The purpose of today’s meeting is to continue the committee’s examination of the Scottish Government’s draft budget 2016-17. Our workshop sessions this morning sought to explore the impact of the Government’s spending decisions on local communities and, in particular, how the draft budget relates to issues such as agriculture, tourism, flood prevention, transport and broadband provision. Under agenda item 2, members will report back on those issues. I invite one representative from each of the two groups to speak, and other MSP colleagues will be able to contribute to the discussion. First, the deputy convener will tell us what happened in group 1.
We had a good time at our workshop and I am grateful to all the people who took part in it, including Jackie Baillie MSP, Jean Urquhart MSP and local representatives. I thought that an hour and a half would be too long but we filled the time easily; in fact, some of the items towards the end got squeezed a little bit. For the first hour or so, we spent time on broadband, farming and flooding, so I will touch on those issues.
Most of the group’s members were unhappy with the situation with broadband. We heard about the community broadband partnership and that 18,500 people live in highland Perthshire. We heard about some of the practical problems, for example for farmers when they try to complete quite complex forms online with poor broadband availability. We also heard that state aid rules have prevented the local partnership from doing more because it has reached certain limits and cannot reapply for three years. There is a feeling that the Scottish Government or the United Kingdom Government should work with and put pressure on BT. The fact that BT changes its plans regularly makes it more difficult for the community to take up the slack. We heard about a coffee company that had been forced to move out of its site in Glen Lyon because of lack of broadband; the issue has even impacted on the local school.
We then looked at farming and the issue of the subsidy system. A lot of that was new to me, as I do not represent a farming constituency. We discussed the timing of payments and the desire for a commitment to a fixed date on which 90 per cent would get 90 per cent of their grants. The timing of payments means that farmers are starting this year with borrowing; traditionally, that did not happen. There had been a difficult summer and crop prices were low. We talked about the LEADER scheme and European money.
That moved us on to flooding, which has obviously had a big impact on farmers, too. We talked about the fact that the railway was closed when an embankment was washed away. It became clear that there is both a regulatory issue and a finance issue. There is a lot of hope for a strategy to deal with flooding. I think that members will raise with John Swinney this afternoon the need for a strategy so that the issue is not considered only in local pockets. There is the issue of Scottish Environment Protection Agency restrictions. The issue about rivers not being dredged and river beds rising, which could cause more flooding, seemed to be mainly regulatory. More on the finance side, perhaps, was the fact that the Forestry Commission seems to be doing less maintenance, certainly when trees and so on fall into burns. We touched on the issue of SSE operating the dams and whether it has a remit to control flooding.
We spent less time on the other areas that we went on to, which included community empowerment. However, the community empowerment model is quite impressive in that 10 community councils work together very much, although they have very limited funding of about £9,000 at the moment. Various ideas were suggested, such as whether they could take on more responsibilities, even from the council, and perhaps get funding to go with that. I think that that sometimes happens with parish councils in England. It was suggested that because community trusts often attract people to them because they have a bit of power, perhaps they should be more democratic. However, the chicken-and-egg question was whether more people would become involved in community councils if they were given more powers or whether more people would have to be involved first to give community councils the ability to deal with more funding.
We touched briefly on various issues around the lack of housing, which is sometimes about the lack of land and sometimes about severe planning restrictions. Again, there were practical examples, such as the fact that the theatre staff level is quite high over the summer and the theatre has to lease local properties to house the staff, otherwise it would be very difficult for them. People on low incomes are finding it very difficult to get housing in a number of places, including Pitlochry.
On tourism, we heard in particular about the theatre in Pitlochry, which has a turnover of £4 million and 110,000 people a year coming to it. In particular, there are questions over Creative Scotland funding; we will probably raise that with John Swinney, too. It is extremely difficult for the theatre to handle a major capital project, such as reroofing. However, the theatre is very integrated with local hotels and restaurants.
Finally, we touched briefly on transport, and people were very positive about the A9 being dualled. However, there are practical problems, such as how the road gets round Dunkeld and whether there could be an impact on the local community at junctions coming into Pitlochry. There is the idea of a community rail partnership and the view that Abellio has to be held to account for the commitments that it made in the tender process.
I think that those were the main points.
Thank you very much for that. Jean, do you have anything to add?
