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Agenda item 4 is the Audit Scotland report on “Scotland’s key transport infrastructure projects”, which was published before the recess. The Public Audit Committee, which has responsibility for considering Audit Scotland reports, took evidence on the report last week from the permanent secretary and senior Scottish Government officials; it also heard from the Auditor General for Scotland.
The Audit Scotland report highlights the fact that most of the projects are
Certainly. You are right to say that the report gives a good picture of the current status of all five projects. It also recognises that the projects are live and on-going, and large and very complex, so there are still risks to be managed in getting them through to completion as expected, on time and on budget.
Can you explain how reporting on capital projects has improved over the past 10 years?
Certainly—we see improvements at two levels. First, at the overall level, it is clearly a good thing for the Government to have put in place a cap for the total level of commitments that it expects from revenue financing of capital projects, using mechanisms such as the non-profit-distributing model and the regulatory asset base for rail projects. We think that the next step would be to start developing reporting on the way in which commitments against that cap have been made and what the long-term consequences are. That would be a good step in developing transparency and clear financial reporting for the Parliament and for others who have an interest.
You mentioned the introduction of the six-monthly reports. When were they introduced, and what was the scenario prior to their introduction in terms of reporting to Parliament?
I am not sure whether I have a date, but Dick Gill will be able to help me with that.
The Scottish Government started its six-monthly reporting to what was then the Audit Committee in mid-2009, I think—it was certainly during 2009. That followed the “Review of major capital projects in Scotland: How government works” report that the Auditor General presented in December 2008, which was our first comprehensive review of major capital investment in the health and central Government sectors. That report identified a shortfall in public information about those large and important projects.
To be clear, are you saying that for the first 10 years there was no reporting to committees on capital projects?
There was no systematic reporting, in the sense that the six-monthly report identifies every project in the central Government and health sectors that is expected to cost more than £50 million. Previously, of course, there was ad hoc reporting on individual projects, and some projects would have been subject to legislation, so there would have been reporting, but there was not systematic and consistent reporting.
The five projects that the report looks at are only partially completed. For example, the Aberdeen western peripheral route is at a very early stage. Has it always been Audit Scotland’s practice to examine projects at such an early stage, or is this the first such report?
That is a good question. There is an assumption that audit is always retrospective and that it comes along at the end of the financial year and looks back at the accounts for the year. That is true, to a great extent, and a big part of our work. However, there is also a long record of our doing work that looks ahead at the way in which policy is being implemented, particularly for big and complex investments in which it is not very much help to come along afterwards and point out where things could have been done better. It is much more helpful to look at the progress that is being made, with the aim of making a constructive contribution and identifying things that could help with particular projects or be a contribution to the management of the capital programme in future.
You have highlighted more issues relating to Transport Scotland’s management of rail projects than to its management of road projects. Is that because there are more fundamental concerns about Transport Scotland’s management of rail projects? Is it because Transport Scotland is not directly responsible, as it is for the Forth replacement crossing, but must work with the UK body, which is Network Rail? What is the reason for more rail projects than road projects being highlighted?
There are at least a couple of reasons. I will ask colleagues to come in after me to amplify what I am about to say. At the high level, one reason is that it is more complicated to do projects through the regulatory asset base than through direct funding, as with the Forth replacement crossing, or NPD, which is being used for the road projects. As you said, Network Rail is part of the rail projects, so there are different requirements. That brings its own challenges in terms of ensuring that all the information is available for good decision making.
Strategic oversight of railway investment is a relatively new responsibility historically for Transport Scotland and the Scottish Government. One of the reasons for setting up Transport Scotland in 2006 was to have stronger control and strategic oversight of railway investment. There is a long-established track record in Scotland over many years of the Government supervising and controlling roads projects, but rail is a relatively new area in that regard. Of course, the decision-making framework is quite special in the railway sector because of the roles of Network Rail and the Office of Rail Regulation.
Are you saying that because all those other bodies are involved in rail, it is much more difficult to get a clear picture?
