Item 2 is the first evidence session for the committee's inquiry into the methods of funding capital investment projects. We are using a round-table discussion format today. We hope to have a good introduction to the inquiry by exploring the view from the public sector and thereby eliciting and clarifying the interests and concerns of those who commission and purchase capital investment projects.
I am a member of the Scottish Labour Party and I represent Glasgow Rutherglen.
I am the executive director of financial services at Glasgow City Council.
I am the Scottish National Party member for Dundee West.
I am an assistant director at health facilities Scotland, which is an operating division of NHS National Services Scotland.
I am the Conservative member for the South of Scotland.
I am the director of finance and corporate services for Transport Scotland, which is an agency of the Scottish Government.
I am the director of finance for NHS Greater Glasgow and Clyde.
I am the Liberal Democrat MSP for Orkney.
I am the director of funding at the Scottish Further and Higher Education Funding Council, which is a non-departmental public body that funds universities and colleges.
I am the Labour MSP for Hamilton South.
I am the finance and regulation director for Scottish Water.
I am an SNP member for Central Scotland.
I am the director of finance at the City of Edinburgh Council.
I am the committee's deputy convener. I am the Labour member for Dumfries, which just happens to be the home town of Queen of the South Football Club.
This could take a while, if you continue in that vein.
I will start off.
You have raised some fundamental topics, such as the management information that is available, the backlog of infrastructure problems, central Government assistance, capital receipts, and prudential borrowing and the means of obtaining it. Are those issues shared by you all? Does anyone else have comments?
In a local authority context, obviously it is the same for Glasgow. The main sources of funding are capital receipts, borrowing and grants.
Quality is involved.
Yes.
We have heard from two local authorities. Does anyone else want to comment?
I will pick up on a point about asset management and backlogs. We manage the trunk road network, which is the biggest asset on the Scottish Government's books—it is valued at about £13 billion, so it is a sizeable asset to look after. We developed an asset management plan and published what we will do through to 2009. That formed the basis of what we applied for and gained in the latest spending review. We mapped our plan against overseas examples in places such as New Zealand and Scandinavian countries. We have worked up our asset management plan. It all relates to identifying our biggest priorities, be they safety issues or reducing a backlog. A number of issues impact on how we take our plans forward.
Have you always had an asset management plan? How new is it?
It is a revamped version, or a more up-to-date version, of what we had previously. It has involved a lot of work on our part and we have had external help. We have worked with other authorities, for example other United Kingdom bodies and overseas bodies. We are also involved in the world road congress. We aim to be at the forefront.
We are working closely with the Scottish Government health directorate and national health service boards in Scotland to develop a specification for a national asset management system, which will allow us to view and interrogate the NHS property portfolio nationally. Previously, each NHS board and organisation was responsible for holding asset management details, and the extent and quality of the information that was held locally varied. The project will create a consistent, national base for the collection of information and, we hope, will assist with the development of national service strategies and the holding of information centrally in the directorate.
What stage is the work at? What problems have you found in creating what appears to be a fundamental necessity?
The asset management advisory group was established towards the end of last year. It is chaired by the health directorate and a number of NHS boards are represented on it. A system specification is being developed and we hope to go to the market in the next few months, through the Official Journal of the European Union, to identify a system that will meet the national need.
In our planning in the further and higher education sectors we use the national estate management statistics systems, which are internal benchmarking systems and are not public. We are starting work on a set of core indicators for asset management, which we intend to publish.
Do all the public sector organisations that are represented here have a comprehensive asset register? Do you know how much land you own? The local authorities in my area own a lot of land, but they do not know how much they own or its location, let alone its market value.
Do you want to respond, Mr McGougan?
The member's comments were partly relevant to Edinburgh, so I am happy to do so.
Do we need a rule change to allow local authorities not always to sell at market value?
I do not think so. At the moment, we are allowed to dispose of land at below market value with the consent of the Scottish ministers. That consent has never yet been withheld. The rule is more of an issue for the rest of the public sector. For eight to 10 years, we have been working with Lothian NHS Board to find a new site for Boroughmuir high school. The board is constrained by the rule, which has not helped the council to meet its development aspirations.
Does the problem extend beyond local government? Do our other witnesses have evidence on the matter?
At the moment, NHS Greater Glasgow and Clyde is working closely with Lynn Brown. We have reached the stage of introducing joint management organisations to take responsibility for managing services in our community and to produce strategies for developing their services over time. Increasingly, those organisations are beginning to identify the need to co-locate services or to provide joint premises and facilities for health and local authority services—usually social work, but sometimes education services.
What is Scottish Water's view on the matter?
