned taxes are just some of the new features of public spending in Scotland, and they are unique in the United Kingdom devolved landscape. However, the journey is not yet complete, as work continues on areas such as the assignment of value added tax and the devolution of air passenger duty. We will have more powers that impact more directly on more people, so we can all expect the picture to grow ever more complex in the years ahead.

Given that, it is even more important that the Parliament and the public understand how money is raised and spent and what the resulting assets and liabilities are. Transparency is critical to that understanding, and the budget process review group has been helpful in determining the approach to scrutiny and defining a range of new publications, including the first medium-term financial strategy, the fiscal framework outturn report and publications that are aimed at accessibility, such as “Scotland’s Finances: Key facts and figures”, which was published alongside the budget. The annual accounts and other existing publications, such as the Scottish consolidated fund account, have been expanded to include additional levels of disclosure on areas such as borrowing and investments.

Such changes have increased transparency about existing and new powers, but there is more to do. We intend to publish by March next year a tailored-for-Scotland consolidated public account. That is challenging, not least because of the large number of bodies that it embraces, and we have gathered data from the financial year 2016-17 to shape and inform our approach. That new publication will significantly expand the information that is available on Scotland’s devolved public finances, and we look forward to engaging with the committee, Audit Scotland and other interested parties as we consult on the publication’s form and content early in the new year.

The publication of a new national performance framework in the course of the year resulted in our reviewing how we report on performance and, in particular, on the link between spending and outcomes. We will continue to engage with Audit Scotland as that work develops.

We have made progress. However, in her report, the Auditor General for Scotland made recommendations for further improvements in transparency, particularly on capital borrowing and the Government’s intervention in private companies. As was outlined in my letter to the committee of 23 November, we accept and will act on those recommendations.

I welcome external scrutiny, but internal scrutiny is important, too. The changes to the tax and spend landscape demand appropriate governance arrangements to challenge our work in the Scottish Government. As the Auditor General acknowledged, I changed arrangements during 2017 to meet those additional demands; the changes included the creation of and appointments to new roles, such as the director general Scottish exchequer and the chief financial officer. I am strengthening internal scrutiny further; interviews are taking place to appoint additional non-executive directors, with a particular focus on areas such as tax, accounting and digital. I shall monitor the effectiveness of those arrangements and look forward to hearing Audit Scotland’s views in its report on the 2018-19 accounts.

Convener, I am sure that I do not need to tell you or the committee that these are challenging times, not least for the Scottish Government and the civil service in responding to current events while maintaining competence in the day-to-day delivery of outcomes for the people of Scotland. As that includes the need to be open, capable and responsive in our transparency agenda, I welcome the profile that the consolidated accounts and our other publications are being afforded.

I am happy to answer questions that you and other committee members might have, convener.

Thank you very much, permanent secretary.

In your letter to the committee, you said that you

“do not believe that the Accounts ... are the best place for an extensive review of the Government’s ... achievements”,

and you suggested that you might instead signpost

“readers to ... more detailed sources of information”.

Do you agree that, as I think you said in your opening statement, the consolidated accounts should be extended to include all the assets, liabilities and operations that you have responsibility for or stewardship of?

I and my colleagues can say a bit more about our plans to produce a consolidated account, which will cover devolved public spend in Scotland.

Are you suggesting that more detailed information might be placed somewhere other than the however many pages of the financial statements? If so, is it helpful to direct individuals to multiple sources of information rather than one?

In short, no. In making our performance reporting more transparent and accessible, we are required to look at not only the amount of information that we produce but where we locate it. We are working on two proposals. We are looking at where the accounts might give us a bit more of an opportunity to provide information, but it is more likely that we will look to consolidate information in websites that we already use.

The committee asked about performance, but we need to differentiate between the Scottish Government’s performance as an organisation, information on which will probably always be found on the Scottish Government’s website, and progress on outcomes in the national performance framework. The Scottish Government’s performance is its own responsibility and the website is the right place for us to go into detail about how we are doing in that respect.

As for the national performance framework—as I said in my opening comments, it has now been refreshed—responsibility for that lies not only with us but with a large number of public authorities, not least since the passing of the legislation that places such a duty on them. We therefore need a website that takes account of multiple inputs from a number of authorities. We have curatorial responsibility for the national performance framework but, given that Scotland owns the framework, it is important that people can go to one place if they want to look at our progress.