Yes, particularly on the flooding. John Mason mentioned that the issue was not completely a local one, but it seems to me that there is a lot of local knowledge around flooding. One of the issues that came up is the role of SEPA. We should highlight that local groups often ask SEPA for advice but are told that they have to get an expert report before SEPA gets involved. However, in the days of the old water boards, people would go to them for their expert advice as they believed that those organisations could give it. There seems to be a bit of an issue in that regard now with SEPA. I do not know where the funds would come from for local people to commission the kind of expert report to which SEPA has referred.
From what people were saying, it seems to me that there has to be a local strategy for flooding. There were good ideas from around our table that came from knowledge of work that used to be done but is not done now. It seems to me that any national strategy would need to have that kind of local input if we are going to deal with the flooding issue.
On the issue of broadband, I think that there is a real piece of work for us to do regarding the link between the work that BT has been paid to do by the Scottish Government and the United Kingdom and how community broadband Scotland fits in with that. The issue is whether we can expect wholesale broadband coverage and what the timescale for that would be. We are losing people from some areas as a result of the lack of broadband coverage.
Finally, on the theatre, as cuts start to impact, Creative Scotland is more inclined to revenue fund than to have a budget for capital, particularly for capital repairs. The Big Lottery Fund is keen to fund big and shiny, exciting new projects that it can hang a hook on, but is maybe not so keen on funding to repair roofs. That is a serious issue that I think we should look at.
Thank you, Jean. Jackie?
Needless to say, my colleagues have covered most of what needs to be covered, but I just want to emphasise a couple of issues.
First, I was struck by people’s frustration at the lack of broadband. The problem is common to many areas of Scotland, but I also want to emphasise Jean Urquhart’s comments and point out that some places do not have 3G, never mind 4G. We absolutely need to meet this telecommunications challenge. I can see people’s frustration; they see the cabinet at the end of the street, but they are not connected to it and no one has a clue how long it will be before they are. Moreover, when they are connected, the broadband speeds are interesting, to say the least, and substantially lower than those that are available from community-based broadband schemes. Clearly there is a lot of work to do in that respect, not just because of the frustration for individual residents but because the local economy might be losing out. If broadband is to be our window on the world—which it is—and if people are increasingly using that medium to grow their business and export things, we will really lose out in terms of economic benefit if it is not up to speed across the whole nation.
We cannot escape having to comment on flooding. My area has experienced flooding in the past, and a lot of people with local knowledge there have pointed out what the people here pointed out, which is that river beds used to be dredged, farmers used to take out gravel and such practices seemed to have stopped. Whether or not that is a result of Scottish Environment Protection Agency regulation, the reality is that it is not happening, and although it has been recognised that some of the flooding was unavoidable, a lot of people have suggested that things could have been done to mitigate some of it and that, had we done that preventative work, some of the extensive damage that was caused might not have been so serious. The question whether we can encourage such preventative work gives us, I think, food for thought.
Thank you very much for that, Jackie, and I thank colleagues who participated in group 1.
We move swiftly on to Gavin Brown, who will talk about group 2.
I, too, thank everyone in the group—they made a massive contribution—and my colleagues Mark McDonald, and Ross Burnside from the Scottish Parliament information centre.
It is difficult in the couple of minutes that we have to do justice to what was a wide-ranging discussion. However, issue number 1 was broadband. It took up the most airtime, and it does not surprise me to hear that the situation was similar in the other group. Frustration was expressed about the time taken to progress certain projects; for example, we heard of a project that has taken six years to come to fruition. As we know, technology moves on to a remarkable degree in a six-year period. There was also frustration about the extent of coverage and the speed of broadband. Indeed, some businesses and some parts of Pitlochry would be as well not to go online between 5 o’clock and 7 o’clock because of the dramatic drop in speeds.
If broadband was the biggest issue that took up the most time, the second largest was tourism. Clearly, tourism is critical to this part of Scotland, which has a very proud record in that respect; it certainly plays a key role in the local economy. However, the challenge for the people in Pitlochry and the wider area is to try to move as close as they can to year-round tourism; it cannot be seen as a summer experience, because what does the area do for the rest of the year and how does it attract good people to come and make a career in tourism? Some big moves have been made with the enchanted forest, and the theatre was given particular praise for putting on shows later in the year than had previously been the case, but there is still a challenge to meet. Through VisitScotland we are pretty good at getting people into Scotland, but we are less good at getting those tourists to spread their nets widely across the country. The Pitlochry partnership is doing what it can, and I encourage people to look at www.pitlochry.org.
