Official Report 279KB pdf
“Review of Cairngorm funicular railway”
Following a report from the Auditor General for Scotland, the committee decided to take evidence on the "Review of Cairngorm funicular railway". I welcome to today's meeting Sandy Brady, the acting chief executive and director of strategic planning at Highlands and Islands Enterprise; Douglas Yule, operations director at HIE; and Keith Bryers, head of property and infrastructure at HIE. Mr Brady has indicated that he would like to make some opening remarks.
Cairngorm funicular railway is a unique Scottish visitor attraction and one of the most challenging projects ever undertaken by Highlands and Islands Enterprise. The project's planning, construction and operation have been thoroughly reviewed by Audit Scotland. HIE accepts in full the findings of that review. In particular, we note that although HIE followed accepted practice on project appraisal and management when the funicular was designed and built, those standards have now moved on. Our current procedures are more rigorous, as the review indicates.
Can I just clarify something, Mr Brady? Will the board consider a new business plan next Tuesday?
It will consider a series of options that arise from the independent work that we commissioned from Johnston Carmichael.
Right. When will your new business plan be ready?
I suspect that the business plan will be implemented at some time following the board meeting, during the course of 2010.
How close are you to having a considered business plan?
The business plan will be prepared in the light of the HIE board's decision on which of the three options it wishes to take forward. They have not yet been debated by the board.
So it will be some time next year before we are able to see a business plan.
That is correct.
Okay. You said that your procedures are now more rigorous. Does that suggest that your previous procedures were not rigorous?
The procedures at the time were different. They were appropriate to that time, but a number of steps that are now undertaken in project appraisal were not undertaken then. The Audit Scotland review looked at those and at current best practice and concluded that the procedures were appropriate and of the standard that was expected at the time when the funicular project was put together.
In the light of what we now know and the standards that now pertain, could it be suggested that a less-than-rigorous approach was taken at the time? You said that the procedures were different, but was the approach less rigorous?
It was equally rigorous. The documentation that goes back to that period is considerable. Not only had we to satisfy the Secretary of State for Scotland that we should commit such a sum of money to the project, but we had to apply for European funding under the objective 1 programme, and both of those processes in the project appraisal were exceedingly rigorous.
Have the reasons that justified the investment changed? Do we now have a different set of reasons for continuing it or are the fundamental aspirations the same?
The aspirations are the same. We always saw the investment in the Cairngorm funicular as part of a series of investments in the Strathspey and wider Highland area. We have invested heavily in the redevelopment of the Aviemore centre, which is part and parcel of that, and we now have the Cairngorms national park in the area. We have always seen those three elements together as the three legs of a stool, if you will—the investment in the skiing facilities, the investment at Aviemore, and the investment in the national park.
Was that economic investment in infrastructure, which you hoped would boost jobs and tourism, properly balanced against environmental issues?
We believe that it was. At the beginning of the 1990s, a two-year piece of work was done by the Cairngorms working party, which was a multidisciplinary group that the secretary of state set up to look at the balance of recreational, environmental and economic interests in the wider Cairngorms area. The working party's report in 1993 indicated that it favoured the continuation of the balanced approach, and much of that thinking was incorporated in the subsequent move to a national park, but it recognised that downhill skiing was a key part of the attraction of the Cairngorms area, that it had been in place since the early 1960s, and that it was part and parcel of what went on there.
Early on, HIE identified a number of risks including climate change and, if required, reinstatement costs. What plans were put in place to deal with those risks? How did HIE plan to tackle them at the time?
We tried to do so in a number of ways. One of the greatest risks was the financial cost of constructing the funicular railway. There were some parallels with the gondola at Aonach Mòr, but a funicular railway had not been built in Scotland before. We were aware that it was a ground-breaking development and that we would learn a lot of lessons as we went along. We took a considerable amount of professional advice and, in the way in which we constructed and procured the railway, we tried to learn from the experience of other skiing resorts in Europe. We were very much aware of the fact that we were breaking ground.
You said that the procedures that were in place were appropriate at the time, but that current procedures are more rigorous. What approach do you take now when you assess risk in major capital projects? How does your current approach differ from the way in which risks were assessed and dealt with 15 years ago?
One of the most important differences is in the use of gateway reviews. That technique has been widely introduced across the public sector over the past five to 10 years. Gateway reviews, as such, were not in place when the Cairngorm funicular project was brought forward. Were we doing a similar project today, it would undoubtedly go through that process, which is a cool, dispassionate and objective look at the project from its inception and initial planning, through the appraisal stage and on to the construction period. It ensures that the project's benefits are realised. We recognise that we would have a more focused team to deliver the project. The work was done by a number of officers, who worked on the project as part of their wider portfolio of work. These days, we would install a senior responsible owner, who I suspect, for a project of such a scale, would work virtually full time on the project. We would probably also go for a project board, members of which would challenge the team procuring the project to ensure that we were on track to deliver what we were trying to achieve.
How robust were the visitor number estimates on which the business case was based?
We estimated that the non-skier visitors would probably number around 165,000 per annum. The figures were examined by independent consultants, who took views from comparable attractions elsewhere. In reality, we more or less achieved those figures in the early years of the funicular, although they have drifted slightly downward since then. One of the challenges that we face is to re-establish the attractiveness of the funicular for the non-skier.
That is why I am surprised that, when construction started in 1999, HIE did not review the project again, because by then you knew that skier numbers were declining. Why did you not take that into account?
We considered the skier numbers closely in the 1997 appraisal when we decided to commit funds to the project, and the issue featured as part of the discussion of the European funding. A period of about 18 months then elapsed before construction began on the funicular. One finding of the Audit Scotland review is that we ought to have paused at that stage to re-evaluate the assumptions. We did not do so. We were up against some tight deadlines, notably the deadline imposed by the European funding. When the final agreement on that funding was reached in 1999, we proceeded immediately with the funicular.
You said that one thing that stopped you reviewing the assumptions was the pressure to meet deadlines to qualify for European funding. If you had not been under that pressure, would you have done things differently and reviewed the case?
It is difficult to say. There was a momentum to the project. We had been given every political encouragement by the Secretary of State for Scotland. He wished to support the project and see it happen, particularly as the Government had committed £8 million to the redevelopment of the Aviemore centre and saw the two developments as very much complementary. The effect of the European funding deadline was to squeeze the number of construction summers that we had on the project, broadly from three to two. If we had not had that deadline, we might have had a slightly longer construction period, but that is conjecture. We dealt with the situation that was before us. We had to try to open the funicular within the window of two summers, and that is what we did.
At the time, who owned the Aviemore centre?
I ask Douglas Yule to answer that.
In the late 1990s, it was owned by a company called Aviemore Mountain Resort Ltd, which was a predecessor of the organisation that subsequently acquired it—Aviemore Highland Resort Ltd. That consortium owned the centre until recently; it changed hands again within the past 12 months.
In the organisations that owned the centre in the late 1990s and subsequently, which individual or company was the driving force? Would we recognise any of the names?
The main consortium that carried out the redevelopment of the Aviemore centre was Aviemore Highland Resort Ltd, which involved Macdonald Hotels, David Sutherland and the Tulloch Group, and HBOS and HIE as investors.
So Macdonald Hotels has been a consistent player all the way through.
Only from the time that it acquired the interest in Aviemore Mountain Resort from the previous owners, which was in the late 1990s.
Hello, Mr Brady. I am a bit new to all of this. Am I correct in thinking that you are acting chief executive of HIE?
That is correct.
Why is there no substantive chief executive?