That is the work that we are undertaking. I can say a bit more about it and who we are involving in the process if the committee requires.

I seek your assurance or confirmation on one matter. Information that you put into the consolidated accounts is subject to some form of scrutiny by Audit Scotland, because it is associated with the financial statements. However, if you spread information around other sources or websites, will the same scrutiny from Audit Scotland be required for that?

We are working—and will want to work more closely—with Audit Scotland on the scrutiny that is available to the national performance framework and where the website lends information for that purpose. However, we are looking at two distinct but linked websites, both of which will be referenced with and have a relationship to our accounts. One site will deal with progress against the national performance framework, which covers all of Scotland and a number of public authorities, while the other—the Scottish Government’s website—is, as you would expect, where the Government’s bread-and-butter performance will be set out. The two sites need to link and connect with each other.

I would expect that, if you referred to something from the financial statements, the auditors would scrutinise that.

Yes, and they will hold us to account on the national performance framework, too.

You mentioned in your opening statement the recommendations on giving loans to private companies and on the relationship with private companies. I welcome your comment that you accept in full all the Auditor General’s recommendations about those loans.

The issue is transparency—not only transparency in the Parliament but transparency with the public about how decisions are made, the level of any investment and the potential return on any investment. Will you detail what framework you have in place or what plans you have to put a framework in place on, first and foremost, how decisions are made about money going to private companies? What plans do you have to provide transparency on the investments that the Scottish Government has made?

We have quite an extensive framework in place, which includes UK and other legislation, our own economic policies and supporting documentation—the economic strategy, for example—and a realm of guidance, procedures, expertise, oversight and scrutiny, which are all brought into play in discussions to support sound Scottish Government decision making on investment in private companies. That is all subject to the Scottish public finance manual, as you would expect.

We need to look at two elements. We need to be clear about why and where the Scottish Government might invest—we would go to an economic strategy or our manufacturing action plan for that—and about how the Scottish Government might invest, which is guided by the Scottish Government’s medium-term finance strategy. That strategy asks pretty searching questions of us, as it should, about the business case, due diligence, benefits, affordability, risks and so on.

We need to bring all that together to ensure that people are aware of the considerable evaluation, testing and due diligence that take place. That information is all there, but your point is about bringing it together in a framework. There might be an existing vehicle for accommodating that information and making clear to people the decisions that we are taking and the granular activity that takes place before we make any decisions on investment in private companies. Gordon Wales might want to say more about that, because he has been very involved in the processes. The Scottish public finance manual might be the place where we could lay out coherently, for everybody to see and understand, the processes that need to take place and the hoops that need to be jumped through before we take such decisions.

Your second question was about publicly available information and the role of Parliament. As you know, we make numerous loans and investments through a range of tools and processes, and we report on them through schemes that are approved by the Parliament as part of our budget. You will be aware of some of them—there are too many to mention here.

As the committee has said, a small number of investments that have a higher profile are likely to be in the public interest to disclose—that includes their levels of financial risk. I am mindful, as are others, of the important role that the Scottish Parliament plays in that, which is one reason why the Cabinet Secretary for Finance, Economy and Fair Work informed the Finance and Constitution Committee about both investments and loan processes that were under way earlier in the 2017-18 financial year.

No concerns were raised about that process, but we need to be clear about when circumstances require us to ensure that the Parliament—and, through Parliament, the public—is aware of such investments. There will be only a small number of them, but we will need to consider the criteria of maintaining commercial confidentiality, which you may want to talk about a bit further, legal obligations and—most important—the risks to the value and the intended impact of the investment. As I said, Gordon Wales may wish to talk about the two investments that were probably in your mind when you asked your question.

I was going to raise two specific examples: Ferguson Marine Engineering Ltd and Burntisland Fabrications Ltd. Can you give any details about the extent of those investments, what our equity stake is, what our expected return is, whether we have any plans to make any further investment—any further loans—or whether we plan to sell off those assets?

You will appreciate that a level of commercial confidentiality is still operating. That is one of the reasons why we spoke to the Finance and Constitution Committee earlier on. We are quite early on with both those investments and decisions. However, Gordon Wales might wish to say a little bit more about our process for taking decisions and how Parliament will be involved in that.

There are no plans to sell off or accelerate the repayment procedures that are already in place for both of those investments. You will be aware that there was a fair amount of disclosure in the accounts about the extent of both of the loan arrangements that were put in place.