The issue of the A9 also came up in the discussion, and the comments that were made were similar to those that were made in the other group. Improving the A9 is seen as a huge boost to the area in the medium to long term, but in the short term it has to be managed extremely carefully. There were genuine concerns about congestion, which round here can have a pretty detrimental impact on tourism. We therefore need to be very careful about how the situation is managed.
A number of members talked about infrastructure with regard to buildings. There was a sense that in Pitlochry—and in Perth, too—the fabric of too many buildings, both houses and businesses, was not being retained effectively, particularly from an external point of view. Given that 2017 will be the year of architecture, it seems like a good time to encourage people to take their responsibilities in that respect more seriously.
There were also calls for VAT to be reduced—obviously, that is at a UK level. Could a grant scheme be set up to try to encourage people in the short term? Mark McDonald will no doubt touch on that. He had some particularly good ideas that relate to that.
12:00The issue of community transport was raised, and an example was given. In the voluntary sector in particular, if a patient lives in Kinloch Rannoch and has a 9 o’clock appointment in Ninewells hospital, the chances of their getting there at 9 o’clock are pretty slim, unless they own a car. Things have progressed with the demand-led transport system that is being set up, but demand way outstrips supply, of course, and there are issues that need to be resolved.
Obviously, flooding was discussed at great length. I echo the frustrations that came through in the other group. A far better national approach is needed. There was a feeling among the group that there simply has not been action and implementation on the ground following lots of wide-ranging discussions.
I will close on a positive note. I was hugely impressed by the highland Perthshire defib locator project, which has been driven by Pitlochry high school. It has created an app with help from Highland Perthshire Communities Partnership and the Friends of Pitlochry Community Hospital so that, basically, people can know where every defibrillator in the highland Perthshire area is located. People can download the app to their phone, and if there is ever any problem, they will know exactly where the defibrillators are located. That is a really impressive project, and I think that it has potential national scope once all the bugs are tested. I am excited to see what can be done with it.
It was fascinating to listen to the entire discussion.
Gavin Brown has covered most of the areas that we spoke about and has done all the product placement, as well. What he said was good from that perspective.
We heard a number of good examples of local work that is being done. As Gavin Brown highlighted, there was a very interesting discussion about the condition of buildings. Since I was a vice-convener of housing at a local authority level, I have always had an interest in private sector dilapidations and how we deal with them. Local authorities have a budget for private sector housing grants, for example, but that is not substantial and it would not cover the scale of the issues that a lot of communities face.
Housing that was bought under the right to buy will be a real challenge in the not-too-distant future. Individuals were able to get very cheap mortgages because of the discounts that were afforded, but they do not have the equity to be able to maintain the properties. They do not have any access to capital to be able to maintain and repair the properties, so real problems and challenges are coming. We need to have a discussion about what support mechanisms can be put in place to ensure that those buildings are safe and to improve their energy efficiency. The consequence of the approach is first and foremost a safety issue, but the loss of energy from those buildings and the obvious costs that are associated with that for those who own and operate them are also issues.
One member of our group referred in the discussion to the issue of absentee landlords. What stake do those who own commercial properties and lease them out but who do not live locally in the community have in the community? What opportunity is there for the community to benefit from the investment of those people rather than just individuals benefiting from it, particularly in ensuring that those buildings are maintained? If a person is not local to the community and does not have that stake in it, what incentive is there for them to ensure that the property is kept well maintained?
I am not entirely sure how another interesting issue that we covered could be taken forward. However, the issue of the impact of a number of hotel and restaurant booking websites and the difficulties that are often faced by some of the smaller operators in the market is fascinating. Those websites often command a fee for listing the business; in essence, they drive a bargain that ensures that the discounts that are offered are all borne by the owners of the hotels or restaurants. There is a question about what the benefit is for them, other than the fact that they need to be on those websites in order to get the necessary exposure. So much business now comes through people accessing those websites that, if someone is not on the websites and their local competitors are, they will not be at the races when it comes to people making bookings.
There is then a question about the impact that that has on the local economy. Obviously, if it is impacting on the ability of those businesses to turn over a reasonable profit, that impacts on the number of staff that they can employ and how much they can reinvest in the business, which then has a cyclical impact.