The substantive chief executive is Sandy Cumming, who is currently recovering from Bell's palsy, which he has had since August. He is about to return to work on a part-time basis and hopes to resume his duties some time in the new year.
How long have you been acting chief executive?
Since 10 August.
And how long have you been with HIE?
Since its establishment in 1991.
So you know the background to the issue.
There are indeed funiculars at much higher altitudes. The Cairngorm one runs from roughly 2,100ft at the bottom station to about 3,600ft at the top, so by Alpine standards it is not particularly high. It is the climate and environmental factors that make the difference. The degree of exposure, particularly to wind and chill, on the Scottish mountains means that the conditions are comparable with those at a higher altitude in Europe—at 6,000ft, 7,000ft or 8,000ft in the Alps, for example.
Did you, anyone from HIE or anyone connected with you have a look at how things were done in the Alps or anywhere else in the world?
Yes, we did. Back in 1992-93, we conducted several reviews of possible alternatives to replacing the aging chairlift system. Our consultants at that time—which I think were led by CairnGorm Mountain Ltd—considered comparators from elsewhere in Europe and North America. They looked at more modern chairlift systems with two or four chairs, at gondola systems and at funicular railway systems. On balance, they recommended the funicular railway system.
That was recommended by the consultants.
That is correct.
You then decided to go to tender. What kind of tender was it?
I ask Mr Bryers to give you the detail of that.
In addition to the visits that Sandy Brady mentioned, a number of staff, including me, visited several funicular installations in Europe to learn from them when we were putting together the tender proposals for Cairngorm. The tendering for the funicular package was based on three lots: lot 1 was the train, lot 2 was the civil engineering works and lot 3 was the buildings. Those were all procured through the Official Journal of the European Communities, as was required at the time, on a competitive basis. I think that four different funicular manufacturers tendered for lot 1.
What form did the tender take? It was not a fixed-price tender.
No, it was not a fixed-price tender. It was a design and specification tender.
Why did you not opt for a fixed-price tender?
I cannot remember exactly why.
That is a crucial point. If you had opted for a fixed-price tender, you would not have overrun on costs as you did.
One of the things that we struggled with at that time was the fact that our professional advisers on the procurement indicated that they thought it highly unlikely that any contractor would commit to a fixed price because of the uncertainties involved in the type of construction.
So you did not even try.
We had advice from our consultants that the best route to go down was the competitive tender. I am not sure whether we tried a fixed price—I can check that for you. I think that the advice was that that was not appropriate for a project around which there were so many construction unknowns.
How many tenders did you receive for the three packages?
As I mentioned, we received four tenders for lot 1. I think that we received about 14 expressions of interest in the civil engineering works at the initial interview stage, which was narrowed down considerably to a much smaller number. I think that about four companies submitted tenders for the building works.
In each case, did you accept the lowest tender?
We do not consider only price when we are considering tenders nowadays; we consider price and quality. In that sort of contract, quality means the ability to comply with environmental protection measures, to build within very restricted timescales and to deal with the weather. All those things are put into the mix when we consider who offers the best deal. The lowest price was not always the most appropriate criterion.
Can you remind me who offered the best deal for each of the three lots?
For lot 1 it was an Austrian company called Doppelmayr, which is now known as the Doppelmayr Garaventa Group, and for lots 2 and 3 it was Morrison Construction.
That is a coincidence.
The aim was always to award the civil engineering and building work as one package, if possible, to avoid two contractors trying to do a job on the same site.
In each case, was the Morrison Construction bid the lowest or did the company just offer the best deal?
As I recall, it offered the lowest bids.
The lowest in each case?
I think that that is correct, yes.
Where was the major cost overrun?
The major difficulty probably related to the replacement of the proposed steel beams on the rail track with concrete beams. Morrisons made that proposal with its tender. Construction of the tunnel was another challenging engineering issue, given the weather conditions, the altitude and the various environmental considerations.
Morrisons proposed changes to both those aspects of the original tender specification.
That is correct.
Having won the contracts out of 14 companies in one case and four companies in the other, Morrisons persuaded you to change the specification.
That was done as part of a cost-saving exercise.
A cost-saving exercise?
We agreed to merge the two lots and to seek savings because Morrisons had won the two contracts. A package of changes was made, which included reducing the specification of the buildings, removing the proposed middle station building and considering suggestions from Morrisons about how it could tackle this unique project. That was undertaken in partnership with the company and with our professional advisers at the time.
Had Morrisons constructed a funicular before?
Nobody had constructed the civil works for a funicular before, but the funicular manufacturers had constructed many funiculars, which is why they were visited in the years before the railway was constructed. It was important for the selected civil contractor to feed into the tender documentation for the award of the train works, so that the two could merge.
There are funiculars elsewhere in the world.
Absolutely.
Yet Morrisons had never been part of any of that construction elsewhere in the world.
It had not, and nor had any other tenderer for the civil or building works.
I want to clarify an issue that has developed in the course of questioning. Lots 2 and 3 were awarded to Morrisons. HIE's chair, who was present at board meetings in 1996 and 1997 when the project was discussed, was Sir Fraser Morrison. HIE's chief executive left in September 2000 to go to Morrisons as its director for corporate development. You tell us that Mr Yule joined HIE from Morrisons. Might some members of the public perceive an unhealthy relationship between Morrisons and HIE?
That is possible. Media coverage in 2000 implied that. We are happy to found on the review that Audit Scotland conducted as part of producing the section 23 report. The documentation that was provided to the Minister for Enterprise and Lifelong Learning in 2000 when the public concerns were expressed is available. He satisfied himself that no impropriety whatever was involved.
Why is the relationship so close and why does such movement take place between the company and HIE? Is it because there is not much choice of expertise in the area? Were Morrisons and the people associated with it so way ahead of the expertise that was available in the rest of Scotland that going for them was a no-brainer?
That question is difficult to answer, but I will do my best. At the time, Morrison Construction was without question one of the leading construction companies in the Highlands and Islands. It had expanded from a small family firm into a major national and international player. The company had done well at obtaining contracts in the Highlands and Islands, the rest of Scotland and beyond throughout the 1980s and 1990s. It is no surprise that Morrison Construction has been responsible for a significant proportion of the infrastructure investment in the Highlands and Islands in the past 20 years.
The contracts were not awarded only on the basis of price; Mr Bryers tells us that they were awarded on other factors. Once they were awarded, Morrisons suggested that certain changes had to be made. However, Morrisons had very close connections with HIE—for example, Sir Fraser Morrison was chair of the HIE board and Morrisons recruited the HIE chief executive, who would have known the fine detail of what was being discussed. Is it just a flight of fancy to suggest that there was an unhealthy relationship?
It would be very unfair to the integrity of the individuals involved. Sir Fraser Morrison left as chair of HIE in 1998, before the contracts were let. We had moved on: we had a new chair at that time and a different board. Iain Robertson, the HIE chief executive, left in September 2000. I have no doubt that he was a good friend of Sir Fraser Morrison and that Sir Fraser sought to recruit somebody who was bright and able into his company. Those matters were entirely separate from the procurement of the funicular railway.
I just want to check one thing. You said that the documentation was provided to the enterprise minister in 2000. Was that Henry McLeish?
It was Henry McLeish.
Thank you.
Continuing on the theme of the funicular's construction, you state in your written submission to the committee that Morrisons and Doppelmayr won the competitive tenders, but you go on to say:
Yes, indeed. I will ask Keith Bryers to kick off, then I will come in.