09:15  

The question is not whether information about the investments should go into the public domain but when would be the most appropriate time for that. That goes to the two specific points that were mentioned by the permanent secretary: commercial confidentiality in any legal agreements that might have been entered into; and, more specifically, situations such as this that can often be fairly risky. In the two examples, BiFab in particular was significantly in the public domain. There is a question about exactly when that information goes into the public domain and whether putting it into the public domain earlier places the Government’s investment at more risk. It is always difficult to know when to do that, but it is often dictated by things like the ability to win contracts. Both organisations are in processes to be awarded contracts, so it would be more appropriate to put more information into the public domain once those processes are over.

Would you accept that there is an issue around transparency, particularly as we are talking about public money—taxpayers’ money—and the public having a right to know what companies they are investing in, how much they are investing and when and if they are likely to get a return on their investment? Is there not also a risk that it might appear that decisions are being made for political or other reasons, not purely financial or economic reasons, because of the lack of full transparency and of a publicly available framework? I do not mean with the particulars that we are discussing, but the principle more broadly.

I can see why you might say that. A key issue is that when the Government acts to intervene in private companies, it has to do so in the same way as a commercial investor would. Under the market economy investor principle, which is set out in the European Union state aid framework, we are required to act as a private investor would. It is not the case that the Government is able to inject whatever funds it feels are appropriate; it has to do so in the same way as a commercial investor. That relates to such things as the amount of the investment, the expected return and the duration over which the lending takes place, which are done on an entirely commercial basis.

The accounts are normally the appropriate vehicle to disclose that; you will have seen from the 2017-18 accounts that a fair amount of information has already gone into the public domain through them. Unless an appropriate parliamentary statement is required, the accounts are normally the primary vehicle, and would be the vehicle through which we would disclose loans.

As the permanent secretary also said, the Government makes a significant number of loans every year. I accept that there has been quite an emphasis on those two particular loans, but we normally do not disclose the detail of every loan that goes to every individual or company. We believe that the public interest was best served by singling out those two examples and that is why the disclosures in the accounts are as they are.

Further to that, do you accept that there is at least the risk of political interference with regard to decisions about which companies get loans and which do not?

We have talked briefly about a framework. The Government is required to act in the same way as a commercial investor would in that space. It is also important to bear in mind the fact that regulatory, proprietary and value for money considerations are incumbent on the accountable officer who makes the advice and, indeed, on the permanent secretary as the principle accountable officer in that space. Those all require the senior civil servant who makes the recommendation to the minister to do so within that regulatory framework and say whether it is legal and the Government has powers to do it, whether it is the type of thing that Parliament would expect funding to be utilised for, and whether it demonstrates value for money for the public purse. There are comprehensive assessments to be made on all three things before the advice goes to the relevant minister.

On that point, I can understand the hesitancy in publishing all that information while it is still commercially sensitive. However, once it is no longer commercially sensitive because we have a return on our investment and we have moved on or no further investment is planned, would you be happy to publish all that information, communication and analysis?

We would want to discuss that with ministers. The other thing on which we would want to be clear is whether there are any legal requirements that mean that we could not put that information into the public domain—

But, in principle, yes.

In principle, yes.

Gordon is right—in principle, yes.

I take your point about transparency and public interest. Bringing together the onerous sets of responsibilities and tests that we have to pass into one place so that people can see and understand what needs to be gone through before any decisions are taken is an important part of increasing transparency.

I know that you are talking about specific instances, but bringing that information into the public domain might assure people that there is limited opportunity to take anything other than very well-informed and well-tested decisions on such investments.

Thank you, permanent secretary.

I have a final quick question about the 2 Sisters Food Group plant, which is relevant to my region. Financial support was provided to the plant that set out a timeline for its continued existence and operation. That has not been delivered. What is the process for recovering money that has been given to companies that have not gone on to fulfil their promises?

Any loan arrangements that are in place are legal undertakings that are entered into by the companies involved, so the Government would be expected to recoup those investments at a later point. If circumstances meant that the company was in administration, or some other factor meant that it was not able to pay back the amount, the Government would fall into line in the same way as any other creditor.

How does the Scottish Government decide when to inform the Scottish Parliament about the provision of loan facilities?

It is important to recognise that there is no specific point in the process to do that from the point at which a minister makes a decision to provide loan facilities. It is generally dictated by the circumstances associated with individual cases. For example, if we look at when the information on BiFab entered the public domain, that surrounded what was clearly a very public campaign. The then cabinet secretary decided to make a parliamentary statement on what was happening in the company at the time.