I am not sure that it is more difficult. It is a different environment for Transport Scotland to operate in and perhaps it is more complex.
Do you want to comment, Mr McKinlay?
No, thank you.
The report states that annual payments for road projects funded through the NPD model and rail projects funded through RAB are not made public during the earlier approval phases of projects. Why do you consider that to be an issue? How do you think that it might be resolved?
As I said in answer to an earlier question, we think that it is good that the Government has set a cap for the amount of long-term revenue commitments that it wants to enter into for capital investment. It must be a good thing to ensure that those commitments are affordable. The next step in that is obviously to develop a mechanism for reporting what the cap is—it will change over time, because it is set as a percentage of the departmental expenditure limit—and to report what the commitments are against it.
I understand why there would be no early public reporting of NPD projects, but I am struggling to see why it would be commercially sensitive with regard to RAB borrowing. Can you go into some detail on that?
I will ask Dick Gill to respond, because he knows much more about this than I do, but you are right to say that the issues are different for NPD and RAB. For NPD, it is about commercial sensitivity and I suspect that, for RAB, it is more about uncertainty until an agreement is reached.
There is a commercial dimension to, and tension in, RAB-funded projects because Network Rail is an independent entity and, as we know, RAB is a commercial arrangement between Transport Scotland and Network Rail. Conventionally, a lot of people have said, “You cannot release this information because it is commercially sensitive,” but our view is that there is room for the public sector to be smarter about these issues. As a result, we recommend in our report that the reporting of costs be made at a portfolio rather than project level, as that would take a lot of the commercial sensitivity—to the extent that it exists—out of the situation. It is important to be clear about the real public sector costs in the long term for all stakeholders who are looking at these projects.
So your understanding is that RAB borrowing is a commercial agreement between Network Rail and the Government and that the amounts of interest charged for different projects will vary.
There is a standard rate for rail projects, which is agreed with the regulator. However, once a project has been scoped, the regulator has to assess its costs. Transport Scotland will specify what it wants; Network Rail will prepare cost estimates on that basis; and the regulator will then assess whether those costs are reasonable for that project. There can be some negotiation in that process.
The report highlights a number of concerns about Transport Scotland’s business case development and assurance procedures. Have the cost implications of Transport Scotland’s not complying with best practice been assessed? What guidance has been given on how Transport Scotland should and could achieve best practice and what should the Government be doing to ensure compliance?
It is worth saying that we found all the projects to be well managed, given their current stage of development, and that governance arrangements for two of the projects were sound and properly in place. The other two projects—the rail projects—are still in development as a result of changes to either the scope or the financing and we have recommended that, in both instances, business cases should be kept up to date so that they are available at key decision-making points.
The Treasury publishes guidance on preparing business cases, and it is mandatory that all public bodies follow it. It is green book guidance. There is a five-stage process for developing business cases. There are the strategic business case, the outline business case and the full business case, and there are various assurance processes.
Does each set of guidance contain guidance on different things? Is one problem the fact that we are almost at a point at which there is guidance about guidance?
As Carolyn Smith explained, there are different types of guidance. I think that the differences are essentially about specific local circumstances. The Treasury guidance is for the whole United Kingdom public sector and the Scottish Government guidance obviously deals with specific Scottish requirements.
Are you confident that the circumstances that you have talked about will not happen again and that there is more awareness of the importance of constantly reviewing processes as they are gone through?
This answer is quite subjective, but my belief is that Transport Scotland thinks that business cases are an extremely important part of the process. Perhaps our view about how regularly those business cases needed to be reviewed was slightly different from its view. Our judgment was that, in the example of the Borders railway, in which the procurement route had to be changed because the NPD route did not work, it would have been appropriate and would have made sense to look again at all the basics around the project at the stage when the fundamental way in which it was being procured was being changed. Transport Scotland had the slightly different view that it was continuing to develop the project and that it would look at the proper business case at a later stage. It was therefore a question of degree rather than there being a fundamental gap in some areas.
