Infrastructure and Capital Investment Committee

Meeting date: Wednesday, October 5, 2011

Official Report 524KB pdf

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Infrastructure and Capital Investment

Item 4 is evidence from the Cabinet Secretary for Infrastructure and Capital Investment on matters in his portfolio that relate to the committee’s remit. I welcome the cabinet secretary, Alex Neil MSP, and his officials from the Scottish Government: Ainslie McLaughlin, who is from Transport Scotland; and Aileen McKechnie, who is head of the innovations and industries division. I invite the cabinet secretary to make a brief opening statement.

I will be brief this time. First, it might be useful to remind members what is covered by my portfolio. This is a unique portfolio in that it is the first time that a head of a Government in the United Kingdom—the First Minister—has brought infrastructure and capital investment into one portfolio. My portfolio covers housing, transport, digital strategy, water, European structural funds and procurement policy. I am also responsible for regeneration, fuel poverty and a range of other matters of which the committee is aware.

The purpose of the approach is to drive forward the Government’s capital investment programme. It is important to explain to the committee that the Government strongly believes that increasing capital spending is essential at this time of economic difficulty. We think that for two reasons. First, it is generally recognised that, for every 1 per cent of gross domestic product spent on capital investment, 0.3 per cent of additional growth is generated annually in the economy, on a permanent basis.

Secondly, the multiplier impact of capital spending is significantly higher than the multiplier impact of resource spending. Of course, resource spending, which includes teachers’ salaries and national health service operating costs, is extremely important. However, given that our overriding objective is sustainable economic growth, we have decided to transfer £750 million in total from the resource budget into the capital budget over the three-year period of the comprehensive spending review, starting next April.

The other significant development is the NPD programme of £2.5 billion of expenditure, which will cover about £1 billion of capital spending on transport. The main projects in that regard will be the Aberdeen western peripheral route, which I am sure the convener supports, as well as the M8 bundle, which is a major improvement in the M8 between Newhouse and Baillieston. The other £1.5 billion will be split fairly equally between education and health. In education, the programme will fund, for example, the new Inverness College, the new Kilmarnock College, the new City of Glasgow College and an expansion in the schools programme. Major projects in health, which will be the beneficiary of about £750 million, include the Royal hospital for sick children in Edinburgh and various hub and local health clinic projects.

I remind the committee that, in his final budget as Labour Chancellor of the Exchequer, Alistair Darling cut capital spending by 36 per cent in real terms over this year and the subsequent three years. His decision was endorsed by George Osborne. We think that that approach was misguided. In the current economic circumstances, the emphasis should have been on maintaining, not reducing, capital spending, for the reasons that I set out. However, we are where we are. That means that our core capital programme, which is part of the block grant from the Treasury, has gone down from about £3.6 billion a year to £2.5 billion a year. Therefore, the £2.5 billion NPD programme will go some way to closing the gap and the black hole that will be left by the cuts that have been imposed on our capital budget.

Over the next three-year period, between our main capital programme and NPD, we will invest a total of £10 billion. On top of that, there will be substantial investment in the railway network, funded through RAB—which is the regulatory asset base method of funding. The figure that I have just given does not include, for example, the entire investment programme for Scottish Water, because some of that is being funded from reserves that Scottish Water has built up.

10:30

As you know, convener, we have requested the UK Government both to increase the borrowing powers proposed in the Scotland Bill and to bring forward this Parliament’s ability to use those borrowing powers. We would like to increase our capital spending by more, to see us through these difficult economic times and to sustain as high a level of employment as we can.

The Government’s strategy in relation to capital spending is obviously paying dividends. Compared with the rest of the UK, Scotland’s figures for unemployment have been moving markedly down. Employment levels in Scotland are markedly higher than in other parts of the UK. We believe that that is the result both of bringing forward capital spending two years ago and of maximising, within our limited resources, the level of capital spend in the economy in Scotland.

We will start our questions with a question on the Borders railway.

I thank the cabinet secretary for his introductory remarks, on which I would be tempted to ask lots of questions. However, the convener would pull me up if I did, so I will stick to a question on the Borders railway, which will be the first item in our rather limited questioning this morning.

You did not mention the railway, which was interesting in itself, and I would be interested in the background to the end of the tendering process. Furthermore, tying in with your opening statement, would you talk about the funding method and about how payments will pan out for the Borders railway?

The Government is very committed to the Borders railway, and we maintain our intention to complete it by the turn of 2014 and 2015. We regard the railway as an essential part of the jigsaw in maintaining high levels of economic activity in the Borders.

When we originally envisaged the project, we put it out to tender as an NPD project, and we had three initial tenders. Two of those tendering have subsequently withdrawn. One consortium withdrew because it had too much work. It had been successful in another major contract and felt that it did not have the capacity to commit to the Borders railway. That left us with just one consortium tendering, and we considered whether we would be better to leave ourselves at the behest of that one tendering consortium, or to go down the road of working with Network Rail and funding the project through RAB. Once we had examined the pros and cons, it became clear to us that the sensible way in which to fund the project was to use the RAB mechanism. Network Rail agreed, so it will be responsible for the project. If you would like more detail, I am happy to invite Ainslie McLaughlin to comment.

Thanks, but I will ask another question first. I am told that Network Rail has still to review the project and to put in place its delivery plans. That leads me to ask whether you are confident about the delivery date of 2014-15.

However, I am more interested in the funding. I think that the budget announced so far is somewhere between £235 million and £295 million. Would you explain how the regulatory asset base approach will work? In particular, when will payments be made? Will they be part of this spending review period, of subsequent spending review periods, or of both?