Essentially, we were trying to do a three-summer job in two and a half summers, because we lost half of the first summer through the European regional development fund delays, following the judicial review. We also had an ERDF deadline, which meant that we had to complete the job by the end of December 2001. By the time the job started, the contractor had a huge amount of work to do in less time than we had originally envisaged. The construction took place in a very constrained environment, in terms of getting materials up the hill, because the type of access road that you would usually expect was not available. The construction company had the use of an access road, but it was very constrained. The company installed a cable crane, but that was subject to a number of delays and the tonnage that it could take up the hill was restricted—helicopters had to be used to move concrete up the hill. All those things caused the project costs to increase.
Before I bring in Willie Coffey I want to clarify something that relates to the previous questions. Mr Yule, which post did you hold with Morrisons before you joined HIE?
I was development manager with the Morrisons developments division, which was located in Inverness in the Morrison Construction group offices in Harbour Road.
Did you have any involvement with the funicular?
No, none whatsoever. When I came to HIE in August 2001, I was specifically excluded from any discussions, meetings or decisions on the funicular or Morrison Construction for the subsequent 12 months.
Mr Brady, you said in your opening remarks that you thought that the planning of the project at the initial stages met all the standards in place at the time, and that, of course, standards move on, but I want to challenge you on something.
It is to do with the timing. In the project envelope of £14.5 million at the outset, there was a significant contingency. Lots 1 and 2, which Mr Bryers has described, came in from the competitive tender process very much on budget and were let. The challenge arose when lot 3—the buildings—came in at significantly more than was available in the planned budget. At that point, we had to drain down the contingency in recognition of the fact that the buildings were going to cost significantly more. With hindsight, I have to agree with you that having a contingency of £8,000 is not the way in which we would normally approach the situation. However, it was to do with the timing of how we let the lots.
But do you still stick to your point that, as costs rose, setting aside a ridiculously small amount for contingency reflected good practice at that time?
It did not reflect good practice at the time. We had a significant contingency in place, but the requirement to find further funds for lot 3 of the project caused us to drain down that contingency. When lot 3 was let, the contingency had declined to around £7,000 or £8,000.
What measures did the company employ at that point to try to meet those escalating costs? Members have asked about the various tendering mechanisms that were used and whether they were fixed price or variable. The costs ultimately escalated to—I think—£26 million, all told. How did you deal with those mounting costs at the time? What measures did you deploy to try to keep the costs in line?
The construction cost of the funicular railway was £19.5 million, and the original funding envelope was £14.5 million; so, in round figures, the extra cost was £5 million. The key focus was on trying to ensure that, when lots 2 and 3 were merged by Morrison Construction Ltd, we sought the savings to which we have referred. That resulted in a reduction in the specification of the buildings, the removal of the middle station and so on. We did everything that we could. We took legal advice at the time on how the thing had been set up, as the third lot was let. However, the challenge remained that we could not find a contractor who was able to undertake lot 3 for anything close to the £4.2 million that was allocated for it. The reality is that we worked very hard throughout the construction process to try to find ways of ensuring that the overrun was contained. We did our best and got it down to £5 million, or 33 per cent. We note that Audit Scotland picked up that point in the section 23 report and concluded that HIE had done everything reasonable to contain the costs, given that we were faced with a situation in which there was no prospect of stopping short once the works had started—effectively, we needed to complete all three lots to have a functional railway.
Effectively, with the costs escalating as they did, there was no real protection within the model to contain costs. It was ultimately going to cost what it was going to cost, was it not?
That is a fair comment.
The cost was just escalating to whatever level it was going to reach and that was it, frankly. Obviously, the public purse had to pick up the tab.
Before you do that, I want to ask a question about the costs. In response to Willie Coffey, Sandy Brady said that the construction overrun was £5 million. However, the total cost of the project came to £26.75 million. What other support was provided to the operator that resulted in the additional £7 million beyond the £19 million?
Those costs relate to the funding of the operations of CairnGorm Mountain Ltd. I ask Douglas Yule to say a bit about that.
I am sorry, convener; unfortunately I do not have the detail on the £4.7 million.
The funding—
Sorry, but it is not £4.7 million; it is £7 million. The budget figure was £14.61 million. Sandy Brady said that the construction costs rose to £19.54 million. However, the notes that we have say that the total cost became £26.75 million, with the public sector contributing more than £23 million. In other words, the additional £5 million took the construction costs up to £19 million, but why is there another £7 million somewhere in the total costs? What was that for?
That related to the costs of the operation of CairnGorm Mountain Ltd over the period since the completion of the funicular. The funding for that came from the public sector—from ourselves and from Highland Council—and from Bank of Scotland, which was the company's banker.
Would such costs not be annual revenue costs? How many years' operating costs are contained in the £7 million?
That would be the accumulated deficits from the operating costs over the period from 2001 to the present day.
So £26.75 million is what the funicular has cost to the present day. Is that correct?
Broadly speaking, that is correct.
Okay. We can check that out.
My question arises from the convener's questions. Do you know Alan Blackshaw from Newtonmore?
Indeed we do.
Do you know that Alan Blackshaw has written to Sir John Elvidge about the funicular?
Yes. Mr Blackshaw has written to a number of people about the funicular over a long period.
In his letter to Sir John Elvidge, Alan Blackshaw claims that HIE had authorisation to spend £12.356 million of public money and that it spent beyond that without any authority. Do you accept that?
Authorisation for the construction costs was sought from the Secretary of State for Scotland at the time. As cost escalations on the project came in, we kept our sponsor department within the Scottish Executive fully informed. Each of the escalations was authorised.
Who were they authorised by?
By the Scottish Executive.
Do you have documentation to prove that?
Yes, we have documentation. Audit Scotland saw that documentation as part of its section 23 review.
So why has Mr Blackshaw got this wrong?
I could not hazard a guess on that. Mr Blackshaw is a passionate observer of the Cairngorm funicular project. He was a board member of the local enterprise company back in 1997, when the project was approved. He has been a long-term critic of the procurement of the funicular. We respect his views, but we simply do not agree with them.
Could you provide documentation to the committee to confirm that all the expenditure was properly authorised by ministers?
Yes, we could do that.
You said that you respect Mr Blackshaw's views but you just do not agree with them. Would it be reasonable to say that he has been proven to be correct?
I do not think so. Mr Blackshaw is one of a number of people who have been critics of the Cairngorm funicular project from its conception, right through its planning and construction and up to the present day. Just as a number of people were disappointed with the decision to proceed with the funicular, the funicular project also has many supporters. A large number of businesses in the Strathspey area believe that the Cairngorm funicular investment was vital to regenerate the local economy. Thousands of Scottish skiers—some of them of international standard—are very grateful for the continued investment that has been made in the area over the past four or five decades. Any development project in an environmentally sensitive area such as the Cairngorms is bound to attract both supporters and detractors.
Let me return to the issue of the cost overruns that developed. You said that you kept the Scottish Office fully informed and that approval was given by the Scottish Office at each stage as problems developed. Is that correct?
The Scottish Office approved the £14.5 million envelope for the project. As the escalations came in, we kept the department notified. Its view was that the escalations were a matter for the HIE board, which had to decide whether it wished to commit resources to them.
So no further approval was sought from the Scottish Office or from ministers either for extra funding or funding for such a significant overrun.
No authorisation for further funding was sought. HIE assured Scottish Executive ministers that the funding could be found from within HIE's envelope of resources. The Scottish Executive expressed itself satisfied with that and said that that was a matter for the HIE board.
So ministers—at the Scottish Office, I presume—did not contribute any more funding, and all the cost overruns up to the £26 million were fully met by HIE. Were ministers content to bear the financial implications of that use of what was a substantial draw-down from a limited budget?