My comments relate to asset information. We have a huge stock of assets throughout Scotland. No water company in the world can claim that it has located every one of its assets. We have about 96,000km of pipes underneath the ground. I do not pretend for a minute that we know precisely where every element of that pipework is located. The challenge for us—which plays through capital investment—is continually to try to understand not just where our assets are but what performance they are capable of delivering, and to identify risks to future performance. We invest about £200 million a year just in replacing asset stock. It is important for us to become ever more efficient in how we target maintenance investment, to prevent a backlog appearing and to keep our asset stock in a steady state. The key to that is good information, especially about performance and risks to performance.
On the asset side of things, Transport Scotland holds a very detailed asset register for the trunk road network. Our job is slightly easier than that of Scottish Water, in that we have 3,500km of roads that we can identify fairly easily.
On asset management information and valuation, within the past two years the Scottish Executive Health Department commissioned the Valuation Office Agency to carry out a full asset valuation of the entire NHS property portfolio. I believe that the conclusion was that the property should be valued at £3.93 billion or thereabouts—the figure is mentioned in one of the committee's papers. Each NHS organisation will know the value of its own property, but information on an all-Scotland basis sits within the Scottish Government health directorate. That information is very recent.
Mr McGougan talked about the need to play catch-up because of the backlog of investment that is required in the City of Edinburgh and, no doubt, other council areas. Will the release of capital through receipts from the sale of assets—for example, in order to bring together different bodies on a single site to release space—be increasingly difficult for councils to achieve? Presumably, assets that are sold off cannot be sold off again. Will the process of managing the assets over a period of 25, 30 or 40 years enable successor councils—elected members and officials—to continue to maintain or improve the assets through capital receipts?
The current perspective is that that will become more difficult over time. We have started with the more readily identifiable surplus assets, so the job will get harder because we will have to work harder at our asset base to make better use of those assets, either on our own or in conjunction with public sector partners. That will certainly become more difficult over time.
Does that apply to Glasgow City Council, too?
I think that the issue needs to be considered in terms of what the assets are for. Like City of Edinburgh Council, we have been very successful in realising capital receipts. On our balance sheet, we have about £100 million of surplus assets that are waiting to be disposed of. Although there is an issue that we cannot sell the family silver twice—as people say—we still need to look at what the assets are for. For example, we need to consider whether we need all our office accommodation going forward, given modern ways of working. We have many people who work in the community most of the time, yet an office and desk are kept warm for them while they are out on the street. We are starting to look at how we want to deliver such services, given that such receipts will not be available in the future. The issue is also about how we have a modern service going forward.
From earlier evidence, I know that there was a backlog to be made up in regard to the funding council; there is now more of a ring-fencing approach to the maintenance of assets. Are you confident that there is now a culture of maintenance and servicing that will enable us, once some of that backlog has been caught up, to avoid slipping back to the levels of backlog that have traditionally occurred?
Local authorities have not dealt with the life-cycle maintenance issue particularly well. We tend to build the assets rather than invest in the long term, but there is now greater recognition that we should be doing that instead. The question that we are asking in Glasgow is whether the council should be in a particular building in the first place. Do we need it? If we need it, we will maintain it, but if we do not, what will we do instead? It is about not just accepting that we must keep such assets.
The funding council has addressed life-cycle maintenance, and working towards a steady state of sustainable reinvestment is a specific aim in our corporate plan. We are not there yet; we are still working through the backlog, but as we do that we are trying to phase into an on-going sustainable reinvestment mindset, which needs to be backed up by funding to make it affordable.
Are there any other ways of using surplus assets to finance investment, rather than just disposing of them?
Yes. The City of Edinburgh Council has put land into joint ventures; we have done that with the private sector in relation to Edinburgh Park, where there is a joint venture with the Miller Group, and through our own waterfront company, which is a joint venture with Scottish Enterprise. The intention behind both those joint ventures was to use the council assets and private sector assets on the one hand, and Scottish Enterprise cash on the other, to help to develop the area and to build an asset base. That will allow us to take advantage of the asset base in west Edinburgh through the business park at the appropriate time in the future. The waterfront company is a help to the regeneration of the whole of north Edinburgh and the provision of up to 30,000 new houses, which is a key element in the growth of the city and the Scottish economy.
Are there any examples of that being done elsewhere?
Glasgow City Council has done that with the Commonwealth games, and the games village. The city is putting the land into that equation to unlock the potential for the developers to build the village; that is the same as Edinburgh has been doing.
Those examples are both from local government. Would the method be applicable elsewhere?
I can give two examples. The health board is quite closely involved with East Dunbartonshire Council in the regeneration and redevelopment of Kirkintilloch, and both agencies have played in some capital receipts to support a number of regeneration projects, including a leisure centre, a new local health centre and the like. Another example, from mainstream Glasgow, is our plan to provide a new hospital on the Southern general site, which will be the major new hospital for acute services for NHS Greater Glasgow and Clyde in the future. Part of our plan is to play in up to around £130 million to £140 million of capital receipts to contribute to that.