The regulatory asset base is, in many respects, not dissimilar to the NPD programme. In essence, the money is borrowed by Network Rail and then, once the project is up and running, we pay a unitary charge to Network Rail over a period of years. That is similar to how NPD works, and RAB is now an established mechanism. Indeed, I was at a conference on infrastructure in London last Wednesday, and it is clear that the UK Government is considering using the RAB funding technique for non-railway projects—specifically, for other infrastructure projects.

Our target date to complete the project is the end of 2014. We are in detailed negotiations with Network Rail about how we reach the milestones and we are trying to finalise in more detail precisely how we achieve the target. We are happy to report back to the committee as the finalisation of the detailed negotiations proceeds.

The capital cost will be between £235 million and £295 million, but annual payments will start to be made in the next spending review period.

They will be in the next spending review period. We do not start paying for the railway until it is completed and up and running.

Obviously, you do not think that the decision on the funding method for the project rules out the non-profit-distribution model for other projects, but does your experience of the tendering process for the railway raise any questions about that model?

It does not really raise any questions, although it tells me that some companies are doing extremely well despite the recession. They have reached their internal capacity and cannot tender for other work because they are already well stretched with the work that they have. One reason why I am keen to publish our pipeline of work and to make it much more transparent than it has perhaps been in the past, and to be more precise with the industry, is so that it can better manage its teams. To bring together a team for a project such as the Borders railway—even the funding team, let alone the contracting team—is a significant operation. It is clear to me from discussions with the industry that the more visibility it has of the pipeline of work across the range of Scottish Government investment, the more it can plan to put in place the skills and funding that it needs to carry out such substantial projects.

The RAB approach has been used for a number of other projects by Network Rail in Scotland. I am happy for Ainslie McLaughlin to give more details of that.

A few months ago, John Swinney talked about not overcommitting on NPD. I think that he talked about having 1 per cent of the budget for payments on NPD and 4 per cent when combined with PFI payments. Will the RAB payments for future commitments be contained within that figure, or will they be over and above it?

That is a guideline. We fund projects in various ways. At present, we do not have borrowing powers, but the guideline will apply when we have borrowing powers and have to pay back what we borrow from the Public Works Loan Board at its rates of interest. We also have RAB repayments and the legacy of PFI unitary charge repayments, and we now have NPD repayments. As a rough rule from the Treasury, to be prudent, total repayments in any one year, either to the Public Works Loan Board by way of interest or by way of unitary charges for RAB, NPD or PFI, should not exceed about 5 per cent of the total departmental expenditure limit.

I want to return to the process for the Borders railway. You mentioned that the three consortia came down to one, which led to the decision to go down the Network Rail route. I assume that the last of those bidders will have incurred a considerable cost in proceeding through the bidding process. Does it have any expectation of recovering that cost?

When any company bids for work, it will take into account the risk of not getting the work, particularly if it is bidding in a competitive situation. When the original bid was submitted, the situation was clearly competitive. Every one of those companies always bids for work knowing the risk of not getting it. That is well understood in the industry. If we start paying out compensation to everybody who does not win a public sector contract—

But might not the consortia have been bidding on the basis that one of them was going to get the work?

There is always a risk. Whatever risk the companies built into the business plan is a matter for them. At the end of the day, we cannot get into a position in which we give compensation to companies that do not win contracts.

Ainslie McLaughlin will give more details on that.

Specifically on the Borders railway, we made it clear to all bidders that no payment would be made for tender costs in the case that the project did not proceed or to the two bidders that lost out on the competition. The three bidders did ask about that. For some contracts, such as the Forth replacement crossing contract, we agreed up front that we would pay bidders aborted bidding costs, or that we would pay aborted bidding costs if the project did not go forward. However, it was quite clear, up front—

Yes, but this project is going forward.

What we were clear on was the case if the competition, the tender, did not proceed. That was made clear to all three bidders.

In other words, the companies knew exactly the terms and conditions—

So, they understood that they were bidding for a process and that the Government might change its mind and not allow any of them to be successful because it was going to take a different route altogether.

In fact, when they were bidding, there was a theoretical possibility that the project would not go ahead.

I understand that they would understand that the project might not go ahead. However, the project is going ahead. Are you saying that they were aware that the project may very well go ahead but that the Government would not accept any one of the tenders that were being made?

Yes, it was made very clear to them that, whatever the scenario, we would not be paying out any compensation.

Fine. I am happy to let it stand at that and just check that that is their understanding too.

Is any of the work that has already been done salvageable?

I am sorry?

Salvageable—the design work that will obviously have been done in relation to the project to date.

I think that it is, but I will ask Ainslie to give more details.

The preliminary reference design done by Transport Scotland remains, is available, and will be passed across to Network Rail, which can use it to develop the project quickly.

You were keen to say that you expect the project to be completed in 2014-15, within the budget originally set. Now that the project is with Network Rail, will it have to go through the whole Official Journal of the European Union process, or will some of Network Rail’s existing framework contracts allow procurement to be fast tracked so that things can get under way sooner rather than later?

Network Rail has a number of ways of taking the project forward through the framework contracts already in place, as you suggest. It can also short circuit, to some extent, the OJEU process, as it already has a standing list of contractors that have been through a pre-OJEU process. That will shorten things.

So the answer is yes.

Yes, there are ways in which Network Rail can shorten the procurement process.