The £26 million includes a £1 million contribution to the project from Highland Council and several millions from the company's banker, the Bank of Scotland. As a result, the total cost to HIE was around £22 million or £23 million. If you want details, we will produce a very precise table showing exactly how those figures are made up.
That would be helpful. You said, however, that the bank contributed several millions.
That is right.
But if the project's total cost was £26.75 million and the public sector contributed £23 million, that leaves a gap of £3.75 million.
HIE contributed £23 million and the Highland Council £1 million.
All right. The public sector contributed £24 million. That still leaves a gap of £2.75 million, which was contributed by the bank. That is hardly "several millions".
We will confirm the figures for the committee but I have to say that £2.75 million sounds to me like several millions of pounds of private sector money.
It is a couple of million rather than "several millions". I am not going to engage in semantics, but I think that the figure is probably on a different scale.
What's a million between friends?
With regard to the jobs that it was hoped the project would create, the Audit Scotland report says that there was an estimate of £11,000 net grant equivalent cost per job as a result of the project. What did that figure turn out to be?
We have not done the calculation in those terms. It was a Treasury formula that was in use in 1997. The formula, especially the way in which net grant equivalent is calculated—which, I should say, is what allows you to do the calculation that you have referred to—is no longer in use.
That is interesting. So the net economic benefit is entirely separate from the net grant equivalent cost per job that the benefit creates, no matter how high that cost gets.
At the time, cost per job was an important factor in the way in which we looked at all kinds of projects. However, I point out that it is a static thing. We have managed to keep those jobs on the hill for eight years now; if the funicular railway continues to operate for the remaining years of its design life that level of employment benefit will have persisted in the Strathspey area for the best part of 25 to 30 years. Given those terms, the scale of investment is not inappropriate.
Perhaps I can help with the figures. When the initial budget was £14 million, the cost per job was £11,000; however, as the outturn cost was £27 million, the cost per job became about £22,000. That is simple arithmetic. Are you saying that, regardless of that value and no matter how high that cost goes, the net economic benefit to and impact on the area have still been worth while?
The point is that the costs of the Cairngorm funicular have been borne and the railway exists. All the scenarios for taking the resort forward require us to take a hard look at the use of further public money, whether revenue support or capital investment, with regard to the on-going benefits that those jobs bring to the area each and every year.
We accept that the funicular is now there. However, we are not investigating whether it should continue to be there and what the financial implications of that might be; we are looking at the process and other historical aspects of the development.
I apologise for my late arrival, which was the result of traffic problems.
I do not think that it is an accurate assessment of the return; it is a figure that one can come up with by doing the arithmetic that you described. We would have to take economic advice on what the costs are in relation to the benefits over time. Cost per job is a concept that implies that a job is created at one point in time and that is it, as if we would be happy regardless of whether the job went away after one year, 10 years or 15 years. Although cost per job was one of the criteria that we employed in our appraisal processes in 1997, in line with Treasury guidance, the means by which projects' economic impacts and outcomes are assessed is now more sophisticated.
But as you will appreciate, the difficulty that we have, as the Parliament's Public Audit Committee, is that our role is to ensure that public funds have been properly spent and value for money for the public purse has been obtained. The business case set out that the net grant equivalent cost per job would be £11,000. We do not know what the outturn is because you have not done the calculation. I have suggested to you that, on one reading, it could be as high as £131,000. You dispute that, but you are not able to give me an alternative figure.
I accept those points. We do not work things out on that basis any more, so I can only return to my point that it is important to look at a facility that has now been in place for eight years and realise that it has created a stream of benefits over that period. The real value of that investment is the stream of benefits that it will create over the lifetime of the asset. To date, the indications are that, in relation to capital costs of £19.5 million, the stream of economic benefits has been, and will continue to be, well worth while, provided that the funicular railway can operate as a summer and a winter attraction.
You said that your processes for considering investment decisions are now more sophisticated. Are those processes entirely consistent with practice throughout the Scottish public sector, including practice in Government projects?
Yes, entirely. We have spent a lot of time and effort over the past five to 10 years on ensuring that that is the case. Our own internal team has worked closely with Audit Scotland to try to ensure that. We have taken a great deal of professional advice. Every project officer in HIE goes through considerable project appraisal training to ensure that they apply consistent and up-to-date standards when they consider the exceedingly diverse range of portfolio projects with which we are faced, which include hotel upgrades, investment in fish-processing facilities and the development of tourism facilities.
I am not sure that I am entirely confident about what you say. This is not a criticism of you, but the huge overruns in some of the major projects that continue to be developed by public agencies in Scotland mean that I am not sure that we could say with any degree of certainty that that higher level of sophistication is leading to better performance on staying within budget. However, that is not an issue for you; it is a wider problem that the committee has encountered.
I will turn the question round.
These days, we commission an economic impact assessment of each major capital project in which we are involved, to work out what all the benefits would be—the construction jobs, the direct employment impacts, the indirect and induced impacts and so on. That information is in the mix, so we have a clear estimate of the benefits that would be realised from the project. That approach has been applied to a string of large-scale projects in the Highlands and Islands on which we are working.
So there is no longer a maximum figure.
There is no maximum figure. We do not apply a cost per job in those terms.
When did your approach change?
Probably around the turn of the decade, when we started to look at projects on a different basis. In particular, we tried to relate economic benefits in the round to the cost envelope.
As the Public Audit Committee, we might be concerned about that. What to you may be more sophisticated may to us be completely open ended. You can put any amount that you wish into a scheme. There is no relationship between capital input and job creation.
That is a fair comment on an issue that troubles us on marginal projects, in particular. In some cases, the amount of money that is requested from us is significant but the economic impact assessment indicates that, rather than creating jobs directly, a project will have benefits that are modest or largely indirect, requiring other people to do things—for example, tourists to spend money. We regard such projects as marginal. They are the projects on which we spend the most time agonising over the decision, to ensure that, when we commit funds that could be used for other purposes, we do so with full knowledge of what we will achieve.
Do you no longer have a red light, alert or requirement for Scottish Government or Treasury approval of projects of this nature? Have such controls been removed?
Largely. We operate with the Scottish Government under a delegated authority regime. For most projects, that means that the decision is made at the hand of Highlands and Islands Enterprise.
The counter-argument is that there was always discretion to go above the limit. However, you had to know that you were doing that, and there were checks to prevent you from doing it at delegated level. If you went beyond the standard assessment, you required approval from either the Scottish Executive or the Treasury.
Cost per job was never applied as a strict criterion project by project.
Exactly—that is the point that I am making.
At the end of each year, we reported the cost per job of all of our projects. Within the portfolio, some projects had a high and some had a low cost per job. Normally, self-catering tourism projects had a high cost per job, whereas fish-processing projects had a low cost per job. We accepted that there had to be a mix of such projects in the wider portfolio.
You are saying that that indicator has now gone—it is no longer considered or felt to be valuable.
That is correct.
Does Anne McLaughlin still want to pursue the issue of employment and economic benefits?
No, I have said all that I wanted to say.
Have the benefits that have come to the Highlands justified the investment? Have the benefits outweighed the costs?
We believe that they have. One benefit is employment directly within the project, which has been calculated. We also believe that the project has led to wider investment in many projects in the Strathspey area that we have not been directly involved in funding. We have increased confidence in the area—somewhere that surged forward in the 1960s and which had lost its place in Scottish tourism has been reinvested in. The facilities are modern and they attract new, younger visitors to the area. The range of attractions that we have in the area is also much greater than it used to be. Looked at in the round, we think that Badenoch and Strathspey, as one of Scotland's longest-standing tourism destinations, is now in a far better place because of the investment in the funicular railway, in the Aviemore centre and in other businesses.