A point was raised about the policy priorities that underpin capital investment work. Lynn Brown gave a good example from Glasgow when she spoke about the capital expenditure programme for schools, its objective of improving education in the city and how it tied in with the pre-12 strategy. Are there any practical examples of how the success of the policy objective is measured once such investments are completed? The measure of success in the Glasgow example would be whether the education of the children has been improved by the capital investment decisions that have been implemented.
The main assessment method in Glasgow is attainment and the expectation is that our children's attainment will increase. Attainment is closely monitored and it is improving.
Elaine Murray has a question. She has been very patient.
You described the variety of funding methods. Does anybody want to volunteer information about how you choose which funding mechanism is suitable for which project? For example, Transport Scotland has changed the mechanism for the funding of Borders rail. It would be interesting to know what was behind that decision.
We go through a number of stages before we reach the point at which we decide on the funding mechanism. At the start of the process, we use standard appraisal guidance to decide whether various schemes meet whatever our objective might be. That is a value-for-money assessment in terms of the cost benefit ratio—assuming that the assessment beats a ratio of 1, it will deliver more benefit than costs.
In the case of Borders rail, where a decision was made to change the funding mechanism, what information determined that you would select a new funding mechanism for that project?
The basis of that decision was to come up with a cheaper form of finance, which is what the not-for-profit model aims to do. The decision was based on value for money—on whether there was a better option out there or a cheaper option, and how it compared with what we could get elsewhere. That is what it came down to.
What in particular would direct you towards a not-for-profit model rather than the conventional private finance initiative model? Both models are forms of public-private partnership.
Within the not-for-profit model, the private sector is not able to take the large dividends from refinancing that might occur under a traditional PPP scheme.
It is interesting that during that exchange you referred to non-profit-distributing models as not-for-profit models. Transport Scotland's submission to the committee states:
I should say that the NPD models are non-profit-distributing models, rather than not-for-profit models. You are right: the standard terminology is "not for profit", but we should say "non-profit distributing". I apologise. We should be clear about that.
There have been two different Governments in Scotland, which have had different views on the way in which public sector investment can be financed. How constrained are you? Are you saying that you rely on what the Cabinet Secretary for Finance and Sustainable Growth thinks is the best model? How much are politicians directing you to make decisions?
I would not say that we were led directly by politicians in our choice. We must follow clear, transparent guidance to ensure that we come up with the right value-for-money assessment.
In the submissions that we received, only the Scottish funding council mentioned the use of a bond to raise funding. In the United Kingdom in the past, the municipal bond was a fairly standard method of funding capital investment, particularly at municipal level. In the United States, particularly at city and county level, but also at state level, the bond is used as a mechanism—it is probably used more than any other mechanism—for funding capital investment. I ask the Scottish funding council to explain the pros and cons of the bond model. Have the other witnesses considered the bond model? Would they consider it? If not, why not?
The bond that we mentioned in our submission was taken out by the University of Edinburgh, which is the biggest institution that we fund. The university was able to do that, because it is a large business in its own right and was able to satisfy the potential lenders that it was a good lending risk. It has a well-defined programme of works to which it would apply the bond.
Is that based on the bond principle?
The type of finance that will be used is yet to be decided.
Local authorities have powers to issue bonds. I can remember local bonds being issued to local citizens in my working lifetime. However, the administration of that scheme was very expensive and, for the past 15 years, local authorities have been able to access significant and sufficient sums for their capital borrowing requirements through the Public Works Loan Board at lower rates than those that would be available on the bond market. Basically, that gives us a source of finance that is cheaper than bond finance. The market conditions and the borrowing instruments that are available to us in bond finance are not the most attractive option, but we have powers to raise bonds if required.
Have the national bodies, such as the NHS and Transport Scotland, considered bonds? Although they might be dearer than finance through the Public Works Loan Board, are they not cheaper than the traditional PFI method?
We will consider individual investment methods later, but Mr Haggarty wants to say something.
I must say that finance, bonds and financial models are way beyond my knowledge and expertise and those of my department. I do not wish to seem to be ducking the question, but I do not have the background to answer it. I am sorry.
Among politicians, honesty is refreshing.
Scottish Water is probably unique in the public sector in that the way that it is financed is the same as any other utility in the UK, which is across regulatory periods. In our case, it is a four-year regulatory period. In effect, we have objectives and a level of financing—the limits to the prices that we can charge customers and to borrowing from Government—set for four years. In the six years that we have been in existence, we have benefited enormously from the flexibility to borrow across the regulatory period. We are not confined to an annual limit but, subject to forecasting, we are able to flex when we borrow across the four years. That has assisted enormously in making capital investment delivery more efficient and enabling us to plan to deliver a programme of thousands of projects across four years rather than sticking with an annual borrowing budget.
So rather than having an annual cap, you may wish to go above the cap in some years.
We can never go above it, but we can delay drawing down the borrowing into the subsequent year. That has assisted enormously.