Do you think that further steps need to be taken to ensure that there is best practice?
Yes; we have made some recommendations about that. For example, one of our recommendations on page 8 of the report is about scheduling decision making across Government. We say that the Scottish Government should
I will make a similar point to the one that Dick Gill just made. December 2013 is a really important point for us in all this. We expect to see progress on a number of recommendations, including the one that Dick just mentioned, by the end of this calendar year. Also included in those recommendations is the first one on page 8, which is for Transport Scotland to look at how it does business case development and the assurance processes around that. I do not think that we are necessarily at a stage today of saying that Transport Scotland will or will not have done that. It has certainly committed to reviewing the things that we have highlighted in the report and we will keep a very close eye on progress towards the end of the year and into early 2014.
But there is no indication in what you have said so far in this meeting and at previous committee meetings that there is anything in particular to worry about.
We do not think that the gaps that we have seen in relation to the two rail projects have had any significant impact on the decision making or on their progress. However, we think that for both projects, given the significant changes that were made either to scope or to the financing method quite late on, it would be very good practice and good risk management for Transport Scotland and the Government to ensure that all the information is in one place in order to be able to step back and consider affordability, viability and value for money before significant decisions are made. That is why we made the recommendation.
We move on specific projects. Alex Johnstone wants to ask about the Forth replacement crossing—or the Queensferry crossing, as I should call it now.
The report says that the project is on track to complete within the latest cost estimate and on—or ahead of—schedule. Yesterday there was a further reduction in the estimated outturn cost. Does the view that is expressed in the report continue to be your view, given that further reduction?
The costs for the Forth replacement crossing have always been expressed within a range of estimates, and so far the Government has been successful in keeping the costs within that range as the contract was let and as work has been done, with the most risky part of the work now heading for completion. The further reduction is within that range of estimates and is obviously good news in releasing resources that can be used to fund other projects in future.
When the project was first discussed and costs were first put on it, the figures were extremely high—high enough to provoke debate in committee and in Parliament about why it would be so expensive to do this project compared with other projects in other parts of the world. Were those original figures truly robust or were they simply overestimates to make the figures look good in the long term?
This is a classic example of how the estimated costs for a project become more accurate over time as there is greater clarity about what the project is, how it will be constructed and how it will be financed. Dick Gill and Carolyn Smith will talk you through the history of those estimates in broad terms to give you a feel for why the estimates shifted so significantly over time.
We comment in paragraph 21 of the report about the changing scope of the Forth replacement crossing—or the Queensferry crossing, as it is now known. The essential difference was that when the higher estimates of more than £3 billion—I cannot remember the exact figure right now—were prepared, the expectation was that it would be impossible to maintain the existing crossing safely and that it would have to close. Therefore, the replacement bridge would need to be an entire replacement. Since then, the engineers have had another look at the cables that are holding up the existing bridge and they have taken a less pessimistic view. That resulted in advice to the Scottish Government that it would be feasible to continue to use the existing bridge on a limited basis.
The initial estimate was in the region of £3.2 billion to £4.2 billion. That was for a completely different project, so we did not look at the robustness of those cost estimates as part of our audit. The scope had changed to such an extent that there was no value in us looking at that original estimate.
Would it be fair to say then that yesterday’s announcement is simply an indication that the project is being carried forward efficiently and effectively?
I think that it is fair to say that. That is clearly good news for all of us, as the saving releases funds that can be used to invest in other capital priorities.
In general terms, would it be fair to say that, given its performance so far, the project is something of an exemplar as to how such projects should be carried out?
It is always nice for us to be able to report good news coming out of our audit work. Clearly, the Forth replacement crossing project is being well managed within the business case that was approved by Parliament.
Your report states that the Scottish Government has publicly reported the estimated increase in the operating and maintenance costs of the Forth replacement crossing but has excluded risks and optimism bias. What might that mean in practice?