We will move on to the decision to take over CairnGorm Mountain Ltd.
As we have discussed, in the period from the completion of construction through to your decision to take over the operating company and then the takeover some months later, very substantial losses were being made. Can you explain the extent of those losses and the action that HIE took as a result of those year-on-year losses?
During the past eight years, the losses were quite significant. The company had, of course, accumulated significant debt during the closure period while the funicular was being built and it did not come out of that in good financial shape, given that there was an extra year's construction period. The creditors at that time, who were us, the Bank of Scotland and Highland Council, were all working in quite close co-operation to try to help the company through this difficult period but, largely because of interest charges and the need to manage a new operation, the losses continued to escalate in that early period. As the period went on, the creditors all took a number of actions. A co-operative creditor arrangement was entered into in 2004, whereby the bank reduced the interest rate, Highland Council deferred interest on its loan and HIE adjusted the rent. In that co-operative manner, we were able to improve the business model and the return to the bank was pushed out for a number of years until sustainability was achieved.
That was an upward move, I presume.
Yes. We then went into further discussions about how we could sustain the company.
I will press you on that stage and the bank's decision to increase the interest rate, as I want to understand it all a bit better. Looking at the year-on-year losses, I see that the massive losses were in the early years. Am I correct?
Yes.
Around this time, for the first time, the company started to trade profitably for a year, although the position was still marginal in that there were some years in which losses continued to be made. Why, then, did Highlands and Islands Enterprise take radical action? Did the bank take the action that it did because it saw some value returning to the company? Was that a reason for the surprising decision to increase interest rates in a company that was trading so poorly?
It is difficult for me to answer for the bank's motivations. We knew that it proposed to increase the interest rates on the loans and, in fact, it did so unilaterally.
You must have discussed that with it.
We certainly did. It was a robust discussion.
Was an explanation given?
The explanation that the bank proffered was that it needed a better return on the long-term debt in the company. We reminded it of the creditor arrangement that we had gone into earlier with Highland Council and stated that we felt that the increase was a breach of that agreement. There were some strong discussions. In principle, our position was that, if the bank continued to raise the interest rate, we would reinstate the original rent, which would bring matters to a head. There were many strong, robust discussions on these issues. The outcome was a further year's moratorium on the interest rate.
When was that?
It was in 2007. There was a significant loss of about £262,000 in that year because of the poor number of skiers, which was down to about 38,500. That was a significant problem for the bank and that was part of the discussion.
It was a good explanation, thank you. It was very helpful. What was the vost of that to HIE? What additional financial and other responsibilities do you now have as a consequence of having done all that.
We paid £1 to Highland Council for its £1 million debt. We paid £1 to Cairngorm Mountain Trust for its remaining shares in the company. We paid the bank a sum of money that is the subject of a legally binding confidentiality agreement, and I am afraid that I am not permitted to divulge it.
Is it normal for a public body to enter into a confidentiality undertaking on this sort of issue of public interest?
It is not unusual for such agreements to be entered into. We certainly did so because it was in the interests of getting to and maintaining a result for the overall company, as I have suggested. When Audit Scotland pressed us on the point as part of its review, which it rightly did, we asked the Bank of Scotland whether it would relent and allow us to release the information as part of the Audit Scotland review, but it reasserted its rights under the legal agreement and said that it would not give its permission. That is the current position on the legal agreement and the purchase price of the debt and the standard security from the Bank of Scotland.
When Audit Scotland was conducting its audit, it was not given that information.
It was not given the information about the sum of money that HIE paid to the bank for the standard security and the debt.
Your auditors do not know how much you spent. The Scottish Government does not know how much you spent. No one knows how much you spent other than you and the bank. HIE is a public body, so how do those responsible from an audit or political perspective hold HIE to account for the use of the money when it can enter into agreements that no one will ever be told about?
We did, of course, seek approval from the HIE board at the time. It is aware of the details of the agreement that was reached. We also had discussions with our sponsor team, which is aware of the details of the agreement.
I am sorry, but who is your sponsor team?
The Scottish Government enterprise division.
Did it know how much you spent?
It was aware of the terms of the deal.
Did it know how much you spent?
Yes.
But your auditors do not know.
We certainly did not declare it in the audit report. That is clear.
But it is not just that you did not declare it. Did you not say that you did not think that it was appropriate to give Audit Scotland that information?
I do not think that—
We would have happily given that information to Audit Scotland if the Bank of Scotland had relented.
Yes, but I am not asking about that. You would have given the information to Audit Scotland if the Bank of Scotland had relented, but you gave it to your sponsor team. Did the Bank of Scotland okay that?
We discussed the matter in confidence with the sponsor team.
The Bank of Scotland was not aware that you were discussing that with your sponsor team.
No, it was not.
The bank said that you cannot tell anyone about the sum of money. Does your board know how much it was, or does it simply agree in principle?
The board is aware of the outcome of the negotiations.
Yes, but does it know how much the sum was?
Yes, it does.
So the board knows. The bank said that it did not want anyone to know. You cannot tell your auditors, who, in looking at how money is spent, are custodians on behalf of the public, because the bank will not allow you to do so, although you told your sponsor team in confidence. You gave a reasonable explanation of why you decided to take over CML in August 2007, but we do not know whether it cost £10, £100,000, £10 million or £100 million, and no one will ever find that out because the bank says that it does not want you to tell anyone.
I understand the point that you are making and appreciate what you are saying. Our legally binding agreement with the Bank of Scotland contains a clause that says that if legislation makes us release the information, we will be bound to release it. We have been requested to release the information under freedom of information legislation. We have so far resisted doing so, and we will continue to do that until the Scottish Information Commissioner instructs us to release it, if he does that. If the commissioner instructed us to do that, we would have no option. Under the legal agreement, we would be able to go back to the bank and say, "Sorry, but we now have to do this because the commissioner has instructed us so to do."
Yes, but do you understand why there could be a certain amount of unease when public bodies such as Highlands and Islands Enterprise—what I am saying could also apply to other public bodies—can decide to use public funds to enter into financial agreements with banks or other institutions that no one, including the auditors, will know about? How are public bodies held to account when such arrangements can be made?
We went into the arrangements with the best advice from some of the best insolvency practitioners. The negotiations were based on their advice. That advice went before the HIE board, which has the authority to decide on such issues.
But I am not asking about that.
That is what happened, convener.
I know that that is what happened, but I asked a question about a different matter.
We recognise the committee's concern. Douglas Yule explained that there may be a route through which the information will come into the public domain. If you asked us to ask the Bank of Scotland again following our discussion, we would happily do so. I give a commitment on that. We recognise the public interest in the figure.
It would be helpful if you did so. At the very least, the auditors should be given the information, even if no one else is given it. I find it astounding.
No, it was a creditor agreement that we had come to. There was a co-operative creditor agreement at the time, which in effect allowed the company to continue trading. We felt that the bank had breached the spirit of that creditor agreement.
When you entered into the negotiations with the bank, the company was technically insolvent. Is that the position?
It was trading with the support of its creditors, yes.
Therefore, if there had not been a successful outcome, and if there had not been an agreement, the company would have gone into administration or liquidation—into some form of insolvency.
Yes. In effect, one of the creditors was breaking ranks. That circumstance led to the negotiations.
How has the company performed since you took it over financially?
Until September 2009, this financial year, it was running at a loss of £150,000. That loss is in line with the budgets that are laid down for the year. The objective was to produce a balanced budget on the company by the year end. At this point in the year, pre-skiing season, that exactly follows the pattern that has emerged in previous years.