In answer to Mr Neil's question, I do not think that the NHS is able to borrow on its own account, because the funding comes directly from the Treasury. I think that the only other source of finance that is open to us is a PFI/PPP contract arrangement.
If that rule was changed so that you were in the same position as local authorities and were able to consider the bond method for raising funding, would you find it attractive? Have you not considered that?
I have not considered it personally. The proof of the pudding would be in the eating. We are back to some of the points that Mr Houston made earlier. We would have a wider range of options to assess and work within.
I will make one simple comment on borrowing powers. The prudential framework has been a great enhancement to local authorities' ability to invest sustainably and properly. We can all see the economic clouds gathering nationally and it is clear that there could be a constraint on the prudential framework in the future, but I hope that that will not happen, because the framework has opened up other avenues to local authorities and has generally been used wisely.
The funding council operates something similar to the prudential framework. Colleges and universities are allowed to borrow up to certain delegated limits. If they wish to go beyond those, they have to come to the funding council for consent. In granting consent, we always check the affordability of the repayments.
We have considered the different funding methods that are suitable for different sectors of activity. I invite our adviser, Nathan Goode, to sum up the evidence that we have heard so far. We will then move on to our next theme.
That was a fairly wide-ranging discussion and a considerable number of points were made, so it is quite difficult to pull it all together. We started with the point that understanding the current asset position of public sector bodies seems to be the bedrock of investment decision making in most cases. There is a lot of commonality on that.
Thank you.
Why do we not ask Glasgow City Council? It has the Glasgow Housing Association model, which is completely different from the PFI model for schools, and both those models are different from the other things that have been mentioned. Glasgow might be a good example with which to start.
We have a range of models, and our written submission includes some case studies. One of the key things is the level of support that we get from the Scottish Government. For example, the attraction of PPP was that 80 per cent of the capital was funded by the Scottish Executive, as it was at the time. The attraction of the GHA model was that the Executive paid off the housing debt, which was about £900 million, I think. Future investment was enabled because that debt was paid off.
How do your existing models work? Are you satisfied with them?
I am not sure whether the question is about finance or investment delivery, but I can answer the question in relation to investment delivery. We are a big investor—we invest about £600 million a year—and we have gone through quite an evolution in our approach. Back in the days of the water authorities, in the mid to late 1990s, quite a lot was done through PFI. We have nine PFI schemes that have brought in about £600 million to £700 million of investment. We have also had a range of traditional investment delivery. More recently, over the past four or five years, we have gone on to much more of a partnership model whereby we have been looking to be in long-term investment partnerships with clear incentives to deliver—particularly, to outperform across the programme as a whole, not just in individual projects.
The discussion assumes that we have lots of contractors out there and lots of people who are interested in doing business in Scotland. Although it is only one part of looking at which investment models work, we must be conscious of the current workload not only across the UK but globally. An increasingly important aspect to us is how we can get enough contractors into the market. If we do not, it does not matter what the funding model is because the cost will still be high. That is something that we are conscious of and are working hard on.
In our experience, the question is increasingly how we can become an attractive client. Typically, in the public sector, the margins may not be as great as in other parts of the market. How does the public sector become an attractive client? In our case, a lot of it comes by giving forward visibility of workload to the marketplace, so that contractors know that they can invest in Scotland and in skills and can see a continuity of workload two, five and 10 years out.
The previous Administration published an infrastructure investment plan that tried to give a 10-year horizon of potential investments that would come to market. I assume from the comments that I have heard that people feel that that approach complements the considerations around what kind of financial model would make the projects happen.
A new plan has just been published.
There is maintenance to be done for the next 30 years so, yes, the NPD model is just as applicable. It is a new version of PFI.
I want to pick up on the issue of the impact on service delivery. Tertiary education is a dynamic service, and demand for certain subjects changes through time. That makes it difficult to get a firm specification at the outset of a 30-year period and to say that that is what we want to operate for 30 years. We have found that the concession-type contracts in PFI and NPD projects do not work in a sector in which there is dynamic in the specification.
How attractive is investment in proposals by public authorities? You are in competition with all sorts of other investment. What can you offer that would encourage folk to invest more in public projects?
The attraction is the covenant, and the security of the investment in infrastructure over a period. Strangely enough, now that there is less development risk in PPP projects, the pension funds are buying the projects on a secondary basis because of their sustained guaranteed return over a long period. The public sector covenant is an attraction for investors.
Given the burning that has taken place with certain investment vehicles, that solidity might be attractive.
The succinct answer is yes, but there is a price to pay, and it comes down to how we negotiate the amount that we pay. There is no such thing as a free lunch, and if there is a transfer of responsibility, there must be a payment for that. That payment is down to negotiation. We get what we pay for.
In fact, you are in a position of strength rather than weakness.
