Public Audit Committee, 04 Feb 2009

Meeting date: Wednesday, February 4, 2009

Official Report 168KB pdf

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Section 22 Report

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“The 2007/08 audit of VisitScotland”

The next item is the section 22 report "The 2007/08 audit of VisitScotland".

As the committee will know, VisitScotland is the national tourism organisation for Scotland. In 1997, VisitScotland, working with the former area tourist board network, began to develop a tourism consumer website. The aim was to have a website that provided an all-Scotland database of tourism products and services, and an online system for booking accommodation.

After some initial development work, VisitScotland sought advice in 2000 from the private finance initiative Treasury task force, now thankfully simplified to Partnerships UK. Drawing on its own work and the advice that it received from the task force, VisitScotland got the Scottish Executive's approval for additional funding to invest in a public-private partnership venture. VisitScotland prepared a business case to support investment in the joint venture and the Scottish Executive approved the joint venture in April 2002.

A company called eTourism Ltd was created to operate the website and provide other services for VisitScotland. The website was called VisitScotland.com. When the joint venture company was being created, VisitScotland invested £1.85 million to secure a 25 per cent interest, which was shared with the 13 area tourist boards that were still in existence. Other shareholders were Partnerships UK, with a 15 per cent interest, and a company called SchlumbergerSema, which took a 60 per cent interest.

The business case indicated that the joint venture could generate a post-tax profit of £1.5 million a year from the fifth year of its operation. However, eTourism's financial performance did not meet the expectations outlined in the business case. Income grew significantly in 2003 and 2004, but growth slowed from 2005 onwards. Expenditure also grew over those years, although it decreased from 2006. At 31 December 2007, the financial statements of eTourism Ltd reported cumulative losses of £12.4 million.

Because I am not responsible for the audit of eTourism Ltd, as it is a company, I am unable to provide detailed information about the reasons for the financial difficulties. However, from the information provided by VisitScotland's external auditor, it appears to us that the main reason was that income from the online booking service was significantly less than anticipated. We understand that there were high numbers of visitors to the website, but unfortunately that did not translate into bookings. I am not in a position to comment in detail on the reasons for that. However, VisitScotland has suggested that contributory factors were changes in the marketplace, particularly changes in the methods that people used to book accommodation, and the growing number of small businesses in the industry with their own websites. The Economy, Energy and Tourism Committee commented on issues relating to the VisitScotland.com website in its report in July last year.

As a result of eTourism's financial difficulties, VisitScotland decided to provide in its 2007-08 annual accounts for the non-recovery of its £1.85 million loan to eTourism Ltd and the related unpaid interest of £900,000. That resulted in VisitScotland reporting a deficit of £2.6 million against the financial target set by the Scottish Government for 2007-08. I therefore decided that I should make a section 22 report on the 2007-08 accounts of VisitScotland.

It might be helpful if I provide the committee with an update on the current position, as we understand it, of eTourism Ltd and VisitScotland's role. Shareholding arrangements have changed twice since eTourism Ltd was established: in 2005 and in December 2008. In 2005, Atos Origin IT Services, which had become the new parent company of SchlumbergerSema, gave up the majority of its shareholding and retained only 7 per cent of its shares in eTourism. Another company—Tiscover UK—acquired 35 per cent of eTourism's shares. The remaining shares were split between VisitScotland, which increased its shareholding to 36 per cent, and Partnerships UK, which increased its shareholding to 22 per cent. I emphasise that VisitScotland did not invest any more money to acquire the increased shareholding.

In December 2008, VisitScotland decided to acquire all the shares in eTourism, which brought eTourism completely into public control. VisitScotland paid £1.25 million to acquire the complete shareholding. As part of that arrangement, the other partners agreed to write off loans and interest that were owed to them, which were valued at almost £2.9 million. VisitScotland is obtaining financial advice on how the acquisition's value should be treated in its accounts.

VisitScotland is considering alternative business models to secure the future of eTourism and its website operations. I have asked the auditors to continue to monitor developments, including the financial implications of decisions that are made about the longer-term sustainability of eTourism.

As ever, I am happy to answer questions, with the support of the Audit Scotland team.

If we leave eTourism aside, are you satisfied with VisitScotland's performance in 2007-08?

We have done nothing on VisitScotland other than receive the final report of its auditors and its signed accounts. They would be satisfactory if not for the need to take into the accounts the losses that have been incurred.