The overall picture of the company, since its traumatic start, is one of a continuing loss of about £100,000 or £200,000 in some years and a small profit in others—the most being £170,000, I think—depending on the quality of snow and other weather factors. That continues to be the trend.
Yes.
It is a highly marginal business.
Yes, it is.
However, the scale of the losses is nowhere near what it was in the opening few years.
Absolutely. The period between now and April 2010 will make or break our year. The challenge for the future is how to increase the numbers of non-skiing visitors throughout the year, given the uncertainty of snow and skiing conditions. That remains an opportunity for us.
The timescale of HIE's commitment to the railway appears to be quite open ended. I understand that up to 232 full-time equivalent jobs are affected in Strathspey and Badenoch, where it is difficult to attract other forms of industry and employment. I understand that HIE has a duty to ensure that those jobs are not lost, because if they were they would have to be recreated somehow.
That is absolutely correct. In our work with Johnston Carmichael this year, we have taken time to carefully examine options that will enable us to reduce the call on HIE's resources directly and to set up a business model that will allow an enterprise to take forward the operation of CairnGorm Mountain. As Douglas Yule has described, we are in the process of stabilising the finances for the current time and gaining a much better understanding of the relationship of the summer to the winter trade, the operating cost base of the company and so on.
I understand the commercial sensitivity that exists with regard to the way that you are working with CairnGorm Mountain. However, have you worked out how long you will be able to sustainably maintain the company while waiting for a buyer to arrive?
There will not necessarily be a buyer; we are thinking more along the lines of having some kind of service agreement with a company that would come in and run the operation. Clearly, there would be a profit motive in it for such a company. I suspect that the arrangement would be in the form of a lease, at least in the short to medium term. After that, if the operation were successful, we might be able to sell it on, and we would be happy to do that.
And you can afford the commitment of finances and staff for some years.
We can certainly afford that for the two to three years during which we will be trying the model out. If the model is successful, we will be able to reduce our commitment; if not, we will have to look carefully at the model.
Audit Scotland tell us that you helped to recruit new directors for CML. Who are they?
I do not have a list of those names with me, but I can provide it.
Do you mean that the three of you do not know who you have appointed as directors of CML?
As I speak to you right now, I do not know their names.
Is not that unusual? It is a very contentious project.
I was going to ask what experience the directors have of tourism or of funicular railways.
I apologise, Mr Foulkes. We should have that information, but we do not have it here today. The three new directors all have the expertise that is necessary for operation of the company.
How do you know, if you do not know who they are?
I saw the materials that were put together for the spec for the directors, when that was done, but I was not directly involved in the recruitment process.
Who appointed them?
A panel was put together, but it was done principally by the chairman of CairnGorm Mountain Ltd, Grenville Johnston, and his fellow directors. It is an arm's-length subsidiary and we are careful about shadow directorships in terms of our involvement with the company. It was, essentially, an issue for the company itself, although we contributed to the analysis in the run-up to the shortlist.
Let us try another one. What are the terms of reference of the directors who were appointed?
The terms of reference are the same as those for any directors. Under company law, they are responsible for running the company properly and ensuring that they discharge their legal responsibilities.
Do they receive remuneration?
Their remuneration is the equivalent of £400 a day.
They get £400 a day?
That is the same as the HIE board and other public appointees get.
Who pays that? Is it CML or is it HIE?
It comes from the company itself, from its trading.
The company is trading at a loss, so how can it pay directors £400 a day?
CML is not trading at a loss at the moment.
I thought you said that it was: you said that there was a loss of £150,000.
No, CML is working within its agreed facility. It is not insolvent; it is working within the agreed financial envelope with which it has been provided.
Is that at a profit?
It has a balanced budget that it is working towards for the year end.
As things stand just now, is it trading at a profit?
At the moment, it is in the middle of a financial year. It has a facility—in effect, an overdraft facility—from which it is drawing its working capital. It has a balanced budget. It is working to deliver a balanced position at the end of the year, and the costs associated with achieving that balanced budget include directors' remuneration.
If skier numbers hold up, the company will either break even or make a profit. However, as things stand—as this meeting is taking place—the company is showing a loss.
At the moment, it is running a trading deficit of £150,000 with four months of the year to come including the big skiing time of the year, which is where the revenue comes from.
So, the word should not have been "loss"; it should have been "deficit".
I will conclude with a couple of questions. The directors get £400 a day. I presume that they also get travel and overnight expenses.
I think that most of them travel from within the area. They are within travelling distance for board meetings.
The person responsible for appointing them—the chairman of CML—is Grenville Johnston. You mentioned earlier a company called Johnston Carmichael.
Yes.
Is it the same Johnston?
It is. I believe that Grenville Johnston is a descendent of the founders of Johnston Carmichael.
Is Grenville Johnston connected with Johnston Carmichael?
He is not connected with it any more. He is retired.
But he was connected with it.
He was the senior partner in Johnston Carmichael for many years. He was also chairman of the Institute of Chartered Accountants of Scotland.
There are an awful lot of coincidences of overlap between the organisations. Is that unusual or is it quite common?
In an area such as the Highlands and Islands, we try to get the best expertise that is available. Inevitably, because we are choosing from a smaller population, such coincidences tend to emerge from time to time. That is just a result of having a smaller business population in the area.
Do you know whether there is any overlap in terms of membership of societies or organisations?
I could not comment on that, convener. All I can say is that we procured Johnston Carmichael's services through the Office of Government Commerce—it was a pre-procured company. We did not procure the company directly; we took it that the Government had recommended it because of its expertise.
I am not thinking just of Johnston Carmichael; I am thinking of George Foulkes's point about all the connections. I wonder whether these people tend to meet somewhere else at different times and whether they all know one another. When were the new directors appointed?
My recollection—it is only my recollection—is that they were appointed about 12 months ago.
So—the new directors have been operating for 12 months, but three senior staff members of Highlands and Islands Enterprise still do not know who they are.
I have met them and have had discussions with them. However, as I sit here just now, not having a note about the members of the company, I cannot remember their names. I apologise to the committee, but that is the truth of the situation—I cannot remember their names.
They clearly made a considerable impact on you.
You look younger than me, Mr Yule.
We look forward to getting the names of the directors. I invite Willie Coffey to ask about the business model.
Other members have briefly touched on the plans for the future. Why has it taken so long to put a revised business plan together? You said that you are preparing it for 8 December.
We worked very closely with Johnston Carmichael up to the beginning of September, when it submitted its final report. This is a complex and challenging task for us because it is a complicated business model. We wanted to ensure that we took great care to get the best advice, which meant that once Johnston Carmichael submitted its early analysis in spring this year, we had intensive engagement with it. We asked it to think again about some of the analyses and to bring in more international experience in respect of how such visitor attractions work on the continent. There was intensive engagement from about May through to September to ensure that we got the very best report.
I do not wish to pursue you too far in that direction, but I think that the committee has a legitimate interest in hearing from you that there is confidence for the future and that the project can remain viable. However, what happens if we do not get a new operator? Is the project viable without that?
We believe that the project is viable. The infrastructure on the hill is relatively young in its economic life. We believe that it is operating very satisfactorily as a summer visitor attraction and in supporting skiing operations in the winter. We therefore believe that there is something there that can be taken forward. The financial results of the past few years give us encouragement to believe that, if we can get the balance right between the landowner supporting the infrastructure, which is HIE's role, and CairnGorm Mountain Ltd—or a successor company—operating the visitor attraction, we can get it right. However, we are taking our time to ensure that we explore all the options that Johnston Carmichael put in front of us.