It depends on how we manage the contract once it is in place. We have to be careful to ensure that the right management infrastructure is in place to engage with the contractor and the facilities provider and to ensure that we get what we are paying for. We have to work through that discipline very carefully.
My question builds on the back of the service delivery issue, which Lynn Brown talked about. I will illustrate it using a local example. Dumfries and Galloway Council is rebuilding some schools using a PPP model and some schools using the conventional model. The council felt constrained by commercial confidentiality on the PPP model. It is unable to consult local stakeholders in the same way that it can with the conventional model. Has that been your experience, particularly in Glasgow, which has used that model? Has the financing model that you were using constrained your ability to consult service users?
The PPP at Glasgow City Council finished before I started working there. I was not around when the council was doing the consultation so I cannot really comment on it. There is consultation on the pre-12 strategy. Parents of primary school children are very vocal—they want to influence what happens. It becomes a balance between what is needed in service terms, what we can afford and what the needs of parents and children are. A lot of consultation takes place, but my understanding is that, if we want to close a school, for example, consultation is statutory under education legislation. In Glasgow, we have closed a number of schools for pre-12s. There was some opposition to those closures, but it was not significant; the consultation was quite successful. I cannot answer on the position as regards the PPP projects, as I was not in post at that time.
My question was more about design issues. As you say, there is a statutory requirement to consult on school closures. The experience of Dumfries and Galloway Council was that consultation with service users about the design of facilities was difficult because of the constraints of commercial confidentiality.
I cannot comment on the situation in Dumfries and Galloway because I do not know the detail of that, but my view is that PPPs allow as much consultation to be carried out as is desired. The cost attached to that might have been the issue.
I can offer another perspective. I have been closely involved in two reasonably small PFI projects that have come to fruition in the past five years. My experience was that our private sector partners were extremely keen for our nurses, doctors, clinical staff and service users to be right at the heart of the process so that they got those projects right.
I echo what Mr Griffin said. There has been significant consultation with users on the NPD school estate project in Orkney. I do not think that users have felt constrained in any way.
From our point of view, large-scale projects are those that are most likely to attract PFI investment because of scalability and the efficiencies that can be gained from the maintenance of a piece of network for up to 30 years. I will give the example of the M74 extension, which is a short piece of infrastructure, for which we can transfer the risk in other ways without the need for PFI. We are talking about a fixed-price lump sum for the construction of the new motorway, after which it is up to us to maintain it. For us, the risk transfers to the maintenance side. It was said earlier that an intelligent client is an attractive client. The risk depends very much on whether the piece of infrastructure is in a fit state when it is passed over to us, such that it will last for a considerable period of time.
I will follow up Elaine Murray's point. I have been involved in Dundee's on-going school building programme, which uses PPP and conventional methods. The public's perception was of more consultation on schools that were not being funded via the standard PPP, but I am not sure whether that was a result of the funding methods. Great effort was made to involve the public as much as possible in both sets of contracts, but the size of the PPP part might have been a factor. So many schools were involved that a level of confidentiality had to be maintained. I am not sure whether changing the methods would make a difference to consultation. People in Dundee saw a difference between the consultation on PPP schools and the one on non-PPP schools, but I am not sure whether that related to the funding method or to the scale of the projects.
Consulting the public can be a difficult job, as people know, and sometimes we need to be careful that people or organisations do not hide behind the funding model when they consult the public.
That has happened—in the past, hospitals and major local authority projects have greatly exceeded their budgets.
You are sitting in one example of that.
So I am—I was too polite to say.
This is a classic example of an architect's instruction.
Of course it is.
Does that issue reflect the need to build experience in the construction of such contracts? Surely experience would allow a contract to be compiled that built in more of a facility to test the market after a period had passed. That was not built into early contracts. West Lothian College provides a classic example of a dynamic service to which any alterations became extremely expensive because the contractor had the client in a grip, in effect. However, through experience, contracts can be written differently to provide for such alterations.
I accept that.
I agree that, with lessons learned, newer contracts can provide for future changes, but the scale still has a limit, beyond which extra cost starts to be incurred, because the financing for the alterations must have some headroom. The other extra piece of process is that operating the change mechanism means going through the service provider, which adds time to the responsiveness for a change.
Contracts can become more sophisticated, but how easy it is to make changes competitively probably depends greatly on the nature of the asset. For example, if we have a PFI contract for a sewage treatment works and we want to bring in an additional community by pipeline, it is not always easy to secure competitive tension for the expansion works when we are dealing with a single special purpose vehicle.
Our PPP models are not fundamentally different. We have contracts to design, build, finance and maintain—the PFI option—and we have big design and build stand-alone contracts, in which we go for a fixed-price lump sum. We do not think that such an approach is more costly. We get a fixed price and delivery on time and on budget—within 3 per cent on the roads during the past 20 years. The key point is to ensure that we get the specification right from the outset, so that we do not change our minds mid-contract. That is basic project management.