All members in whose constituencies the tourism industry is well represented will be familiar with many of the issues with VisitScotland.com, but not many of us realised the scale of the problem. Delivering cumulative losses of £12.4 million is an unmitigated disaster. I appreciate that you cannot comment on the reasons for that—you can only speculate—but I wonder what the impact on the remainder of VisitScotland's operations will be of the deficit of £2.6 million that it reports in the accounts for the year gone by. Surely that loss will have a substantial knock-on effect on the agency's other activities.

At this stage, it is not possible to give an assurance about the outcome. As I said, VisitScotland held at the outset a 25 per cent share in eTourism, which increased to 36 per cent in 2005. In December 2008, VisitScotland acquired all the other shares and therefore acquired all the liabilities.

It is for VisitScotland to consider—as it is doing—how the operation's relative value should be reflected in its financial statements. As I said, it is considering alternative business models. The issue is important to VisitScotland. Until that process is concluded, my colleagues and I cannot help the committee terribly much, unfortunately.

How VisitScotland's on-going operation will be affected by this financial hit is of great concern to me. We should pursue that.

I have a couple of questions. The first is for clarification. I am not clear about the phrase

"VisitScotland management took the decision to reflect provisions for non-recovery",

which is in paragraph 10 of the report. What exactly does that mean?

It means that VisitScotland made a provision in its accounts for the fact that a loss might occur, which would hit the organisation's balance sheet.

My second question is about the reference to "business cases" in the report—the committee has discussed a business case in relation to another matter. Did Audit Scotland have access to the business case and to information that dated back to when the enterprise was established in 2001?

The section 22 report is focused on the accounts. The work that was done on my behalf was not as comprehensive and detailed in this case as in the case of the First ScotRail franchise, for example, where a specific piece of work was undertaken. The external auditor of VisitScotland has examined the matter for me. That involved looking at the original business case and the history of events after that. The general conclusion is that VisitScotland went through a process that, at the time, seemed entirely reasonable when putting together the business case and the subsequent business plan. Its confidence in what it was doing was probably confirmed by the fact that it was able to achieve a partnership venture, involving Partnerships UK and the private sector.

I will leave the matter there for the moment.

In light of the previous item on our agenda, was a consultancy service involved in setting up this aspect of the organisation?

One of the team may be able to answer your question.

May I come back to you on the matter in a minute?

Okay.

From start to finish, none of this looks very clever. The business plan got it wrong, and VisitScotland failed to react either to losses or to external changes in the market. You say that income from the service was less than anticipated. How can an estimated profit of £1.5 million turn into a £1.3 million loss in 2007, with £12.4 million of cumulative losses plus £6.3 million of liabilities and various other debts? Surely the business plan got it wrong. Why was VisitScotland unable to respond to market and other changes?

I will attempt to be as helpful to the committee as I can, but I must qualify my remarks by reminding members that we have not carried out a full, thorough performance review of the project.

The general impression that comes through clearly from the limited work that the auditor and the Audit Scotland team have done is that the original business case was reasonably put together at the time that it was created. As I mentioned in my opening remarks, income grew significantly in 2003 and 2004 but then slowed. The problem was that people were reluctant to use the site to make bookings. Around 2005, the rate at which visits to the website were converted into accommodation bookings dropped by 45 per cent. That development has caused VisitScotland considerable problems.

From reading the documentation that is available to me, I have the impression that the management of VisitScotland engaged closely with the process throughout. It did not stand back from what was happening and was in no sense negligent. We must recognise that risks are associated with the development of new projects and products; occasionally I have made that point to managers and others in the public sector. When I bring reports such as this to the committee, I am committed to trying to present a balanced view. We must understand something of the context and recognise that the way in which the internet is used today—not only by companies and public bodies but by all of us as individuals—was not really foreseen in the 1990s. The custom and practice of using the internet has developed significantly.

Measured by the number of hits on its website, VisitScotland's performance has been quite good. I will share one fact with the committee. In September 2005, there was more traffic on the VisitScotland.com website than on the equivalent English and Irish sites—the figure was four times greater than that for the Irish site. That aspect of the service is working. Where it has not worked is in the conversion of visits into bookings. That has left VisitScotland short of income.

Surely the service is about converting visits into bookings.

That is a significant element.

I am concerned about the massive and on-going haemorrhaging of money; it is clear that VisitScotland got things entirely wrong. In spite of expert advice, eTourism Ltd looks like an on-going financial disaster area.

I am also concerned about the organisation's inability to adapt to changing needs and markets. The website might be getting a lot of hits, but surely it is the end product that counts. I note that VisitScotland is "considering alternative business models". What exactly does that mean?