Convener, I think that we should get sight at some point of the plans and proposals so that we can give them some public scrutiny. They could either come directly to us or come through Audit Scotland.
We would be happy to submit them through either route.
Thank you. I conclude by asking whether you are confident that the leadership of CML will be able for the next few years to run the business sustainably and viably.
We are. The new chief executive of CairnGorm Mountain is Ian Whitaker, who is very experienced in the company's operations. We are confident that he and his colleagues on the hill who run the resort day to day are capable of that. It is a challenge, because they operate in a difficult environment and have two different businesses there: they cater for family groups and holidaymakers coming in the summer, right through to the onerous duties of running a ski resort in the depths of winter, when they have to get a lot of people off the hillside very quickly if conditions change.
Where did Ian Whitaker come from?
He had been working within the company and was promoted internally.
He was at Our Dynamic Earth before he went to CairnGorm Mountain.
I have a final question. I am conscious that this is our last opportunity to ask questions and I am deeply concerned to hear about the bank's actions, which the committee may wish to follow up. When the bank was acting as the witnesses described, what would have happened financially if the company had gone into some form of insolvency? What would have been the consequences for Highlands and Islands Enterprise? Would a repayment to the European Union have been triggered and would other contingent liabilities have fallen on the public purse? Will the witnesses explain the situation?
The creditors would have been out by the amount that they were owed. That would have included a lot of small creditors. Repayment of the European moneys would not have been triggered unless the funicular ceased to operate. There is a period of time during which, if it is closed and not running, there is an obligation on us to remove it from the hill. That, too, was a motivation for us to ensure that it continued to operate. However, the most significant point is that we would have lost control because of the standard securities. That particularly motivated us as landlords and owners of the facility.
Earlier, you said that the railway could have been shut down for a period not only because of standard securities, but if an administrator took over.
Yes.
What repayment would that have triggered? What was the contingent liability?
A short-term closure would not have triggered a repayment. The funicular would need to have been closed for longer for that to happen. However, the short-term closure would have dented confidence among businesses in the valley and would have had a significant effect on the marketing and other tourism proposals for many businesses that employ a relationship marketing strategy around CairnGorm Mountain in selling their business opportunities. We had spent a lot of time building up that confidence over the previous eight years.
Is it fair to say that the bank would have been every bit as aware of those issues as was Highlands and Islands Enterprise?
The bank had a lot at stake in the valley at that time.
I thank Mr Brady, Mr Bryers and Mr Yule for their contribution to the meeting. We look forward to receiving the extra information that they said they would provide. Obviously, they will go back to the bank, as well. We realise that the project was fraught with difficulties and we do not underestimate the dilemma and challenges that it faces in the future. Everyone wants the project, which is clearly important to the area, to be successful but, as I explained earlier, our interest is in the historical events.
Thank you for those words, convener. We appreciate them and hope that we have been of assistance to the committee.
Meeting suspended.
On resuming—
“Commonwealth Games 2014: Progress report on planning for the delivery of the XXth Games”
Item 3 is on a further section 23 report. I invite Caroline Gardner to brief us.
This progress report on planning for the 20th Commonwealth games was published on 19 November. It is the first in a series of reports that we plan to produce on preparations for the games, and it provides an early indication of progress up until August 2009. We prepared it on behalf of both the Auditor General and the Accounts Commission.
The project is of huge significance to Scotland, not just for 2014 but, we hope, beyond that—we all hope that there is a legacy, as has been discussed in the past few years.
The increase of £81 million that was announced last month followed a detailed budget review that was carried out by the organising committee. Early in 2009, it reviewed at a high level the plans that had been put in place for the 2007 bid and then commissioned a detailed review that reported back in October. That review identified areas in which more detailed information led the organising committee to change the estimates.
I think that you said that the estimates for the infrastructure costs of some of the big building projects that are associated with the games were optimistic. Is that right?
That is right. I referred to page 26 of the report, where we set out the changes that have been seen since the bid was put together in 2006 and agreed in 2007. There are both some cost changes and some changes to the timing of venues, which are important. There has been some slippage. None of the venues is yet behind schedule, but several are closer to the deadline of 2014 than they were when the bid was originally put together.
Do you think that the stated figures are optimistic?
The estimates that are being worked on currently vary in certainty between projects. Some of the venues are now complete or close to completion, but others are much further from completion. The further from completion they are, the more uncertainty there is. That makes it hard to be certain about the quality of the estimates.
Okay.
I echo what has been said about the importance of the project, which everyone wants to be a great success. At the same time, we are anxious to keep a tight lid on costs. The convener asked about the risks to the budget and mentioned the additional £81 million that was allocated just two weeks ago.
The context that I can provide will help you to draw a conclusion about that. The first important point to stress is that the Commonwealth Games Federation says that it put in place a much more rigorous bid process for the 2014 games than for any previous games, partly because of the concerns that you have outlined from footnote 39 of the report. It is in no one's interest for cities and countries to bid for games without a clear picture of the cost. The federation has tried hard to reduce uncertainty for the future, so the starting point should be better.
Although you did not say so explicitly in your answer, it sounds to me as if the level of risk is high. You may wish not to comment on that.
I am not sure that it would be helpful for us to give you such an estimate. All that I will say is that, over a five-year period, there is a lot of risk that simply cannot be managed. We think that the risk that is being managed is being managed reasonably well, but there are big uncertainties that have not yet been pinned down. I have mentioned broadcasting costs and rights and the athletes village, both of which have the potential to have a significant impact on the overall costs of the games.
Has it been possible to quantify a worst-case scenario of what would happen if all the aspects that you mentioned were to come together at once?
We have not done that at this stage. We plan to carry on monitoring the games and report back to you on at least one occasion before 2014 because we know that the risks will keep on changing. A better question to ask of the strategic partners might be about what planning they are doing for 2014 in that regard.
I have just one more question. For interest, when do you intend to do your next report on spending?
We have not set a date yet, but 2011 feels about right. We do not want to keep pulling up the plants to see whether the roots are growing, but a couple of years feels like long enough to see what the risks look like at that stage.
You mentioned in your preamble that the loss of key staff in the organisation could prove problematic. I think that it is mentioned at least three times in the report that that is a possibility—on pages 6 and 8. It says on page 6 of the "Key Messages" document that strategic partners should
We do not think that that is happening yet across the four strategic partners. Each of them is at a different stage of development. As you picked up from the report Glasgow City Council is doing particularly well in that regard; the other partners are developing their plans to do the same thing and ensure that knowledge is shared effectively and they are not reliant on just one person for critical functions.
Are the full-time staff for the Commonwealth games going to be the focal point for drawing all the work together or, as the programme emerges, will strategic partners still work on their own areas to the exclusion of drawing together? I think that the staff will number up to 300 or so people. Will they be the control room for everything that takes place?
I will ask Carolyn Smith to offer a bit more detail on that, but it is worth noting that under the structures for governance the partners have clear separate responsibilities as well as shared ones. It is important to make it clear who is doing what.
The overall plan that is being pulled together will not contain every single detail of every one of the partners' responsibilities; it will focus more on the high level and be used for monitoring the partners' planning for the overall programme. Each of the partners will be responsible for their own more detailed plans, which should also link in with other partners at an operational level to make sure that they liaise on anything that crosses over.
I understand that the extra public sector spending, particularly the extra Scottish Government funding, is more than £50 million.
It has gone up by £59 million.
Where is that extra cash coming from?
That information was not included in the announcement and we have not looked at it yet; it was announced on 16 November.
When new cash is found by the Government in that way, when do you expect to be told where the funds are coming from?