In practice, that does not have very much meaning on its own. We want to emphasise the bigger point that, when the Government and Transport Scotland report progress on major investment projects, it is important that the costs are comprehensive and that they are consistent between projects. How matters such as enabling works, the acquisition of land and so on are treated can vary between different reports. In particular, matters such as inflation, optimism bias and contingency allowances are sometimes included and sometimes excluded. We think that it is much better, both for the purposes of accountability for the money that is spent and for decision-making purposes, if such information is reported clearly and consistently.
We have a six-monthly briefing on progress from the Forth replacement crossing team. When the team comes before us, the questioning is fairly robust.
Are you confident that phase 1 of the EGIP project can be delivered on time and on budget, especially given the uncertainty around changes to the project and the fact that we are still awaiting the full business case?
As I said earlier, all these projects are live, large and complex, which means that it is impossible for us to give full assurance that they will be delivered on time and on budget.
Transport Scotland initially set a completion date for the project of December 2016. In your report, you state that Transport Scotland now expects
I will ask Dick Gill and Carolyn Smith to take you through the source of the information reported on that one.
December 2016 was the date given for the initial larger scale EGIP project, which was set at the time of the business case. Exhibit 4 in our report gives details of that. I think that the 2016 delivery date, at a cost of £1.1 billion, was approved in December 2011. After that, the project changed substantially, reducing the cost to £650 million. It meant that a different type of project was being delivered, so Transport Scotland had to go back and start rephasing and looking at what it was possible to deliver with £650 million.
Just to be clear, the source of the information is Transport Scotland. We have confirmed the factual accuracy of the report with Transport Scotland, so there is no doubt in our mind about the March 2019 date. That was the best estimate available at the time and I think that it would be recognised by Transport Scotland.
Do you know whether Parliament has been made aware of that change?
I believe that there was a statement.
The 2019 date was in the six-monthly update to the Public Audit Committee.
So it was in the Government’s six-monthly update.
Yes.
Your report says that the full business case is expected to be completed by the end of May 2013, after which ministers will approve scope, cost and time targets. Has it been completed yet?
We have not revisited that since the report was published. It is not something that came up in the evidence that was given to the Public Audit Committee last week, so we do not have any more formal information to provide to you at this point.
Are there any key milestones on EGIP that you feel that the committee should be made aware of to enable us to track the progress of the project?
That is one of the things that we would expect to see in the updated business case. The business case is an opportunity to pull together all the planning for construction and other work that needs to be done. That is the source that will enable Transport Scotland, the Government and the Parliament to identify the milestones for reviewing progress and working it through. That is one of the reasons why we think that the business case is extremely important, and we will be keeping it under review as part of our on-going audit work.
We set out in the second-last bullet point on page 9 the high-level things that we would expect to see reported on the individual projects. The date on that recommendation is December 2013. As Caroline Gardner says, hopefully, the discussions that are on-going will flesh out what the appropriate milestones are and exactly how they are going to be reported to Parliament.
So, in your mind, the full business case is of utmost importance in allowing this committee and the Public Audit Committee to scrutinise EGIP and ensure that it is on track, on time and on budget.
Up-to-date business cases are an important part of the governance of any major project such as EGIP because they let you pull the whole picture together into one place. That is why we have recommended that the business case should be up to date and why Transport Scotland is committed to doing that.
We will move on to deal with the Aberdeen western peripheral route, which is of major importance to at least two people on this committee.
Until recently, the project has had a difficult time, for a range of reasons to do with the planning system and so on.
I think that it is more legal wrangling than planning, but go on.
Well put, convener. Thank you.
The project is very much still in its early stages, compared with the other projects that we are discussing today. Is it good to say in your report that those things will happen, given that it is at such an early stage? Would Audit Scotland usually look at such projects at such an early stage?
We have in the past examined major projects that are under way, as I said before, because it is more useful to come in and look at the governance arrangements, the way in which they are being managed and the extent to which the planning for the future is robust and stands up to scrutiny.
Before Dick Gill comes in, I have a question. Are you saying that, in terms of public money—taxpayers’ money—the bundling of the AWPR with the Balmedie to Tipperty project was a good idea and that the governance arrangements for the two projects, which have been brought together, have been satisfactory?