Cabinet secretary, you said that one of the contractors pulled out because it had too much work; I do not know whether you know why the other bidders pulled out. It seems to me that a problem in Scotland is that the consortia that bid for major pieces of work tend to be international companies. Contractors in this country are used to competing against each other for small contracts, but seem unable to come together into consortia that could bid for large contracts. How can we get past that? Can the Government help in any way?

10:45

As well as transport, one of my responsibilities is procurement. We are considering how we can make further reforms to procurement processes so that indigenous companies can maximise their opportunities and be competitive enough to win work—not only in Scotland but elsewhere. There has been a tendency across the board to issue a small number of very large contracts, even for fairly routine things such as stationery, rather than to issue a larger number of smaller contracts, and there is some anecdotal evidence that the impact of that on the economy can be negative.

That is why we, in our submission to the European Union’s review of procurement procedures, included a recommendation that when it announces its reforms—which we hope will be early next year—it will allow countries to take into account the impact of a particular decision on the local economy when they decide the outcome of a tendering process.

The best recent example was down south, when the train-making factory in Derby was unlucky and did not win a substantial contract for a project in London. The contract was won by a consortium led by Siemens of Germany. One issue is that the cost to the public sector of making 1,000 people in Derby redundant, which was the direct result of that decision, might far outweigh the savings in awarding the contract to Siemens. It might not, but we believe that we should be able to take such issues into account. Similarly, many parts of rural Scotland and England can be particularly badly affected by tendering decisions, which can have a major impact not just on a company, but on the local economy. Our view is that we should be able to take such matters into account in deciding how to award contracts.

On the capability of the industry, with the two large road projects that have just been completed ahead of time and well within budget—the M80 and M74 completion projects—the vast bulk of that work was done by companies that are headquartered in Scotland. I recognise that there is sometimes a problem with bigger contracts. The contract for the Forth crossing is huge and is by far the biggest civil engineering contract in Scotland and probably in the UK at the moment. Morrison Construction is a lead part of the consortium. Some specialist services have to be procured from outwith Scotland, but the presence of reputable and good Scottish companies such as Morrison Construction is testament not only to the way in which we are trying to procure projects but, more important, to how such companies are growing their business.

We will move on to the Edinburgh trams.

With the winding up of TIE, which managed the tram project from its inception, will you describe the new governance arrangements for the project and say what the role of Transport Scotland and ministers is?

I emphasise that the Scottish Government has no involvement whatever in the contractual arrangement between the contractor and the City of Edinburgh Council. We have no liability as far as that contract is concerned and we are not entering into any such liabilities. We are making available resource of up to five people with the relevant expertise as part of the project management team, which is now in effect within the council. The Transport Scotland element of the team is headed by Ainslie McLaughlin, who has a lifetime’s experience of managing such projects. He managed the two projects that I referred to earlier: the completion of the M80 and the M74. The M74 project was £20 million under budget and eight months ahead of time, and Ainslie was responsible for its project management. He will be the leader of the Transport Scotland team that is operating as part of the wider joint team in the City of Edinburgh Council.

Why have you brought in Transport Scotland at this point, when there have been problems with the project all along?

Right at the beginning, shortly after the Parliament, against our wishes, allocated £500 million to the project, the Auditor General for Scotland issued a report in which he said that he was satisfied with the governance of the project, the quality of the project management and the strength of the team that had been put together. As you know, the Auditor General is the Scottish Government’s main source of advice and information on such matters. Given the clean bill of health from the Auditor General, we saw no need for us to intervene.

In any case, it was the City of Edinburgh Council’s project, not the Scottish Government’s. There are many projects in Scotland that the Scottish Government either partly or wholly funds but in which we have no direct involvement. For example, every year we give hundreds of millions of pounds to housing associations in Scotland—for fairly substantial projects in some cases—but we are not involved in the contractual procedures. We simply write the cheque for part of the cost. We were in a similar situation with the trams.

The whole thing went wrong—Gordon MacDonald knows the history of it better than I do—and there was a legal dispute between the council and the contractor. We felt that it would be wholly inappropriate—and the Auditor General took the same view—for the Scottish Government to become involved when the project had effectively been halted due to a substantial legal dispute.

When that dispute was resolved, we considered the situation and decided that in order to protect the Scottish taxpayers’ investment, it was an appropriate time for us to step in—with the agreement of the City of Edinburgh Council—and participate in the project management to try to ensure that the project finishes within the new budget and on the new timescale.

Do you envisage that the Scottish Government will at any point contribute more than the £500 million?

We—the First Minister, John Swinney as Cabinet Secretary for Finance, Employment and Sustainable Growth and I—have stated categorically that we will not be putting another penny into the project and that remains our position. We fully intend to ensure that the new budget is sufficient for completion of the project, which is one of the reasons why we have agreed to participate in the project management for the next three years. If, perchance, there is any additional cost, that is the responsibility of the City of Edinburgh Council, and not—as I emphasised in the first sentence of my reply—the Scottish Government.

The balance of £72 million that we have still to pay will be paid in staged payments. Are there any targets or criteria that must be met before those payments are made? Do you have the right to veto those payments if the criteria are not met?

Absolutely. We have agreed on a work plan with the City of Edinburgh Council. It is clear that, as we go along, new issues will arise and decisions will have to be made, but we have made it clear that the money will be paid out, provided that any strategic decisions about the project are in line with our wishes. Otherwise, we reserve the right not to pay out.

The schedule for payment is £12 million this year, £25 million the following year, £25 million the year after that and £10 million in the final year.