There was general agreement around the table that the A9 work was welcome and will be of benefit in the future, but there is a question about what impact there will be on the local community and businesses during the construction period, and whether any disruption will be caused. There may need to be a discussion about that and how it might potentially be mitigated.
That is perhaps not needed here and now, but as the project moves forward it is something that the Government and local authority need to be cognisant of, to ensure that in the short term, while the improvements are being made to the road, businesses are not losing out significantly. Some businesses could go to the wall. The full benefit from the dualling of the A9 will not be realised if there is a detrimental impact on local businesses, as some of those businesses might not recover to see that benefit.
Thank you very much, and thank you to all who participated in this morning’s workshops. We have a fairly comprehensive set of issues, a number of which we will want to put to the Cabinet Secretary for Finance, Constitution and Economy this afternoon.
We will have lunch now and resume at 1 o’clock. Those who participated in the workshops are welcome not only to come to lunch, but to attend the sessions this afternoon to hear the committee put some of its questions to the cabinet secretary. Before that, we will have the Scottish Futures Trust, which will be another interesting session. We hope to have John Swinney here at about 2 o’clock.
12:08 Meeting suspended.
I reconvene the meeting and remind everyone to keep all mobile phones and other electronic devices switched off. The third item on our agenda is to take evidence on the draft budget from the Scottish Futures Trust. Members have received copies of a submission from the SFT along with a summary of responses to our call for evidence on the SFT, which was issued in the autumn. I welcome Barry White and Peter Reekie once again to our committee. I invite Mr White to make a short opening statement.
Good afternoon and thank you very much for the opportunity to be here in Pitlochry. Before I start on my opening statement, I will make a declaration of interests: in addition to being chief executive of the SFT, I am the public interest director for the M8 special purpose company and for the Moray schools projects special purpose company, representing the public sector. I am also a trustee of LAR Housing Trust, the new housing charity. Peter Reekie has a couple of interests to declare as well.
I am Barry White’s alternate on the M8 special purpose company. I am a non-executive director of the International Project Finance Association, which is an international membership organisation that focuses on best practice and education in the project finance and infrastructure communities. I am also a trustee of the Hub Community Foundation charity.
We have had a busy past year and there is a busy year ahead. The LAR Housing Trust has been set up, creating capacity for 3,000 homes and £365 million of investment. We see housing as a key activity in the years ahead.
We look forward to the Ofcom review of digital communications being published—we hope that that will happen next month. That is a set of initial findings from Ofcom, and our work with the Scottish Government on pushing forward the world-class 2020 strategy will be a key part of the work ahead. The review will have a big impact across Scotland because it is looking at things such as a universal service obligation that could be put in place for fixed broadband connections. It will also look at future licence conditions for mobile connectivity. For Scotland, it is an incredibly important review. Those initial findings will have to be responded to and we will be part of that response.
I will mention two highlights. Through the growth accelerator model, we have unlocked significant investment in Edinburgh city centre and we expect the demolition of the St James centre to start this year, which I think will be welcomed by residents of Edinburgh. That investment in the city centre is a great thing to see. Also, Lairdsland primary school, which is now open and up and running, has won design awards and we aim to build on that innovative and award-winning design to help continue to change how schools are designed and to help future learning within those schools.
To give just one example of local activity, our schools for the future programme is investing around £36 million in Perth and Kinross. Some of the schools have already been built and there are more to come.
I will make four brief points on the call for evidence that the committee issued in September, which was well summarised in the papers for this meeting. I took a great deal of pride in the wide range of organisations that responded—public and private, large and small, from environmental organisations to estate agents. The responses were positive in tone and there were some helpful suggestions, so the call for evidence has been helpful to us.
It is also helpful to the SFT team to have its skills and abilities acknowledged by the people it works with. We value the collaboration with all the bits of the public and private sectors, and seeing our efforts come through strongly in the evidence is a great positive. I always think that there is further to go in collaboration. As the public sector, we must collaborate still more.
We have given written evidence on the non-profit-distributing and hub models, and we have updated the profile. The European system of accounts 2010—ESA10—has had an impact. We were particularly pleased to start the new year by reaching financial close on Ayr academy, which is the first of the projects that were paused because of ESA10. We look forward to reaching financial close on more hub design, build, finance and maintain projects in the forthcoming weeks, and other projects are to follow as quickly as possible.