I draw this part of the discussion to a close and I ask our adviser to sum up the evidence that we have heard.
We started this part of the discussion by saying that there is a range of models, the drivers for which are funding and service delivery. We talked about pain-gain mechanisms and how we make the public sector client attractive to the market and create an intelligent client. Of course, the flip side of that is the need for sufficient availability of contractors in the marketplace to deliver the service effectively.
We have covered a fair amount of ground. All contributions were much appreciated. I am pleased to say that we will have a short break and reconvene at about 3.35 pm.
Meeting suspended.
On resuming—
I hope that members and witnesses are suitably refreshed.
I suggest that we also ask about the new situation that has arisen since we started our inquiry—the credit crunch, which is bound to have some impact on organisations' ability to raise funds.
That is a good point. We will raise that issue with dread and trepidation. What have the different models and approaches achieved? Have the new models failed? Have the old models failed?
I will offer one or two starting points. A recent report by Audit Scotland indicates that about £5 billion has been invested in schools infrastructure in Scotland under the new models of financing, especially PFI. It is argued that that money would not have been invested if PFI had not been introduced, because the main point of the model was to take investment off the public sector balance sheet. When the new accounting standards are introduced, the issue will need to be revisited. Local authorities received 80 per cent support for borrowing costs, as Lynn Brown mentioned, and a major programme of works was undertaken throughout Scotland. There has been a significant improvement in the schools infrastructure in Scotland, although Audit Scotland recognises that more needs to be done. Earlier, I spoke about the backlog that exists: at least we were able to start eating into that backlog under the new model that took investment off the public sector balance sheet.
Have you any thoughts on whether the new accounting standards that are to be introduced will affect PFI schemes?
It appears that such schemes will have to come on to the public sector balance sheet. It will be for the Treasury and central Government to determine how funding can be released in the future.
What effects is the change likely to have?
I know that it is supposed to take place in 2009-10.
It has been held back for a year.
Obviously, from 2009 new projects will have to be on the public sector balance sheet. Does anyone know what will happen to old schemes—will they stay off the balance sheet? The decision on that will make a huge difference.
I will try to answer the question. One or two of my colleagues may be able to add to what I have to say.
There is a problem. One reason why PFI was so popular was that it allowed the Chancellor of the Exchequer to meet the golden rule of not allowing national debt to exceed 40 per cent of gross domestic product, and to maintain an annual borrowing requirement of no more than 3 per cent of GDP, as specified by the Maastricht treaty. If you add in even the new schemes, the chances of staying within the fiscal rules are zilch, particularly given the Northern Rock situation and the outstanding guarantee to Network Rail.
It does not matter whether a scheme is publicly or privately funded—the disciplines are the same. The question is whether the scheme is affordable. Can you live within your revenue envelope? In embarking on a scheme through either funding route, you would want to make absolutely sure that you could pay the bill.
I accept all that for individual organisational or project level. The problem is that projects will have to be on the balance sheet and the Chancellor of the Exchequer can approve only up to the level of his fiscal rule. There will be an impact on the number and value of approved projects—I expect that they will be curtailed substantially. I think that Derek Brownlee agrees with me on that.
Just tell that to Derek Brownlee. Alex Neil was not looking for a friend or anything.
The committee will look further into the issue next week.
I have come from a meeting of the United Kingdom local authority statement of recommended accounting practice—SORP—board, on which I sit. We discussed the issue this morning. There will be an impact: assets will have to come on to the balance sheet, as will liabilities. At the moment, the unitary charge goes through revenue, but in the future it will be split—there will be a revenue and capital element—and the capital element will have to hit loans charges. The bottom line for local authorities is that the Scottish Government will need to regulate so that the change does not impact on council tax. The situation is a bit like charged pension costs under financial reporting standard 17. This morning, the board agreed to write to the devolved Administrations to say that that is what will happen.
Thank you for taking us into those deep waters.
My comment is on lessons learned. PFI and PPP have allowed us to become more focused, informed and intelligent clients. As we discussed earlier, that is the case particularly around our understanding of life-cycle costs. Elaine Murray touched on the importance of design. We have a better understanding of how design specification impacts on life-cycle costs.
Do you wish to come in, Mr Houston?
My point is on accounting treatment, which was raised earlier. My finance colleagues in the Scottish Government are still awaiting Treasury guidance on how all this will be dealt with. As we said, this is a technical adjustment that is not to do with cash. The Treasury took on the new accounting standard with great enthusiasm, but having realised the consequences, it has delayed its introduction by a year. We should fully expect a resolution—
After the election.
Behave yourself, Alex.
We should also remember that other countries—Ireland is one—continue to use a PFI model that is on balance sheet. We should not simply be saying, "Oh, we will not do PFI in the future, because it will have to be on balance sheet." There are benefits to be had from PFI. I would not want anyone to go away thinking that we do PFIs only to keep things off our books.