The circumstances that led to your colleague Mr Swinney intervening directly, involved a series of rather bizarre meetings that took place over a number of days, latterly at the City of Edinburgh Council. Mr Swinney intervened to say that the Government was not prepared to complete the final tranche of funding for the project if it was to vary considerably from what the taxpayer expected and what the Government believed that it was funding.

I want your confirmation that that has been applied as a general principle, as well as your assurance that there are no other projects that I would be able to identify—or to which you would wish to confess—for which Government funding is either not complete, or has been completed and that have varied significantly from what the taxpayer originally expected to contribute to.

Not under this Administration. Where changes have been made, they have been agreed, but that has certainly not occurred as a result of incompetence.

I shall take that assurance and interrogate it ruthlessly, cabinet secretary.

I am sure that you will, if you get the time to do so in your new position. [Laughter.]

We will move on to the Edinburgh to Glasgow improvement programme.

We have discussed the regulated asset base approach in relation to the Borders railway. EGIP involves a greater and more significant level of investment using the same approach, which I want to explore with the cabinet secretary. I understand that the driver for the project is primarily to reduce journey times from A to B, which in this case stand for Edinburgh and Glasgow; that may come as no surprise, given the name of the project.

Perhaps the cabinet secretary can set out the improvements that there might be for communities in between, such as Cumbernauld and Kilsyth or—dare I say it—Airdrie and Shotts.

The major improvement for Airdrie and Shotts has come from the opening of the Airdrie to Bathgate line, which is a massive boost for the Airdrie economy and represents major investment by Network Rail, very much supported by the Scottish Government—

I should have been clearer. I really meant Cumbernauld and Kilsyth.

We are always conscious of the need to improve connectivity to Cumbernauld. There has always been a debate about improving the service between Glasgow and Edinburgh and whether there should be more stops—and more regular stops—in the communities between the two cities.

The Government policy objective is twofold. First, it is substantially to improve connectivity by train between Glasgow and Edinburgh, so that the number, speed, quality and comfort of the trains are what they should be in the 21st century. Edinburgh is our capital city and Glasgow is our largest city, and the connectivity between the two is an essential feature of growing the Scottish economy, as we know.

Our second objective is to ensure that the communities in between, such as Cumbernauld, Airdrie and Falkirk, are also well served by the railway system. A high-speed connection between Glasgow and Edinburgh and a better service to the communities in between are not mutually exclusive. We have to look at improving rail services in central Scotland and particularly in the strip between Glasgow and Edinburgh and ensure that there are good train services to and from Cumbernauld, Airdrie, Falkirk and so on. However, there is a market for a straightforward, more-or-less non-stop connection between Glasgow and Edinburgh, and we must serve that market.

Network Rail is taking the programme forward through the RAB approach, which you mentioned, at the behest of the Scottish Government and Transport Scotland. Will you say more about the relationship between the bodies in that regard? Who comes up with the specifics of the project?

We have limited powers over the operation of Network Rail in Scotland, which were devolved to us during the previous 18 months or so. The position is now that Transport Scotland, which is an integral part of the Scottish Government, agrees with Network Rail its investment programme. There is a mutual approach to the discussion. We want to improve the service between Glasgow and Edinburgh and we think that it should be electrified; Network Rail tells us what the implications and estimated costs of doing that would be and so on. Eventually we end up with a commercial agreement, whereby Network Rail will electrify the line over an agreed period, on the basis of its access to RAB funding, and we agree the unitary charge profile for when the project is completed. In other words, there is a partnership, in which in essence Network Rail is primarily the supplier and we are primarily the customer.

Does that mean that the customer gets what they want? Does the Government say specifically what it wants?

It is up to the Government to decide what it is prepared to fund. It is then up to Network Rail to ensure that it builds the project to our specification.

The project is out for informal consultation—formal consultation will take place further down the line. I have had detailed discussions with Network Rail in that context, as you will appreciate. I keep being told that the plans are not set in stone, although I must say that they seem to be fairly hard and fast whenever we suggest alternatives. How concrete are the specific parts of EGIP?

Parts of the programme are pretty well set in concrete, in terms of what has to be done from the engineering and land availability point of view, for example in the context of the route that has to be taken. In other parts of the project, options are still open. Ainslie McLaughlin can fill in some of the detail now or in writing.

11:00

Transport Scotland chairs a project board working with Network Rail to look at the specification and technical details of the delivery of the programme. As the cabinet secretary said, a consultation exercise is taking place.

Some work has been identified, in particular a new intermodal station at Gogar to link in with the Edinburgh tram. Work is progressing on that and it seems to be an integral part of EGIP. Planning is well advanced for the electrification works, which are also seen as a core requirement of EGIP. Continuing discussions will be informed by the outcome of the consultation later next month.

It is a genuine consultation and the Government will listen to all representations before final decisions are taken.

The overall cost of the project has come down a little from initial estimates. Can you set out why that might be? Is it a combination of envisaged projects not being taken forward and better value being achieved through the procurement process?

The overall cost is a target that we are looking at to get best value. Our target is that the specification that we seek for EGIP should be delivered within £1 billion. The McNulty report recently said that there was significant scope for further efficiencies in the rail industry. We are working with Network Rail and the Office of Rail Regulation to bring the EGIP programme in as efficiently and effectively as possible.

Obviously, where we can identify better value for money, we do that. The one thing that you can say about Network Rail is that it is very good at project management and engineering.

On a related matter, Network Rail and the train operators published their initial industry plan for Scotland last week. I had a meeting with them, as they asked me to meet them and I was happy to do so. I am sure that the plan is still being considered in some detail, as it is a weighty document. Does the Government have an initial response to the plan?