For all five projects, what we have not done at this point is step back and examine the business cases for the overall investment. Our focus was very specifically on the way in which the projects are being managed to bring them in on time and on budget against the current estimates. We have therefore not examined the decision to bundle the two projects together. We started with the commitment to invest in that combined project and looked at the way that it is being managed.
We have not sought to examine the rationale for why the projects are a good use of public money, because we regard that as something for which ministers are ultimately responsible. We have looked at controls and decision making to ensure that the project is well managed and sound.
I think that thousands and thousands of commuters in the north-east could tell you about the business case.
Yes, I am sure.
I could raise this point in relation to other projects, but I will raise it in relation to the AWPR and more generally. My questions are about the non-profit-distributing finance model. Your report expresses concerns about the risks associated with NPD finance being higher in the current financial climate. You also express concern about there being no public reporting of the 30-year costs associated with NPD procurement models. Does anything need to be said at this stage about the NPD funding model? Does it need to be refined, honed or developed further until we can be confident that it will work for such projects?
I think that you have asked two separate questions. The first is about the NPD model itself. It is important to be clear that there is nothing wrong with financing capital investment through a revenue financing model, whether it be the NPD model, the private finance initiative, regulatory asset base funding or some other model. We all do the same when we buy a home with a mortgage; it is a way of spreading the cost over a long period. There is no criticism of that approach in itself, particularly when capital resources are constrained and the Government is keen to give the infrastructure a boost and for the economy to get a boost from construction work.
Thank you.
We move on to the M8 bundle.
As you indicated, your report is broadly positive about the development of the M8 bundle projects to date. Would you care to highlight any key milestones that the committee should be looking out for when scrutinising that project?
In general terms, the business case for any project should be setting those key milestones, and they clearly come at the points when a contract is let, when significant construction is complete, and when the allowances for inflation, contingency and risk can be released—or not, depending on progress. I ask Dick Gill to pick up on more specific points on that bundle of projects.
As we highlight in the report, one of the main risks is that it is an NPD-financed project, and the market for private finance has been difficult in recent years because of the financial crisis. At the stage when we had completed our work—we stopped our examination in May this year—the project was with the market and bids had been invited, but several bidders were in contention and the biggest risk was around whether any of those bidders would be able to come up with an affordable and viable financing package.
You talked about NPD, and in that context we can highlight the Borders railway project. What impact has switching from NPD to RAB funding had on the delivery of that project?
At this stage, it has not had an impact on the costs of the project, because we are still in the process of finalising the exact arrangements, but it has obviously had an impact on the timescale for the project, because the original procurement that was intended to go through NPD was not successful because of the commercial environment, so extra time was needed to move through the regulatory asset base funding model and to get the work in progress from there. There has been an impact on the timescale, but it is too soon to say what the impact on the cost might be.
You mentioned that the M8 bundle had attracted a number of interested parties, but we had only one competent NPD bid for the Borders rail project. What lessons can be learned from that?
I will ask Dick Gill to talk you through some of the specific comparative aspects of those two projects, but you are absolutely right. Part of the value of the report lies in its providing a basis for learning lessons for the future for the projects that we are talking about and, more important, for the wider pipeline. Given the amount of money that we are talking about, that will be critical.
I am a bit cautious about the lessons that can be learned, but when we discussed the issue with Transport Scotland its view was that one of the factors that led to its being unable to progress the Borders railway as an NPD project was that it was a rail project. Using NPD and private finance initiative finance for railway projects is a novel idea; in fact, I am not sure that it has been done before. If it has been, it is quite rare. NPD and certainly PFI-financed projects are much commoner in the road sector; there is a track record in that respect, and the market is familiar with them and comfortable with providing them. The lesson for Transport Scotland was whether the Borders railway project was, as a railway project, really suitable for that form of procurement. I might be wrong, but I am not aware that it is advancing any other NPD-financed railway projects.