The Government does not and is not required to tell us about every change in its spending plans at the highest level. That comes through the Parliament's budget process. We would expect to look at the gains as part of our continuing monitoring, in particular as part of the next update on progress in a couple of years' time or so.
The Government—rightly, in my view—has criticised the United Kingdom Government for pulling the additional funds that have been made available to the London Olympics in 2012 from budgets that would have been invested in sport in Scotland and in other projects that affect children and young people in Scotland. I would be very concerned if the Scottish Government was pulling funding—at the current stage confidentially, without any public scrutiny taking place—from sport across other parts of Scotland to invest in the 2014 games.
We have not looked at that at this stage.
However, it could be a huge shift in funding for sport in Scotland. For example, it is more than the total annual budget of sportscotland; it is a significant amount of money and we do not know where it will come from.
Broadly, there are two ways of managing costs for long-term projects. The first method is to start with a cost base at the original price base and inflate it up; the other is to start at where one expects to finish and bring it down again. The Government and the partners have chosen to stick with 2007 prices for now. One consequence of that is that we know that when we reach 2014 the cash price will be higher, simply because of inflation, if nothing else changes. Treasury guidance is generally that inflation should be built into the cost estimates, but that has not happened in relation to the project. That is one of the reasons why tight cost control becomes all the more important.
So, on this project, Treasury guidance has been ignored or set aside—or, to put it in perhaps a more neutral way, it has not been followed.
Treasury guidance has not been followed in relation to the treatment of inflation.
On this project.
Yes.
On a more positive note, there are currently lower construction costs. I am told that, across the public and private sectors, bids are coming in about 10 to 15 per cent under estimate on major capital projects. Has that been factored in to the new costs for the Commonwealth games?
It is one factor that has played into the detailed budget review. As I suggested in response to Mr Fraser's question, the effect is not straightforward. It is certainly true that there is evidence that some construction contracts are coming in lower than the original estimate, but in the current climate there is also a higher risk of contractors going into liquidation. Taking account of both the upside and the downside risk, I suggest that there is not a straightforward effect on the budget as a whole.
So has it or has it not been factored in?
It is one of the factors that we understand the organising committee's review has taken into account; it looked at the likely impact of that factor on the outturn costs come 2014. That has led to the budget increase of £81 million that has been announced. I think that it has also taken account of the downside risk associated with the current climate.
Despite the better bidding climate for the pricing of major capital projects, the cost has still gone up by £81 million.
It is worth me making it clear that most of the venue costs are being met separately from the £454 million budget cost at the moment. Those projects were planned by Glasgow City Council and others in advance of the bid, so changes in that regard will not make a tremendous difference to the games bid.
So the key risk is the village.
Yes, because it is big and because the contract is not yet let.
Okay. Thank you very much.
As usual, the Audit Scotland report is as helpful as it is wise. It contains quite a lot of positive comments about the project management and risk management processes that are being undertaken.
That is a question about detail, which you might want to think about directing towards the organisers. Our understanding is that those facilities were always intended to be completed reasonably close to the start of the games. There is a detailed project plan for getting the entire infrastructure in place, because there are interdependencies and knock-on effects around it.
That is interesting. To be clear, three of the projects are due to complete in March 2014, which is only a matter of months before the beginning of the games. I can understand that there might be constraints on getting into Hampden to make changes, but I do not really follow the reasons why we might be sailing so close to the wind with the other two. However, Caroline Gardner is quite right: we can direct that question to the games management committee.
Carolyn Smith might be able to give you a bit more information.
It is to do with the activities that will take place in those venues. It would not make sense to have them prepared too early because operating costs would have to be picked up if the venues were to be ready at that earlier date. It would not be possible for them to be used for other things in the meantime and the operating costs would have to be picked up. There is a short window for the venues to be put in place; the report is saying that that risk needs to be managed and that contractors need to be available so that changes can be made to the venues in time. That will have to be monitored closely, because the venues are due to be ready so close to the time at which they will be needed.
That is helpful.
I want to pick up on a couple of Nicol Stephen's points. Who do we challenge with regard to the 2007 figures that are to be updated? Who do we ask to update them properly?
The four partners are jointly responsible for that. The Scottish Government is the biggest funder of public money, and the overall strategic group is chaired by the First Minister. The Scottish Government is the key player, but I imagine that it will want to involve its partners in Glasgow City Council as well.
If we want those figures to be updated, which would seem to be sensible and in line with Treasury guidelines, we should take it up with the Scottish Government. Is that right?
That would be the starting point, I think.
That is your recommendation.
Yes.
My other point is about the extra cash going beyond the budget, and money being taken out of virement or contingencies or whatever. Does that not strengthen the case for what we discussed at our most recent meeting—having a report from you on outturn compared with budget, which we do not have for the Scottish Executive's expenditure? Where are you in your thinking on that? We threw that idea at you at our most recent meeting. Have you had time to think about it yet?
Yes, we are thinking about it at the moment. The timing is extremely good, because we are finishing the Scottish Government's audit for 2008-09. The team is looking at what we could do currently and how we might be able to develop that for 2009-10 and future years. We will come back to you on that in 2010 to talk it through.
When do you think that you will be able to let us know about that?
After Christmas and new year would be a good time to come back and talk to the committee about it. We would probably do so informally, to start with, and would give you some options to ensure that we were on the right tracks as regards what you are looking for.
That is something to look forward to—thanks.
You said that a number of joint working groups have been set up at operational level by the strategic partners, but that neither their status nor their lines of responsibility are always clear. Will you expand on that? Are the four partners aware of that? Will they do something about it? When are they likely to do that? At this stage, given that the games are four and a half years away, are you concerned about that, or are you satisfied that they are doing enough to deal with the issue?
It is probably worth saying that we think that the working groups are generally a good thing and are necessary—they are ways of getting together the right people on matters such as finances, the venue and some of the people issues that Mr Kidd asked about, on which a mechanism will need to be available.
Anyone else?
I have one more question. Have we had any indication whether there are plans to send a delegation to the 2010 Commonwealth games?
Carolyn, do you know?
There will definitely be staff from the organising committee and I imagine that there will be staff from all the partners at the 2010 games.
And no doubt Il Duce—I am sorry; I mean the First Minister—will go as well. Is that right?
We do not know exactly who will go from the partners, but they will certainly be represented because of the closing ceremony, the handover and so on.
Of course.
As there are no other questions, I thank Caroline Gardner and Carolyn Smith for their contribution, which we will consider in due course.
“Improving public sector purchasing”
We move on to item 4. We have a response from the accountable officer on "Improving public sector purchasing". Are there any questions or is the committee content to note the response?
I raised the issue of the target date for standard terms and conditions of contract at our most recent meeting. The Scottish Government's reply is rather disappointing in that regard but, frankly, I see no merit in us pursuing the matter further at this time.
Is the ability of smaller and local businesses to put in tenders protected by a European ruling? Large companies may move in on smaller-scale procurement. If they do so on a large enough scale, it would be worth their while. Are small companies protected in that regard?
Does anyone have any information on that?
I think that we can provide some helpful background information that is not in the response from the accountable officer. The Government published a sustainable action plan in October 2009, which requires public bodies to commit to producing delivery plans for how they will purchase sustainably, including from smaller and local businesses. There are milestones for their doing so between this November and next December. That ought to give detailed information on how the public bodies intend to address the concerns that Bill Kidd has raised. The committee may want to consider asking for an update on that later in 2010, to see how they are responding to the concerns about smaller and local businesses.
Okay. Do we agree to do that and to note the response?
Members indicated agreement.
Meeting continued in private until 12:48.