As we look to the future, we face an interesting time on infrastructure investment. We have the implementation of the Smith commission recommendations, the potential onset of greater borrowing powers and what that will mean, and the more direct link between the Scottish economy and revenue for public spending. All those things mean that infrastructure investment is as important, if not even more important, than ever.
That concludes my opening remarks. Thank you very much for the opportunity to be here.
Thank you very much. You have been to the committee on a number of occasions, so you know that I will start by asking some opening questions and my colleagues will take it from there.
The SFT is reported to have made a total of £777 million savings and benefits for the people of Scotland. I must say that, in the five years that I have been convener of the Finance Committee, I do not think that I have ever seen such an effusive set of responses to our call for evidence in support of an organisation. Committee paper FI/S4/16/3/1 says:
“The overwhelming majority of the responses are positive and indicate a high regard for the work of SFT ... staff are mentioned positively throughout the written responses and they appear highly regarded by stakeholders. Their helpfulness, expertise, and willingness to work with other sectors collaboratively has been welcomed in the responses.”
For example, the Civil Engineering Contractors Association said that the SFT’s role was instrumental in keeping many Scottish civil engineering companies in business and preventing far worse job losses during the recession; Homes for Scotland said that the SFT has clearly demonstrated an ability to foster innovation, encourage collaboration and deliver value for money to the public purse; and NHS Dumfries and Galloway said that the SFT specifically provided helpful engagement with funders and ensured delivery of a funding solution through the NPD scheme.
A lot of people out there are singing your praises. I could mention others, but I will not do that for the moment, because we must look at those areas where there is still room for improvement. You would obviously welcome that, too.
Aberdeenshire Council, which has been supportive, said that there was some disquiet around the value-for-money aspects of some areas of one of its project. It considered that there may be merit in a public sector comparator test to demonstrate value for money. Likewise, Angus Council expressed the view that, in relation to the hub companies’ tier 1 contractors, added value could be derived if the SFT placed a greater emphasis on ensuring awareness of the benefits of having a strategic public sector work stream. Will you respond to those points?
Public sector comparators were used historically in the days of the private finance initiative, but they became slightly discredited because people were positioning the answer to come up with the response that was needed to justify the course of action. I do not think that the history of public sector comparators shows that they have been helpful. It is not as if there was a genuine option to do something else. With public sector comparators, the question used to be, “Do you want to do PFI, or do you want to do it through capital spending?” However, if there was no capital, people knew that they had to prepare the public sector comparator in a way that gave the PFI route as the answer. From that point of view, the comparators were never that helpful, because of the circumstances.
In launching its investment programme, the Government acknowledged that it was doing that in times of austerity to supplement the capital budget. It was not as if there was a choice to do anything else—there were no borrowing powers that would enable anything else to be done. In the independent budget review in 2010, we recommended that the Government use all the levers available to it to allow investment to happen.
To answer your question, yes, we could use public sector comparators, but I am not sure that they would be of huge value. In some ways, that would be looking back to historical practice.
On the remarks of Angus Council in relation to the hub, the strategic relationship that exists is one that the public sector and the private sector have to work at. We should be working together with Angus Council to secure that. It is not necessarily the job of the SFT to secure that strategic relationship; it is a joint responsibility. We are firm with people in our position that it is Angus Council’s hub company as much as it is the SFT’s. There is a shared responsibility. We will work with Angus Council and others in that regard.
Morrison Construction suggests that your approach has worked well in the current market but raises a concern that, in a rising market, affordability and value for money will become a different challenge. That view is supported by Kier Construction, which suggests that, as the market recovers, the SFT should conduct a review to ensure that best value continues to be obtained while retaining the attractiveness of projects to ensure private sector investment. Is that something that you are considering?
We are always willing to look at things differently. Those comments were made because we have locked in attractive prices at a relatively low point in the market, which means that, within the hub, for instance, people are working on competitive margins. However, they have a long-term pipeline of work, so it works both ways. I can understand that companies would like higher margins, but I would say to them that, although the margins might be lower in the hub, there is a pipeline of work.
We are aware that, if any new projects are brought to market at a time when construction companies are busy, construction procurement must be an attractive process and not use up too much private sector resource. Public sector organisations have to be good procurers when the market is busy; otherwise they get less competition. In new projects, we must take that into account.