The rules that chancellors set vary depending on economic circumstances. That is why we now own Northern Rock.
Alex Neil mentioned the credit crunch. Do any of the witnesses wish to comment on how it would affect them?
The credit crunch will simply mean that borrowing will become more expensive because the banks will put their rates up. The public sector is well placed because of the covenant that Donald McGougan mentioned earlier—we are seen as a safe investment because we will repay our debts—although I think that there will be an overall increase in interest charges.
I said that finance was not my background, but we could benefit from the public sector becoming an attractive area for investment, given the volatility in the markets.
So, it is about strength, stability, reliability and dependability.
Yes. There are two main strands to the section. One concerns the accounting treatment, on which we had some helpful clarification from Lynn Brown. We must watch this space but, equally, the general trend is towards on-balance-sheet treatment. The point was made that that is not the sole reason for doing PFI projects; there are a number of other reasons, including the life-cycle costing approach and the importance of designed development. The interesting point in all that is the suggestion that, because of how PFI is structured, it is possible to learn things from that process that may be applicable to other forms of procurement in the future. Perhaps that is one way of seeing PFI in context.
We now move to the final part of our discussion. In this section, we will focus on skills. The Scottish funding council's submission states that a major capital investment is a once-in-a-career event for many public sector managers. In that case, how can the public sector develop and retain procurement skills and support to ensure that it is effective and able to negotiate the best possible deals in capital investment? How can best delivery and best practice be ensured?
In Scottish Water, we may be in a unique position in that, as a business, we spend £2 on capital investment for each £1 that we spend on running costs every year, so capital investment is a core business for us. Procurement skills are one thing, but contract management skills are crucial. The public sector needs to be able to manage contracts as effectively as the private sector. That is particularly relevant to claim management and performance management over the life of a contract. In Scottish Water, we have addressed that need through a combination of recruiting people—typically from the private sector—who have procurement or contract management skills, and developing our own capability in-house.
You said you make £2 capital investment for every £1 of revenue. You may just have induced some envy.
I echo Douglas Millican's comments. The entire purpose of Transport Scotland's being set up was to bring the ethos of a centre of excellence into transport project management and our large-scheme projects.
Is that generally the case?
There is not a one-size-fits-all solution, because the descriptions that we have just heard relate to a situation in which a centralised body is responsible for delivery. In the Scottish funding council's case, separate autonomous bodies are responsible for delivery. The funding council's submission sets out the structure that we have had to put in place to support them and ensure that they get adequate training and support so that they are as skilled as they can be when it comes to delivering individual projects.
We have done quite a lot of work to try to develop procurement skills, contract management skills, project management skills, risk management skills and so on in all the NHS boards in Scotland. In PFI projects in NHS boards we have often found that once we have trained people up their skills are better valued in the private sector than they are in the public sector, so they move over the horizon. As we move forward with workforce planning, against the background of an ageing population, we must recognise that once we train people up we have to pay them accordingly in order that we can compete with the private sector and retain their knowledge, skills and corporate memory. We are losing ground in that area and will continue to do so if we do not pay such people appropriately.
It is certainly an issue for the City of Edinburgh Council. We are obviously a relatively big local authority with a number of major projects on the go. We are trying to develop project management, contract management and procurement skills in-house, so that at the least we can act as an informed client.
I echo what Donald McGougan said: we have project managers, surveyors and so on, but we go out to the market for specialist advice. The refurbishment of Kelvingrove museum, which could have been a very difficult project, given that the building is old, was on budget and on time. We had private sector project managers working on that project and we have them working on the new museum. We have just sought private sector advice on our procurement strategy for the Commonwealth games, given all the competing major capital projects in the east end of the city. We would not necessarily gear ourselves up for a seven-year timeframe with developed teams, but it is helpful to go out to the private sector to buy in expertise as we need it in the timeframe that we have.
I acknowledge that there is a need for private sector involvement on occasion, but there is also sometimes overdependence on the private sector for knowledge and expertise. There are good, well-experienced individuals working in the public sector, but we are not investing enough in them, nor are we doing enough to retain them.
Is there any opportunity for different organisations to share experience? Audit Scotland is now a major national institution with a wide range of expertise. Has it been of any help to you in your practical work?
When we were sitting in the anteroom waiting to come into the committee room, I had a discussion with Douglas Millican about his experience of procurement in Scottish Water. We have agreed to follow up that discussion. I am not sure whether Audit Scotland is the best body to co-ordinate such information.
Would it be helpful if there was a unit in the Scottish Government that had information about best practice across the public sector in Scotland that you could access, so that you could learn about best practice in Scottish Water, the health service and local authorities?
Yes. I believe that such a unit might already exist, but I do not know how effective it is at communicating such information to the various public bodies. Does such a unit not exist in the procurement directorate of the Scottish Government?