I think that it means what I said: VisitScotland is currently looking at options for the future and only VisitScotland is in a position to give you the current picture. The auditor will monitor the situation during the current financial year.

Before I bring anyone else in, do we have the information that Andrew Welsh asked for?

I have a comment to add to the Auditor General's statement. I absolutely agree that the board and management of VisitScotland have been on top of the issue throughout. It is worth emphasising that VisitScotland had a minority interest in the organisation that runs VisitScotland.com, so it had limited access to do something about the issue. VisitScotland was a minority shareholder in the early days.

The shareholding was initially 25 per cent; then, in 2005, it was 36 per cent. Until December 2008, VisitScotland did not have a controlling interest in the operation of the organisation. Despite the fact that VisitScotland was aware of the concerns, was considering them and was trying to make its views known, it did not have full control over what was done in response to those concerns.

So it was on board a runaway financial train.

There are slightly different issues for us to reflect on. However, from what has been said, as far as Audit Scotland can see, those associated with VisitScotland acted properly and judiciously. We have other concerns and we will have to think about how we comment on them.

Are you in a position to answer Andrew Welsh's original question about consultants?

I can see no reference to consultants being involved, but I cannot assure you that none was involved. VisitScotland will have the answer to that.

I want to follow up the point about online bookings. Secure transactions have been available for quite some time, and hotels and guest houses use them frequently. Therefore, I am surprised that, in the original model, so much reliance was placed on a revenue stream from VisitScotland.com's secure transactions site when that service was developing right across the internet market.

Perhaps I am more surprised that, at some stage, VisitScotland decided to acquire all the shares in eTourism Ltd, thereby transferring a private debt of £12.4 million into a public liability. I am concerned about that. That is effectively what happened; the £12.4 million debt is now a public debt. Am I wrong?

By acquiring the company, VisitScotland managed to ensure that it continued to operate in the short term. The former partners in the company wrote off loans and other money that were due to them as part of the acquisition. Therefore, I imagine that VisitScotland considered that it was important to keep the company in existence while it looked at alternative business models.

Given that aspects of what the company did have been successful, such as getting a lot of people to visit the website to explore information about tourism in Scotland, it would be difficult for us to say more than that at this stage.

Where does the £12.4 million debt liability lie?

It would lie with VisitScotland, but it might not be crystallised. It depends on the business model and how it goes forward.

It is fair to say that the tourism industry has been critical of the website for some time now. The VisitScotland response tended to focus on the number of hits and the number of people who use the site. However, it has become clear that the industry was right all along, and that the conversion rate—the number of people who book online—has fallen significantly behind the predictions in the business plan. That has become a significant problem for the company—a major loss has accumulated.

There are, no doubt, issues of the type that Robert Black has identified. It would be bad news if VisitScotland no longer had a website or a web presence. I think that everyone here today would like the company to have a good-quality web presence and to see the issues that the industry has identified tackled and turned around. However, I have seen no evidence that that is happening. I am interested in hearing about any timescale for tackling the situation, and about how that will be done in a way that is appropriate and which will include consultation and the proper involvement of the industry.

I have some questions about the details of the deal that was done in December 2008 in relation to the acquisition. In what ways will the industry now be involved? Much has been said by VisitScotland to rebut criticisms from the tourism industry, but it now seems that many of those criticisms were well founded.

With regard to the criticisms, in the report that it published in July of last year, the Economy, Energy and Tourism Committee offered some challenging comments about how the situation was developing. The committee said:

"We note the recent reforms to the VisitScotland.com website but believe that the current scale of its achievements, especially in regard to online booking provision, is far too modest. We believe the current business model for VisitScotland.com has failed and should be revisited."

That is consistent with the sentiment that you expressed.

I personally cannot answer your question about the extent to which the industry is currently involved with VisitScotland. Perhaps my team can help from their current knowledge of the matter.

The Auditor General has asked the auditors to continue to monitor the situation and report back to us on developments, including the development of possible new business models, timescales and any financial implications.

I am sure that the situation will remain an issue of concern to this committee and, as Robert Black identified, to the Economy, Energy and Tourism Committee.

My second group of questions relates to the deal, and the amount of money—if any—that was paid to acquire the controlling interest and all the shares. You mentioned write-offs and restructuring of debt. Was that done at fair value and with appropriate advice? We are talking about a company that was, based on the comments that you have made, technically insolvent. Is that correct?

Yes, that is correct. I am not sure that I can add much more to what I said earlier. Perhaps the team can help.