As I have said, the normal vehicle through which such information would enter the public domain would be the consolidated accounts and the disclosures associated with those accounts, unless ministers feel that it is appropriate to put it into the public domain earlier.

To be clear, are you saying that it is entirely the minister’s decision whether Parliament ever gets to hear about a matter at an early stage?

Obviously, ministers take advice from civil servants about whether it is important to put information into the public domain at an earlier point.

It is difficult to be precise about every single case, because the circumstances are very different. It is important to reflect on my earlier point about the commercial sensitivity associated with where a company is at as far as its cash flow is concerned at a particular time.

One matter that we must consider carefully is whether putting something into the public domain at a particular time might have adverse implications for the company’s finances. It is always a fine balancing act.

I turn to the issue of capital borrowing. The Scottish Government borrowed £450 million of capital funds this year, which I think is its annual limit. How does the Scottish Government decide on the level and type of capital borrowing? What purposes has it been used for this year?

Gordon Wales might want to say something specific about the infrastructure projects that have been funded or initiated through the £450 million of funds.

The borrowing amount is agreed in advance with Her Majesty’s Treasury. That includes clear articulation of the projects, the infrastructure investment that the borrowing will reflect and their associated amounts—that is, what it will be spent on and how much it will cost.

The projects also have to meet a threshold test for being assets for a 25-year period. The borrowing is done over a particular period, and it has to be demonstrated that the assets will be assets for a duration of at least 25 years and possibly more. That supports our request for £450 million over 25 years. We have to go through some very specific tests with HM Treasury on the amount of money that we are funding.

Clearly, we are also looking at infrastructure plans, the economic plan and a whole range of other policy areas relating to where and when we are spending a particular investment. Gordon Wales or Alyson Stafford might want to talk a bit more about the background to some of the investment projects.

I can do that. There were nine specific projects. Would it be helpful if I told you what they were?

Yes. It would help if you could do that quite briefly.

The Forth replacement crossing was £75 million; the trunk road programme of A9, A90, A96 and A737 was £116 million; the northern isles ferry service vessels was £36 million; and Forth Valley College was £10 million. For national health service hospital buildings, Balfour hospital was £47 million; Gartnavel hospital was £10 million; Dumfries and Galloway royal infirmary and Edinburgh sick kids was £70 million; Raigmore theatres was £11 million; and NHS Scotland estate enhancements was £74 million. That is the total of £450 million.

The planned level of capital borrowing was set by Scottish ministers at the time of setting the 2017-18 budget. As the committee will know, because it received the reports on the major capital projects, a whole range of financing tools are used for the overall investment programme. Capital borrowing is one, and that is very much dictated and constrained by the fiscal framework—the maximum limit of £450 million a year. However, there is other revenue-financed investment, and the block grant on capital, too. There is a mix of funding arrangements that cover the whole infrastructure programme. In 2017-18, ministers chose to use the maximum borrowing amount so that they could continue investment in Scotland’s infrastructure.

There is then a decision about what is used and how it is used. This is all about managing the cash flow of grants that go out to the various bodies. As Gordon Wales has mentioned, the bodies receive the money as grants. They do not need to repay it—it is all part of the overall management of Scotland’s finances that the Scottish Government will repay on the loans. For managing cash flow, the timing of that borrowing in that year is left as late as possible. As you might appreciate, if you are thinking of your own personal loans or mortgages, the later in the year that you leave borrowing, the lower the interest that has to be paid on that borrowing that year.

Borrowing in 2017-18 used the national loans fund. The terms that were secured were the best value terms available to us under the constraints of the fiscal framework for 2017-18.

That gives you a rounder picture of the situation.

Following on from that, permanent secretary, in your opening statement you talked about accepting the recommendations that were in the report, one of which is that the Scottish Government needs to finalise the policies and principles within which it manages its borrowing powers. Do you have any indication of when the Scottish Government will finalise those policies and principles?

We have those policies and principles at our fingertips. To go back to an earlier point, part of our endeavour is to bring the policies and principles together so that they are clearly understood and recognised by a wider audience. Alyson Stafford might like to talk about what would make up that framework.