I do not know.
Perhaps we could find out. Thank you for raising the matter.
We have Office of Government Commerce gateway reviews and health checks across the whole UK, not just Scotland. There are mechanisms and processes in place to keep an eye on things and spread best practice.
If we are to take that initiative, it is important that we are able to tap into practical experience and knowledge, rather than just sets of guidance and rules. Whatever source of advice was available centrally would have to have credibility with the services in order for it to be effective. There is a danger sometimes that we end up with a booklet full of best practice, when people really want to know how organisations dealt with a particular situation and what they should think about when they engage with a contractor or service provider.
I think that we should look way beyond Scotland and way beyond the public sector. When we were developing our approach to partnering, we looked at how the oil and gas sector coped when it had to deliver capital investment much more effectively after the oil price collapse of 10 or 15 years ago. I would encourage people to broaden their horizons by looking at what can be learned from elsewhere in the world and from the private as well as the public sector.
Does anyone have any comments on the role of the gateway reviews?
The process for the tram project required us to go through a gateway review, which was a robust and useful step in the process. On 1 May, a report will go to the City of Edinburgh Council that will recommend that any project of more than £10 million should be classified as a major project. We will introduce a gateway review process for all such projects, following on from our experience with the tram project.
Obviously, there is an agenda for public bodies to work together in delivering services. How is such working together affected by the fact that different Government sectors have different accounting rules and different options for capital investment? For example, local authorities have access to the Public Works Loan Board, which provides funds at very competitive rates, but the health and central Government sectors do not have access to that. What problems does that pose?
As I introduced the topic earlier, I feel duty bound to make the first comment.
One difficulty is the different VAT regimes. For example, local authorities can reclaim VAT on capital projects but, as health boards cannot do that to the same extent, it can be more expensive for the health board to build something. If the health board wants to build an asset that will be run by the health board, the new rules on capital—this issue could be looked at—require Glasgow City Council, because we do not own the asset, to treat our contribution as revenue funding. Therefore, our funding for such projects needs to come out of capital funding or from revenue funding and we cannot borrow the money to help to fund the facility. That accounting rule seems a bit strange and it hampers the ability of the public sector to work together. That is the main thing.
We have more flexibility than our council colleagues because we can feed money across through the mechanism of a capital grant to transfer capital resources or through a resource transfer or revenue transfer if the scheme does not involve the creation of a capital asset.
Let me bring this section to a close with a final question. Aside from the specifics of the proposed Scottish futures trust, what principles should be enshrined as a priority in future policy on capital investment?
I am doing too much talking now—
No, feel free.
I commented earlier that the most significant issue is for capital investment to be connected up front with clarity about what revenue funding is available to meet the on-going consequences of the asset over a longer period. Sometimes, there is too much focus on the availability of capital to get a project established and less clarity about the certainty of the on-going revenue funding that pays for the maintenance, capital charges, rates, electricity and gas that are associated with improving and creating an asset over a number of years. It would be good to have the assurance that one was in a position in which that significant additional cost could be covered on an on-going basis. There is not always that certainty.
That is a complete view of the process.
Yes.
I agree that an emphasis on estate strategies and whole-life costing is important to ensure that we do not get back into another cycle of neglect that leads to another problem of backlog for future generations to deal with.
I am not sure whether it is a principle, convener, but I would like a greater recognition of the importance of investment and infrastructure to the Government's main aim of economic development within Scotland. In areas in which growth is possible and needs to take place, there is a need to invest in infrastructure—in public sector infrastructure first of all, in order to generate private sector investment, which would come afterwards.
Infrastructure investment is a lesson that the Victorians taught us. Therefore, a Glasgow view might be appropriate.
The prudential code, and the flexibility that it gives us, needs to be maintained in any future way of dealing with capital. We touched earlier on the fact that the rules for different organisations—which you mentioned in the previous question, convener—need to be sorted out so that we can work together to create infrastructure.
This market day is wearing late, so we will conclude this section, but I leave the option open for any final comments.
I will move away from the finance side and consider the people side. We have an ageing workforce and if we do not examine the workforce and invest in workforce planning, we are in danger of losing our corporate memory, which will lead to overdependence on the private sector to buy that knowledge and expertise back.
I now bring this section to a conclusion with our adviser's summary.
Thank you for an interesting afternoon. The key points coming out of the final section were that skills in procurement and contract management are key to the delivery of investment across the public sector. It is fair to say that there is still work to be done in training and retaining staff within the public sector to deliver procurement and contract management effectively. There was talk of a mixed economy and the use of private sector resource, as well as training people up within the public sector, and of getting the right balance between the two.
Thank you. I thank all the witnesses for their assistance in what has been a very useful and informative session. We appreciate your expertise, knowledge and presence today. It will all help the committee to produce its report.
Meeting suspended.
On resuming—