No, it is too early for us to comment publicly on it. The plan makes a number of suggestions, some of which are perhaps more acceptable than others. We will take our time to consider all the options.

Obviously, we are looking at the long term. The current cycle for franchising ends in 2014 and the new cycle starts around that time. We need to do a lot of planning and consultation before we begin to consider, let alone reach final decisions on, the way forward. We must discuss the plan with a large number of stakeholders and it is too early for us to comment on the specifics of what was proposed last week.

I am sure that that is something that we will be interested to look at later.

Mr Neil, despite what I have been told, I know that you are a fair man, because you have acknowledged the wisdom of the previous Labour-led Administration in commissioning the Bathgate to Airdrie line and the boon that it has brought to your constituents. Will you turn your mind to the other end of your constituency, on the Shotts line, and support my position that there should be a move to upgrade that line, in particular through electrification?

I am always in favour of anything that will improve communications in my constituency. I am sure that Neil Findlay will recognise—anybody with Neil in their name must be fair—that in this job I have to take a wider perspective. We are continually looking at where we can, and where we can afford to, upgrade the railway line. We have already announced major commitments: in terms of the cost Borders rail and EGIP are the two outstanding ones.

We keep things continually under review. We will publish an update to the infrastructure investment plan in November, and we will be showing people our long-term strategic programme sometime early in the new year. The project that you have described is the kind of project for which we will have to decide whether we will be able to afford upgrades other than the ones already announced.

Network Rail’s plan identifies the project as a priority. I am sure that you will be shouting about it at the Cabinet table.

I consider things in the round, and try to go for things that will promote economic growth in Scotland. As I suggested earlier, Shotts is an essential part of the infrastructure of central Scotland. For a long time, it has been a major contributor to the Scottish economy. People sometimes think of Shotts as a small mining village, but it is far from that. It is a robust community, and if you include the surrounding villages, there is a population of about 10,000. Shotts is an important part of the line, and an important part of the economy of that part of Scotland.

We also have to consider the continuation of services to places such as Addiewell and, further along the line, Kirknewton. If they were being honest, people in the railway companies would probably like to close stations on the line, so upgrading is vital for the sustainability of the communities.

Absolutely. We are keen to invest in the railways because we acknowledge their importance to the infrastructure of Scotland, but we have to consider affordability and various aspects of the capital spend. The capital cost will affect the unitary charges that we will have to pay if we are funding a project through RAB. We also have to consider franchise costs. Beyond 2014, a major challenge for all of us in the UK will be how to fund the exponential growth in franchise charges in the railways. It is not simply a question of whether we can afford the initial capital investment and the unitary charges; we will also have to consider the payment of franchise charges, which are a not insignificant amount of our railway budget.

However, let me make it clear that, in principle, we want to improve the line that you mention if we can, and we want to do so as early as possible. You will have to wait for the infrastructure investment plan and the update of the strategic transport programme before we can specify our priorities exactly.

Cabinet secretary, you mentioned the importance of good end-to-end connectivity on the Edinburgh to Glasgow line and of serving the communities in between. In the north-east, there is a dilemma: we want to reduce the journey times between Aberdeen and Edinburgh, but we also want to serve the communities in between. Near Aberdeen, stops are often limited to places such as Portlethen and Stonehaven, although things are not so bad near Edinburgh because of the Fife line. How do we resolve the dilemma of ensuring that commuters can get on the train not only at the major stops but at the places in between while, at the same time, reducing journey times?

We are always considering demand profiles, and the profile between Aberdeen and Edinburgh is similar in many ways to the profile between Glasgow and Edinburgh. The market can be divided into two broad categories—those who simply want to get from Glasgow to Edinburgh or from Edinburgh to Glasgow as quickly as possible without any stops whatever, and those who want to travel to or from the communities in between. There will be many journeys between Falkirk and Glasgow and Falkirk and Edinburgh, or between Cumbernauld and Glasgow and Cumbernauld and Edinburgh.

Similarly, in the north-east, there are people who want to get from Dundee to Edinburgh or Aberdeen to Dundee as quickly as they possibly can without any stops, but that is a long line with many communities on it, and some people will want to use it to travel between, say, Dundee and Arbroath. We are always trying to profile the railway service—the operating service as well as the infrastructure—so that we can match it as closely as possible to the profile of demand.

But we have underestimated the demand in the past. Laurencekirk station has shown that. Surveys that I have conducted of what the demand might be for stations in various areas have shown that it is well above what it is considered to be.

Absolutely. Where appropriate, we have to update the demand profile and take that into consideration when deciding our investment programme.

Jackson Carlaw has a question on future transport plans and programmes.

If Scottish ferries ran to the same variable timetable as the Scottish ferries review, by now we would have to say that all passengers were deemed to be lost at sea. Are you able to give us a firm indication of when the Government will publish the results of the Scottish ferries review, including the draft ferries plan?

I will give you an undertaking: the ferries review will be published before the Christmas recess, come what may.

Does the Government still plan to introduce the single route tenders for the ferry process?

We have just gone out to tender with NorthLink. That is an unbundled tendering process. We will see what that produces. We are doing that because we believe that we can get value for money and better service that way.

We are not stuck in any grooves. We want what is best. Sometimes, what is best for one particular service might not be best for another service. Value for money and quality of service are the two key criteria.