VisitScotland paid £1.25 million to take over the rest of the company in December 2008. It acquired all the shares, and the other companies agreed to write off the debt that was owed at that time.

Do we know how much that was?

Yes—it was £2.9 million.

The Auditor General explained in his opening remarks that it was £2.9 million-worth of debt.

Thank you—I did not pick that up. So there was a write-off of £2.9 million, but there were still net liabilities. Those amounted to £6.3 million in December 2007, and they would have grown by December 2008.

The Auditor General said that VisitScotland is seeking financial advice on the value of the acquisition. Members made a couple of points about the online booking system. Of course, that is not the only service that is provided through the site. A lot of marketing information is gathered, such as where people are visiting from and what they are looking at. There is some value to be attached to that. Financial advice needs to be taken to establish the exact value of the acquisition and how it should be reflected in the accounts. The value might be higher or lower than the previous figure, depending on how the financial advice goes.

So, more work needs to be done in that area. I presume that VisitScotland took professional advice on the acquisition. Are you aware whether it did that?

There is evidence that VisitScotland took advice, involved lawyers—I do not know whether I should say "consultants"—in the procedure and performed due diligence tests through its internal audit team.

Have you scrutinised that yet, or is it too early to have done any audit work on it?

We have not looked at it in detail. Our focus was on the preceding period.

SchlumbergerSema is a massive organisation. Mr Black mentioned the comparison with the English and Irish equivalent sites. Does SchlumbergerSema have any dealings with them?

Unfortunately, we would not know that, because our audit relates only to VisitScotland, in Scotland.

Do you know whether SchlumbergerSema has any dealings with other Government—

I am sorry, but we would not have that information either.

How does all this relate to homecoming?

That would be a policy matter for the Scottish Government to help you with.

Are you looking at expenditure on homecoming?

Not specifically.

Would it not be wise to do that, in light of what we are discussing?

If it is a matter of interest to the committee, we can certainly consider how, in the course of the audit of the current financial year and into the future, we might make an appropriate reference to that project.

It might be worth looking at that. There have been a number of public comments about it. Surely that work must be done in parallel with, or alongside, VisitScotland's work.

From what I understand of it, VisitScotland's work to attract people to Scotland is entirely consistent with the policy objectives of the homecoming project.

But are the two things working together? Are the budgets separate?

I am sorry, but we have not done an audit in that area. I wish that I could help you, but we do not have that information.

Could you find that information? Would you need to carry out a particular audit? How would you set about that? Who would ask you to do it? Would we ask you?

I would ask the auditor in charge of the audit of central Government to have regard to it when they were preparing their audit work and making their final report.

That would be helpful. We want to avoid duplication. The work on homecoming might be consistent with the work of VisitScotland in policy terms, but it would be useful to know whether it was duplicating or conflicting with things that were already being done.

The issue that we are discussing is the 2007-08 audit of VisitScotland. Is the website still working?

Yes.

Anyone who is interested in coming back to Scotland can make bookings through the website. Did any information obtained during the audit indicate whether the conversion rate has improved?

All we have is a general piece of information that the contact centre and the tourist information centres are performing as expected in 2008, but the conversion figures for the website continue to be disappointing.

What timescales are we looking at for the additional work that is being done? I realise that you might not be able to give us any further information on that.

I hope that we do not get too bogged down. If the VisitScotland website is our main website for selling our product, it might be the case that we have got just part of it wrong. People might go to other sites to make the final booking because, for example, different discounts are available—all of us have probably done that when we have tried to get the best-value booking. As well as information on the timescale for the work on alternative business models, I would like to know whether the figures that we are discussing represent reasonable expenditure for the marketing of the VisitScotland brand.

I am sorry, but I cannot help much with those entirely reasonable questions; they would be best addressed to VisitScotland.

I understand members' interest. When we consider our approach to the report later, we will have to reflect on what work has been carried out by other parliamentary committees. It is clear that some future policy practice issues need to be addressed. We are trying to examine some of the problems from a historical perspective, but I suspect that there will be a continuing interest in the failure of VisitScotland's electronic system to convert inquiries into bookings. If this committee does not do such work, others might well wish to.

There is a point that I wanted to check. What is the annual turnover of VisitScotland?

I look to my team to give you a definitive answer.

I am trying to get at the percentage of the agency's total turnover that the £2.6 million deficit represents.

VisitScotland's overall outturn for the year was £52.5 million.

So, off the top of my head, the deficit amounts to 5 per cent of turnover. There you go—I can still do mental arithmetic.

As there are no further questions, I thank everyone for their contributions. We will consider the matter again later on the agenda.