It raises the question of why one would ever consider NPD rather than the RAB funding route for a railway project. Was there any logic to the initial decision?
I am not sure that I can offer much of an insight into that.
That would be a question for the Scottish Government and Transport Scotland rather than for us.
One comment that I can offer is that Transport Scotland—or perhaps I should say the Scottish Government—has become increasingly interested in the concept of regulatory asset base finance. I cannot remember the dates, but the original decision to procure the Borders railway as an NPD project would have been made in 2010 or even earlier, and since then the Scottish Government has seen scope for including more projects in the regulatory asset base than it might have expected when it was making decisions on the Borders railway. However, I am speculating a little and I would be cautious about taking that as the right answer.
We have covered a lot of ground this morning, but I want to ask a final couple of questions just for completeness. Ms Gardner and Mr Gill indicated earlier that the new six-month reporting mechanism that has been put in place for major transport infrastructure projects represented an improvement on previous practice. How has another Scottish Government innovation—the establishment of the infrastructure investment board—strengthened the scrutiny of high-value projects?
As we say in the report, the introduction of the board was a good thing and has helped the Scottish Government keep a strategic overview of its investment in significant infrastructure. As its creation came in the middle of a number of major projects, we also point out that the extent to which it has been able to play the full role envisaged for it has varied depending on the state of play in each project at the point at which it came into being.
It is useful to have that on the record.
The point of that part of the recommendation is that there is obviously a balance to be struck between giving you full and comprehensive information and giving you so much information about so many projects, some of which are quite small, that it would be very difficult to step back and see the wood for the trees. At the moment, there are different thresholds for different types of reporting; the figure of £20 million has been discussed in that respect, but this committee, the Public Audit Committee and the Finance Committee should all have the chance to say what the threshold should be below which the information would be too detailed and above which it would simply be at too high a level of aggregation to be of any use.
Can I encourage you to give us a figure? For example, when Sir Peter Housden gave evidence to the Public Audit Committee last week, he mentioned two figures. He suggested a threshold of £50 million for what is reported on a six-monthly basis and said that the Government is already providing information on the web for projects of more than £20 million. Do you have any figure in mind?
Yes—and I will ask Dick Gill to respond in a moment. We are really not trying to obfuscate; what we are saying is that there is already a lot of information out there and that it should all be pulled together in one place to ensure that it is available to this committee, other parliamentary committees and anyone else with an interest. Dick Gill will talk you through the different figures that have been discussed and where we think we might come down.
We do not necessarily have a view on whether the threshold should be £50 million or £20 million. However, we certainly think that there should be clarity on the issue and that it is not terribly helpful to have different reports with different thresholds because that gives different populations of projects.
That was helpful—I thank you for considering MSPs’ workload.
The Government has accepted the principle that having taken the very positive step of setting the cap it now needs to report against it and to develop clarity about what the cap will look like over time and what has been committed against it with regard to projects that are already under contract and those that are in the pipeline and are well into development.
Like you, we are awaiting the cabinet secretary’s statement with interest, but have you had any indication that the Government is sympathetic to such a move?
The indication from the permanent secretary at last week’s Public Audit Committee meeting was that the Government had accepted the recommendation and was thinking through the practicalities of how it should be done.
Thank you. I will leave it at that.
Something that I thought was missing from the report—indeed, I think that it was mentioned only twice—was the Scottish Futures Trust. What role has it played in reducing the costs of major projects, recommending bundling and so on?
We have not carried out specific work on the Scottish Futures Trust’s role, its effectiveness in the ways that you have outlined or the benefits that it reported in its benefits statement earlier this year. We will certainly keep in consideration for our forward work programme an examination of its achievements so far to identify any areas where it could make further contributions to getting the best out of the Government’s capital investment. However, the Scottish Futures Trust is not part of the report and I do not feel able to comment on it in a speculative way without doing the necessary audit work.
As members have no more questions, I thank our witnesses for their attendance and evidence. We will deliberate on that evidence in private session, into which, as previously agreed by the committee, we now move.
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