The key thing is about where this is all brought together. One of the recommendations that came out of the work of the Government and the Parliament on the budget process, and the Parliament’s budget process review group, concerned the medium-term financial strategy. In May this year, the Scottish Government published its five-year financial strategy, “Scotland’s Fiscal Outlook”. The strategy will be refreshed in spring 2019 and it will bring all our policies together. That is where the capital borrowing policies will also be placed. In bringing that together, we will take full account of the Auditor General’s recommendations.

Mr Kerr asked about finalising. All fiscal policies, including the policies on the use of borrowing, have to be kept under review, in the light of our experience and changing economic circumstances, to ensure that they continue to be fit for purpose. The intention is that the approach set out in the medium-term financial strategy in spring 2019 would be maintained for some time.

09:30  

Where does Gordon Wales fit into the organisation chart, because he is missing in the one I have before me?

He does not answer to Alyson Stafford, although, as you can see, there is clearly a very effective working relationship between them. He is responsible to the director general who looks after the corporate responsibilities and functions of the Government.

I want to follow up on what Anas Sarwar said about housing. For many years, under successive Administrations, we have supported individuals to be able to buy their own home through shared equity schemes. The cumulative value of the Government’s equity in housing must now be into billions rather than hundreds of millions. What is the cumulative outstanding value of that investment?

Secondly, are we sure that every time somebody sells a house with shared equity, we recover the money?

Thirdly, I know that we did not used to, but do we charge any interest on that shared equity that is relevant for other purposes?

I do not have that information to hand. We might need to write to the committee with a bit more information on that. Gordon Wales might want to comment.

I do not have the sum with me at the moment, but I am very happy to write to you about that. As you know, conditions are set out for the recovery of those loans, and the Government takes action to recover them.

You might remember that when the original help-to-buy schemes were announced, the UK Government decided that in England and Wales, it would charge fees after five years for, effectively, the benefit of being able to take part in shared equity schemes. Ministers here decided not to charge such fees, so no fees or interest are associated with those schemes.

Will you indicate in your reply to us what processes are used to capture the issue of cashing in on loans when a shared equity house is sold or somebody dies? That might not always happen, especially when some people will have been in their house for 15 or 20 years. Are you always told when a house is sold or somebody dies?

I would be happy to include that when I tell you what the latest outstanding figures are. As far as the accounts are concerned, I will do that as of now, rather than as of 31 March. I will also set out the procedures associated with that issue.

Can I ask a wider question? Two of the Government’s key strategic objectives are improving the level of economic growth and creating a fairer Scotland. Has any systematic analysis been done, particularly prior to policy changes and budgets, on the impact of revenue and expenditure in Scotland, including council tax and business rates, on growth and the fairer distribution of income and wealth?

That relates to the national performance framework and the refreshed outcomes that we are now operating to. Alyson Stafford might want to say a couple of words about that.

In terms of the national performance framework, a range of indicators are being collected. With the new framework, some of those are new indicators. We will be able to report on a range of the indicators, but because new data needs to be collected to get a time series, data on a small number of indicators—16 of the 81—will be available in 2019 and 2020.

You talked about taking revenues into account. On the economic fortunes and economic impact of revenues, the revenue forecasts are now generated by the Scottish Fiscal Commission, which will take into account a range of factors in generating the amounts that the Government uses in its budget.

The statute says that the Government needs to use those figures or, if it chooses not to, to explain why. The independent body that generates the figures will take into account a range of economic circumstances and a degree of behavioural effects, and they will be reflected in our revenues. Similarly, the block grant that we use towards expenditure will take into account certain economic and tax-receipt factors that have been generated by the Office for Budget Responsibility’s assessment. There are some high-level but also some specific things in place, and again that has been driven by the fiscal framework agreement between the UK and Scottish Governments.

Let me take a couple of examples: the proposal to reduce air passenger duty at some point—although I realise that that will not be possible until other issues are resolved—and council tax, which last year was increased, usually to the 3 per cent maximum, by every one of the 32 councils. Before the decision is taken on local government funding in the next year’s budget, is there any analysis of the potential impact of reductions or increases in local government funding on council tax policy—in particular, an increase in council tax—and whether that makes Scotland fairer or more unfair?

The main focus of analysis is, not surprisingly, on the interface between business and local and central Government with regard to non-domestic rate income, given the direct relationship in that respect between Government policy and what is ultimately part of a funding package that councils adopt and use in their local areas.