Earlier, you spoke about the Siemens situation, which is similar to the situation that we are talking about now because, if we introduce single route tenders, there is a danger that there will be a decline in jobs, living standards and all the rest of it—I am thinking about the situation with regard to the Transfer of Undertakings (Protection of Employment) Regulations. The workforce has great concerns about the single route tenders option.

We must consider the situation in its totality and in conjunction with the Government’s other initiatives, particularly because of the constrained financial situation, which is why the ferries review that Jackson Carlaw referred to is important. As Neil Findlay knows, we intend to build on the success of the road equivalent tariff pilot project in the Western Isles. The evaluation showed that it was not of great benefit for commercial traffic but, with regard to passenger traffic, it provided a major boost to the Western Isles economy. Our intention is to roll out the road equivalent tariff to other areas.

Our objective is to expand and improve the ferry service and to use it—as we have done in the Western Isles, with RET—as a major instrument of economic growth for the island communities. That will lead to the creation of a significant number of jobs.

With regard to the Gourock to Dunoon tender, we managed to ensure that there were no compulsory redundancies and that any job losses involved people who were due to retire or who volunteered to be made redundant. From memory, I think that we kept the job losses to six. We are conscious of the situation in the isles, where jobs can be scarce.

We have to look at the policy in the round and at how to get more value for money. If we can reduce the cost of the ferry service and invest that money in rolling out the RET, the net economic impact will be far greater than if we retain the current level of manning and ferry service.

11:15

We might have to agree to disagree on that. There is real concern among communities that going down the single route tendering process could undermine the service. Equally, driving down the incomes of the people who work on the ferries is a genuine and real problem.

In the tender that we put out last week, we nominated Stromness and Scrabster as the two ports and the 90-minute journey time was part of the invitation to tender. Far from being a reduction in service, that is very much confirmation that we are committed to those elements of the contract. Those were the litmus tests for people in that part of Scotland. I have had a letter of congratulation from the convener of Orkney Islands Council, saying that he is delighted with the specification in the invitation to tender.

It strikes me, and it has for some time, that the democratic process and the elections to the Parliament probably interrupted Parliament’s reviewing of the lessons from last winter and preparations for this winter, so we were not able to do the quality of work that we might have been able to do. We have been relying on the Government to carry on with that. I note that a debate on winter resilience is scheduled for when we come back after the October recess. Even with the new reach and power of a majority Government, I have seen no legislation to ban snow, so I expect that you anticipate that it will be necessary for us to be properly prepared as we go into winter. When do you expect a report to be available for members to consider ahead of the proposed debate? What risks might we still need to take into account in relation to the preparations that you have made?

We are working very closely with Philip Hammond. I met him in London last week and we discussed the matter because Westminster is obviously wrestling with the same kind of issues that we are wrestling with because the weather is so unpredictable. I have to say that two scientist friends of mine who do not know each other have both told me that this winter is going to be the worst in 200 years, and I told Philip that.

I met Mr Hammond yesterday and he did not pass that nugget on to me, but I am grateful to you.

Whether we are talking about grit and salt or logistics, we are working on the basis that it could be another very severe winter. Keith Brown did a sterling job last year and he is well prepared for this year. He has taken the lead on resilience preparation and we will be publishing the details of that at the earliest opportunity.

Will that be ahead of the proposed debate?

We have not fixed on an exact date because we still have some issues to resolve and co-ordinate with our friends in London. However, we will make available all the information that we have and that Parliament should have about our preparations for winter resilience. There is no point in trying to hide the information because we need the co-operation of all stakeholders in making the resilience plan work.

I agree. The lesson of last winter was that Scotland really does expect the Parliament to be prepared.

Absolutely.

I am very proud to say that I have never met Mr Hammond and I have no desire to do so. I thought that I would declare that as other people are declaring their famous friends.

I am disappointed to hear that you have no ambition for Government, Neil.

Time is pressing. We do not need to hear these things.

I have a couple of quick items for information, cabinet secretary. When will the results of the Scottish road maintenance review be published?

Next month.

And did I hear correctly that the new infrastructure investment plan will be published next month as well?

That is the intention, yes.

Very good. I also commend you for the commitment that you made earlier to improve transparency in relation to Government-supported projects—ensuring that the pipeline of projects is visible, in order to allow businesses to plan and to prepare bids.

There are other good reasons for having transparency—it can benefit communities and wider developments, for example. I have been concerned about the apparent disappearance of some projects into the bowels of Transport Scotland, and I can think of one in particular in my constituency. You will be familiar with the upgrade of the A77 at the Bogend toll. The project went through all the statutory processes and we were told that work would be starting this spring. That has not happened, and we are not receiving any feedback on when it is likely to happen. Will you undertake to make that information available to us, in line with your commitment to improve transparency?

Do you not want to mention the Maybole bypass as well?

That one too, yes. We will come on to that one.

The project that you refer to is one of a number of shovel-ready projects that, had we the money, we would start now. However, we cannot suffer a 36 per cent reduction in our capital allocation without some consequences, so the timing of some projects—even shovel-ready projects—has slipped. The severe cut in our budget was initiated by Alistair Darling and has been endorsed by George Osborne.

Projects of a certain size are not appropriate for NPD-type funding. NPD is really for bigger, strategic projects at Scotland level; NPD would not work for projects below £30 million or so. As money becomes available, we will be giving priority to shovel-ready projects, for two reasons. First, they have been through the process and are clearly highly desirable in their own right for the local community. Obviously I am aware, Mr Ingram, of the junction that you are talking about, and I know about the dangers and the accident rate. Secondly, if we had the money, the shovel-ready projects—and other projects in the pipeline that we could make shovel ready very quickly—would help in seeing us through this difficult economic period. As money becomes available, we will be keen to get projects moving.