What I am getting at is that we are spending a lot of money on the expenditure side of things to create a fairer Scotland while on the revenue side of things, particularly in relation to council tax, we are making Scotland more unfair. There seems to be a contradiction in that respect. Should we look at the impact on fairness of council tax—or, indeed, air passenger duty? I realise that work will have been done on the impact on growth of reducing air passenger duty, but has any work been done on the fairness of such a move?

With regard to air passenger duty, the main work has focused on the economic growth arising from reducing it.

So no work has been done on the fairness of it.

All our policies are tested for fairness. You are pointing to the technical elements of air passenger duty and council tax, but we have a responsibility to check, test and advise not just on the basis of the revenue incurred but with regard to any fairness issues that might arise as a result of a fiscal decision. Alyson Stafford is quite correct in that she is talking about a particular aspect of raising taxes, but, as I have said, all our policies are tested against fairness, not least because of our huge commitment to reducing poverty, which you will be well aware of, and the very clear targets that we have in that respect. They need to be tested against those circumstances, too.

But we are not hitting those targets. Child poverty is going through the roof.

Those are the targets that we have set for ourselves as the Scottish Government, which have still to be met and are going to be very challenging.

Absolutely. Can you send us information on the analysis that has been done and any conclusions reached on the potential impact on fairness of, say, a reduction in air passenger duty and the increases in council tax?

Okay.

That would be very helpful.

It is reported that the underspend this year is £339 million, which is a good bit higher than underspends in previous years. Why is there such a difference? Can you also confirm and clarify that the underspend is ultimately carried forward and deployed effectively in future spend?

As you might imagine, judging by your question, the £339 million headline covers a multitude of different decisions, some of which are deliberate. Scottish ministers planned to make use of the new Scottish reserve, effective from April 2017, and to carry forward £235 million of that chunk of money to support additional expenditure in the 2018-19 budget. That was approved by the Scottish Parliament. Therefore, a significant amount of the money was carried over to 2018-19 and is already being used.

There is also a significant amount of money that is accounting underspend, which is due to technical shifts. Annually managed expenditure money—we call it AME—cannot be used for services. For example, quite a large proportion of the education underspend is to do with that; because of its nature, it cannot be used for cash purposes. There are also small elements, particularly in education, where money has been ring fenced because it has not been spent this year. Gordon Wales talked earlier about Forth Valley College, which has some capital investments. It did not manage to trigger all the spend during the year, so some was carried forward.

As you rightly said, the vast majority of the money has, therefore, been carried forward intentionally, and one significant chunk was for spend during 2018-19. If we look at the overall fiscal underspend—Gordon Wales will keep me right on this—0.2 per cent of our spending power was underspent.

Yes, that is correct. I will make a couple of additional points. It is important to understand that some areas of funding cannot be carried forward. The permanent secretary referred to a couple of different things. One is something called non-cash, which is provided by the Treasury in order to deal with depreciation and impairment of assets and is money that cannot be spent on public goods or services.

The other thing is the annually managed expenditure budget—the AME budget that the permanent secretary referred to. That can only be used on a very small number of items. There are two, in particular: student loans, and NHS and teacher pensions.

Those budgets are ring fenced by the Treasury and cannot be used for other purposes or carried forward. Everything else, which is effectively in departmental expenditure limit—DEL—funding, has been carried forward through the Scotland reserve. Its spending power has been maintained and it is deployed in this or future years.

Bill Bowman asked about the transparency angle earlier. How do the public see the movement of a usable underspend through from one year to the next? For example, the accounts report that last year’s underspend was £85 million. How do the public get a sense of where the usable element of that is being spent and earmarked? Is it demand-led spend at the time, or is it already earmarked and set aside?

There are two things. One is about how the money is carried forward and what goes in and out of the Scotland reserve. That is all contained in the “Fiscal Framework Outturn Report”, which was published a couple of months ago. It includes a detailed set of tables that explain what happened before 2017-18, the transfers in and out of the Scotland reserve and what the picture looks like at the start of 2018-19. There is full transparency on what is happening.

Back in January, in his plans for the budget, the cabinet secretary set out the details associated with the sums that he was carrying forward into this year and how they were being deployed as part of the overall budget for 2018-19.

Willie Coffey also has a question on internal audit. I am keen to hear about that from the witnesses.

It would be fair to say that the subject of the internal audit process and its quality right across the public sector landscape has been raised at this committee by a number of colleagues over months, if not years. The Auditor General’s report comments that,

“although the Internal Audit Directorate meets some of the Public Sector Internal Audit Standards (PSIAS), it does not comply with significant aspects of the standards.”

What are your comments on that and what are you planning to do about it?

09:45  

I will take the question in two parts. First, every five years, I think, the Scottish Government internal audit undergoes a test against the public sector internal audit standards, as does every other public sector internal audit. The Scottish Government’s turn has come up and its internal audit will be tested against the 56 standards in the first part of 2019. That is the normal rhythm of testing. We should be ready and keen to see the result of that evaluation.

Secondly, there has been an enormous amount of work and investment in the quality and nature of our internal audit service, which Audit Scotland has credited us for, to be fair. At the time of the Audit Scotland review, there was already a back-to-basics review, as we called it, that looked at the rewrite of the audit manual, investment in staff training, and additional quality assurance processes. We also brought in Grant Thornton for external testing and expertise to see what it could add to the checking and challenging of our internal audit services.

In addition, as you will see from the Scottish exchequer family tree that we circulated with my letter, we now have a director level at the top of the internal audit structure, with a remit to ensure that the internal audit is fit for purpose. She has been given additional staff resources to ensure that the pretty hefty workload that internal audit in the Scottish Government undertakes is feasible and that she has the capability and skills to carry out that work. She has brought in quality assurance processes, such as customer service surveys, and implemented a training and development strategy, so there is, quite rightly, a lot of investment in a very important part of our scrutiny and accountability services.

That goes back to something that I did when I first came in as permanent secretary, which was to look at the governance and assurance arrangements for the organisation as a whole. I do not know whether Alyson Stafford would like to say anything more about that.

Extensive work has been done, led by someone who is professionally qualified not only as a chartered accountant but as an internal auditor, with specific qualifications. Internal audit has led a change programme to make sure that our internal controls provide independent objective assurance and advisory activity, and value is added to the operations of not only the Government but other bodies. It has the skills to advise us on risk management; economic and efficient use of resources; compliance with policies, procedures, laws and regulations; safeguarding against losses; and ensuring the integrity and reliability of our information and data.

The other thing that is worth drawing out from the conclusions of Audit Scotland and the internal review by the Scottish Government audit and assurance committee is that Audit Scotland did not identify any internal audit reports in which the underlying evidence would suggest an

“incorrect audit opinion or conclusion”.

I met the team on Monday this week and I can assure the committee that it is working through the back-to-basics project to make sure that all the important foundations in the 56 areas that Audit Scotland identified are corrected.

Permanent secretary, this committee has looked at internal audit quite extensively and we find that problems start there in many of our public sector organisations and escalate into governance and management. It is worrying that the Scottish Government has to do a project to go back to basics on its internal audit procedures. Some of the problems that the Auditor General identified are quite worrying. How did things get to that point?

The use of the words “back to basics” was not intended to cause alarm; it was more intended to show the comprehensive job of the new internal audit director who, as Alyson Stafford has said, was coming in fully qualified to look top to bottom and see whether our internal audit was satisfactory to her purposes and those for which she was appointed, and whether she could give us a clean bill of health. Although I would not want anyone to be alarmed by the title of the review, it is important that we recognise the crucial nature of the service, and the strain that has been placed on it as the organisation’s powers and responsibilities have grown.

We are now operating in a completely different set of circumstances for Scotland, operational as well as policy, and in a way that could not have been envisaged a few years back, so it is quite appropriate that we take the temperature of the supporting services. I include not just internal audit, as it is as much to do with human resources, finance and the way in which we govern our business. It is important that we take an opportunity to step back and check that we have what we need for a set of responsibilities—operational responsibilities, in particular—that we did not have previously.

Although it was stated that the internal audit director reports to Alyson Stafford—that is correct with regard to pay and rations—she also has a line of accountability to me. She can come and talk to me, or any of the accountable officers, at any time about what is going on in the organisation. She also has a direct line to the newly formed Scottish Government audit and assurance committee, which is a big part of internal audit’s process.

Okay, but the title of the review suggests that you needed to go back to the basic principles of audit. I asked how far back that goes. Are you saying that it went back to the first further devolution of powers? Is that when problems started to emerge?

No, and I am not identifying problems. Alyson Stafford has already said that we do not have any reason to believe that the quality of what internal audit has been producing in the Scottish Government has anything other than our full endorsement and confidence.

But the Auditor General said that it

“does not comply with significant aspects of the standards”,

which are the public sector internal audit standards.