In the infrastructure investment plan and the refresh of the strategic transport programme, I want to show people the pipeline of projects and to give them an indication, as money becomes available, of when those projects will happen. If we had borrowing powers sooner than 2015-16, and if we assume that Mr Swinney would agree to give me a share of the capital spending that could be funded using borrowing powers, a high priority for me would be the shovel-ready projects that Transport Scotland is ready to roll with.

If the overall aim is to increase economic growth, priority ought to be given to shovel-ready projects and to getting things moving as quickly as possible.

I agree, but some shovel-ready projects have been planned and have been waiting for quite a while. We therefore have to consider the pipeline; as money becomes available, we will move along the pipeline.

What are the chances of money becoming available? One of the things that we are doing is transferring cash from resource budgets to capital budgets. Will you use some of that money to make progress with the kinds of project that I am talking about?

In planning the CSR for the next three years, we have identified the projects that should and will be completed in the next three years. Some of those have been publicly announced. For example, on the A82 we have given a commitment that Pulpit Rock and the Crianlarich bypass will be done by 2015-16. For various reasons we have not announced some of the projects yet, but we will announce them. In terms of the infrastructure investment plan and the refresh of the strategic transport programme, I am keen to give members and the community in Scotland as much visibility as possible on what we have in the pipeline.

Remember that, as the chief economic adviser to the Scottish Government pointed out a few months ago, it will be 16 years before the Scottish Government has the same level of budget in real terms as we had last year. We have the pipeline and, as money becomes available, we want to get projects going, starting with shovel-ready projects. We are very keen to get them going, but the issue is getting the money to do so.

How flexible can you be in that regard? If you have committed money to projects, which might, for example, suffer delays, can money be switched to shovel-ready projects?

The only significant project that has really suffered a delay, which is out of our hands—it is because of how the courts have operated—is the Aberdeen western peripheral route. I hope that we will be out of court soon, so that we can get that project moving.

None of the projects that we have identified in the CSR should suffer any delay, because they are all shovel ready.

When will the list of projects be published?

The infrastructure investment plan will be published next month, and the plan is to publish the refresh of the strategic transport programme early in the new year.

I understand the frustration. Clearly, every member—it is the same for me in the area that I represent—can identify projects, particularly road projects, in their area that are vital for either road safety reasons or economic development reasons, or both. However, when you suffer a 36 per cent cut in your capital spend, there is a limit to what you can do.

I will try to be brief.

I think that that comment is slightly disingenuous. In the full knowledge of the capital expenditure reductions that were coming, the Government was prepared to meet the full cost of the Forth crossing replacement development. There is now a reduction of some £250 million in the anticipated cost of that development but the Government has made the political choice to divert that £250 million away from further investment in roads and transport infrastructure to other projects. Has your department not lost out, in the sense that a sum that you believed that you could fund, even in the knowledge of the reduced overall capital budget, is now being taken away from investment in transport?

Money is becoming available. Transport Scotland confirmed to the committee that the inflationary level that it has applied to the Forth crossing project—8 per cent—could well prove to be considerably higher than the anticipated rate of inflation, so that project could cost less again. Is that not evidence that money is becoming available for projects, as has just been identified, but the Government has made a political choice to move a £250 million notional saving out of roads investment and spend it elsewhere?

My department has not lost out, because most of the funds that you say the money has been diverted to are also within my bailiwick, so the department has not lost out.

Some of the funds.

We have to look at the priorities across the Government.

Indeed.

We are making a statement to Parliament on fuel poverty this afternoon. As a result of the unforeseen huge increase in energy prices, 770,000 households are now living in fuel poverty in Scotland. As a result of the price increases announced in the last two or three weeks alone, the figure will increase by another 170,000. That is an example of a priority that we are having to cope with.

The VAT increase to 20 per cent has had a knock-on effect on the cost of certain services. For example, the NHS’s VAT bill has risen very substantially. There are many external factors over which we have no direct control.

The principle is clear: we are operating towards our national priorities. Those include transport, housing, water and other areas such as superfast broadband, which I hope you will cover so that Aileen McKechnie can talk to the committee. However, our priorities would be much easier to achieve if our capital budget had not been sliced by 36 per cent.

11:30

I think that Adam Ingram wants to ask a question on broadband.

The cabinet secretary has just invited us to ask questions on broadband, so I will do so.

What progress has been made on the Scottish Government’s digital strategy? The Government recently announced details of the next generation digital fund as part of the spending review. What will that entail?

On the finances, the UK Government has confirmed—as Adam Ingram knows—that our share of the £530 million of television licence money that is being set aside to fund superfast broadband throughout the UK is just over £68 million. That can be compared with the £58 million that has been allocated to Wales, which has half the population and half the land area that we have to cover. I have made it clear to Jeremy Hunt, the Secretary of State for Culture, Olympics, Media and Sport, that we are very disappointed at Scotland’s allocation, particularly given our geography and the challenges that we face.

Of that £530 million, £100 million remained unallocated, at least according to the public announcements. I met Jeremy Hunt in London last week and asked him if it was possible for Scotland to get a share of that £100 million. He replied that the UK Government has allocated the £100 million, but has not yet announced where the money will go. The indications are that it is not for rural broadband, and that none of it is coming to Scotland. We remain very disappointed at the allocation.