Audit Scotland also said that it recognised the amount of work done and investment made in internal audit, which pre-dated the review, and it recognised the importance that we are placing on the investment in internal audit. I do not think that we can do anything more than continue to invest in support and ensure that internal audit’s voice is heard strongly in the organisation. I return to its lines of reporting to the most senior board of the Scottish Government on assurance and audit, and to me.

You perhaps took issue with the term “problems”. When did issues start to emerge and what caused that? Was it the further devolution of power?

I cannot say, and I do not identify problems starting at any time. We have tried to ensure that we take a fresh look at the demands on the internal audit service at a time when we are being stretched and asked to grow to accommodate further powers.

It will be a gardening process. Rightly, we will constantly check that what we have in the way of internal audit facilities and challenge is strong, effective and well resourced.

What is the timescale for the project to complete? You have just said that you will continue to monitor it, but when will you complete the back-to-basics piece of work?

My understanding—Alyson Stafford will keep me right on this—is that all the processes that I have talked about are either in train or complete. Alyson might want to talk in a bit more detail about that.

The review is done, Grant Thornton has completed its work, the new manual is in place and the training has taken place. The next milestone is in spring 2019, when there will be the third party separate assessment. In addition, Audit Scotland will continue to review internal audit, and the Scottish Government audit and assurance committee will keep track of the progress that is being made.

It is now about continued reflection, including through the reviews that are happening, to confirm and make sure that the good work is still there following the training and what has been put in place.

Ms Stafford, do you have a timescale for how long it will take to fully comply with the public sector internal audit standards?

The work that is in place will ensure that that happens.

My understanding is that we will be tested against that in the spring, as I said earlier, when we will be coming up to the end of our five-year cycle.

I turn to outcomes, which are mentioned in the Auditor General’s report. There have been several articles in the media recently about the huge amount of spend on NHS and social care integration, which now amounts to half the Scottish budget. After this evidence session, we are about to scrutinise that with the Auditor General. How can we as politicians assure the public about that level of expenditure, when there is scant evidence on the outcomes that the spending leads to?

That is a good example of a wider point that the Auditor General made about how the budget and outcomes correlate. Some of the work that we are already undertaking—Alyson Stafford might want to say more about this in a minute—looks at how we ensure that the national performance framework, which was refreshed this year and includes health and other outcomes, is what we use to inform our budget decisions and how we present performance information to Parliament and the public.

The health sector produces a huge amount of information on targets, as well as other materials and reports, and, as you are aware, Audit Scotland reports weekly and monthly on how the health service is performing. The important element is to ensure that that information, and other indicators of the kind that Alyson Stafford talked about, is brought to bear on the long-term outcomes for Scotland. Many of the outcomes are dependent on health or prevention—before it even gets to the health service.

We are looking at not just how we report on the national performance framework for Scotland on its website, as I said earlier, but how it connects to the budget and to the information that we share with the public. One of the things that we have been doing is to look at our open government commitments, and our second report on open government will come out later this year—in December, I think.

We have also been working with the University of Oxford’s Blavatnik school of government. I am a fellow there and have had a year’s worth of academic challenge and assessment on how we connect our work on outcomes to performance and budget responsibilities. That work is at the core of our performance and national performance framework agenda.

In your opening statement, I think that you said that you accept all the recommendations of the Auditor General’s report. Is that correct?

They are all being addressed, as we speak.

Do members have any further questions for our witnesses?

I would like a quick clarification from Mr Wales. When you talked about investing in private companies, you mentioned that that was done on commercial terms. How do you determine what the commercial terms are for such an investment?

Because of the complexities that are associated with such investments, we almost always employ external advisers. They give us advice based on market conditions and the types of deals that are done in particular sectors and with particular companies to tell us whether the type of arrangement that we are looking to put in place is within the general ambit of other deals that are done in that sector.

We also make reference to European Union and state aid regulations that set out, for example, the interest rates and terms that should be associated with particular loans.

Are those advisors appointed on a per-deal basis or do you have a panel?

We usually appoint them on a per-deal basis.

Is it made public about who you consult?

It probably is and I am happy to tell you now who they are.

Yes, or you can write to the committee.

I can do it now: for Ferguson Marine we consulted PricewaterhouseCoopers, and for BiFab we consulted Grant Thornton.

As there are no further questions, I thank the witnesses for their evidence.

09:58 Meeting suspended.  

10:02 On resuming—