In the CSR we set aside £50 million of our own money and up to £25 million of European structural fund money for superfast broadband. If we add our money, which is £75 million, to the UK Government money, which is £68 million, we have £143 million.

The other problem is that all along the department in London has absolutely refused to give us the information that we need on how it has modelled the allocation and the market data that it has received. It has now—only in the past two weeks—given us some information, but we are still being denied the additional information that we believe we need. We are having to finalise our strategy against a background of inadequate funding and information.

Having said that, we are determined to move ahead with our digital roll-out. Highlands and Islands Enterprise, which has responsibility for leading the project in that area, will connect up 50 communities, and that is at the procurement stage already. I had a very successful meeting last week with the south of Scotland partnership, which covers Dumfries and Galloway and the Borders area. The partnership is well prepared and ready to roll, and I have given a commitment that we will provide its allocation as soon as possible.

We intend to publish our strategy for rolling out the funding for the whole of Scotland in the next few weeks. I am determined that the way in which we manage the funding should not involve a supplier and contractor relationship. We need to work with all the stakeholders in the public and private sectors, but when we tender for the work to lay fibre-optic cables or whatever, I want the contracts to involve some kind of payback and community benefit.

There are more than 50-odd broadband contracts across the public sector in Scotland at present, but as far as I can see—and as the McClelland report indicated—we are not pooling the resources to get a greater community benefit and a bigger payback to the Scottish economy from those who win the contracts, which is what we want to do.

So you are going to lay out your strategy in the next few weeks.

Yes.

And will that include inviting bids from consortia of, say, local authorities? You mentioned the pathfinders in the south of Scotland and the Highlands and Islands. Are you going to encourage local authorities to come together and bid for the funds?

Undoubtedly, we need a bottom-up rather than a top-down approach. However, we must also have a national framework to govern how we operate. I am very keen for any proposals in respect of our next generation digital fund to respond to local demand, local needs, local plans and local strategies, but to do so within a national framework to ensure that we move together as a nation.

My understanding is that infrastructure providers are rolling out their own investment across the country but are focusing on what they determine to be commercially viable. The sooner the public sector can come in and ask those providers to match funding or whatever, the sooner we can reach the targets. Is that your understanding of the situation?

Some local authorities are able to put in more funding than others. For example, the local authorities in the south of Scotland have made a fairly significant financial contribution and that will have to be taken cognisance of in deciding how things will be rolled out. When private sector contractors—those who, as it were, lay the cables—start to make a profit or get revenue from public sector investment, there should be some payback to the taxpayer. Ideally, I would like to have a revolving fund to ensure that as money is paid back we can keep reinvesting it and stay ahead of the curve. Given the critical importance of superfast broadband to every business sector, every area and every individual in Scotland, we have to maximise investment.

Moreover, we must ensure that our investment strategy is not dependent on only one or two specific technologies. After all, technologies are changing so rapidly that such an approach could very quickly become dated. In a sense, then, the strategy must be technology-neutral.

Aileen, do you have anything to add?

We are very keen to encourage the market to go where it should go, because it is commercially viable for it to do so. However, we want to work alongside it. We have learned certain lessons from the roll-out of current generation broadband, in which a kind of outside-in approach was taken: the market rolled things out and then the Government came in after the event. We are keen to reverse that, which is why we are working so closely on proposals with local authorities and other partnerships in the Highlands and Islands, the south of Scotland and colleagues in Aberdeenshire, Fife and other areas of Scotland. We will not intervene in places where the market and the private sector will deliver, but we will work alongside them to augment our own investments. We are seeking to take that collaborative approach across Scotland, but it is complicated. After all, our aspiration is for something that is locally, regionally and nationally effective, and it takes a bit of time to get that right.

Am I right in thinking that last week BT announced that it was going to invest in Cumnock?

I think that it was Maybole, Alex.

Let us not get too parochial. We will revisit these matters in our broadband inquiry, and I note that time is marching on. Do you have a quick question, Neil?

I have a question about Scottish Water, which I know is not part of our agenda but—

Please be very quick.

At our last meeting, we took evidence from Scottish Water. The draft budget acknowledges that, with the budget cuts, “there are risks” to that organisation—which I have to say is pretty revolutionary language for this Government. Can you elaborate?

Scottish Water has a very substantial investment programme and between now and the end of the current regulatory cycle in 2014 about another £0.5 billion will be invested. Some of that money has been generated from Scottish Water’s own reserves—particularly this year and next. Over the piece, those reserves have become very substantial, so the organisation has—sensibly, in my view—agreed to contribute to funding the investment programme. Nevertheless, the Scottish Government’s commitment is still huge.

I point out that the risk is not high but is just the normal risk that attaches to any investment programme. However, the important thing is that we have asked the Chancellor of the Exchequer to allow Scottish Water to fund its entire investment programme either through the bond market or through borrowing. That would be the logical thing to do; indeed, any modern public corporation should be able to fund its investment programme in that way. We were promised an answer from the chancellor this month and, if it happens, it will not only be very good news for Scottish Water but free up resources that we are committing to the organisation, which could then be used for shovel-ready projects in transport.

Can I just pursue that, convener?

I have to stop you there, Neil, because we are running short of time. You can bring the issue back up when we question the cabinet secretary in great detail on the budget.

That concludes our evidence session with the cabinet secretary. I thank the witnesses for their evidence and suggest that we have a short comfort break of five minutes or less before we move on to the rest of the agenda. The way things are going, we are not going to be finished until 1 o’clock.

11:42 Meeting suspended.

11:48 On resuming—