There is also going to have to be a change in emphasis in the market as a whole as the market turns the corner and there is an increased focus on the training and development of the workforce. I would say that the building blocks through the hub are well placed to help the industry face the challenges of moving from organisations that are searching for work to organisations that need to grow and develop their workforce in order to keep pace with what is happening in the industry.
BAM Construction said that some participants in the hub frameworks are concerned over the closed nature of some of the hub supply chains. It appears that participants often have a limited choice of contractors, and BAM Construction feels that that could eventually damage the hub procurement model.
I disagree with that. BAM has picked up a reasonable amount of work through the hub. The hub supply chain is not closed, as it can be revisited at various times throughout the lifetime of the hub joint venture. There has been some changeover of contractors. Inevitably, if someone is in a framework relationship, those who are not in that relationship feel that they would like to be in on it. In some ways, therefore, that is not a surprising remark. However, the public sector benefits from that long-term relationship. We can see that Ayr academy got to financial close quickly recently through the hub design, build, finance and maintain process. That speed is one of the benefits of partnership working, as it allows people to collaborate in a way that delivers better value for the public sector.
13:15
Another area of concern was raised by Reiach and Hall, which said about the bidding process:
“there is still a huge amount of wastage in the system.”
It said that it has been involved with both NPD and hub projects and believes that there is a “marked difference” between the two and that, as a result, there is little appetite for bidding for future NPD projects under the current model.
First, Reiach and Hall is a tremendous firm of architects. The City of Glasgow College buildings that it has designed for the Riverside campus, which is now open, and the city centre campus are wonderfully designed buildings that have won a design award already. If you are ever in Glasgow city centre, the Riverside campus is worth a visit because it is a wonderfully designed building, and seeing young students in there, many of whom come from overseas, is fabulous.
In its longer evidence, Reiach and Hall also said that the current process is much improved over previous processes, but it still sees waste in it. We had long discussions with Reiach and Hall after it gave its evidence to ask how we can improve on that. For example, the company is working on the Forth Valley College project, which is part of the next stage of NPD, and it will work that design up at a certain stage and put great design into that college at an early stage. We are looking at ways of improving the process, and that improvement has already been made in hub because construction contractors and designers work on a one-to-one basis with the public sector client.
There is a balance to be struck when we are competing for NPD projects. The construction contractors always say that they need to manage the designers so that they can make sure that value is engineered into the building, and designers always say that they need to manage contractors to make sure that their flair is designed into the building. There is a happy medium and the two can work together incredibly well as a combination. The balance needs to be struck between construction input and design input into the competitive process.
Reiach and Hall has acknowledged that improvements have been made, but we will look at whether further improvements can be made.
You have almost pre-empted my next question, which is about that dialogue and discussion. Reiach and Hall says:
“it is ‘against the rules’ for the client to contribute ideas during dialogue discussions. This makes a ‘normal’ design conversation impossible”.
Is that the case? Other people have praised the SFT for being innovative, but Reiach and Hall suggests that it is concerned because “dialogue is very inhibited”.
I do not agree with that comment. There is room for dialogue and discussion of design. I would judge the situation by the outcomes. Inverness College UHI, which is now open and running, is a wonderfully designed building. The buildings that have been opened are really well designed and fantastic, so the outcomes show that we are getting well-designed buildings.
If we look back at historical PFI projects, we can see that the standard of design that we are now getting is considerably better because we put a huge effort into doing reference designs up front, and we get the public sector to think through how it wants the building to work. As a result of that, we are getting better buildings.
As we set up major procurements, we spend a lot of time thinking about the interaction of a procurement process that has to go through open competition and has to be run commercially, and the design process, which is happening in parallel. It is tricky to get the interaction between stages of design development and the stages of procurement right, and not everyone will think that it is right in every case. In fact, it is almost necessarily the case that, if the architects like a particular process, the contractors will think that it is taking something away from their ability to influence.
One of the other pieces of work that we are involved in in the construction and procurement review is about upskilling public sector procurers, because they will have the design discussions as the procurement progresses. The skill of the procurers is important in getting the best from that inherent tension.
On fees, Jmarchitects has highlighted a concern that, despite guidance from the Scottish Futures Trust, there is
“little consistency across the hub programme.”
It gave the example that it
“has been working for more than two years on a large healthcare project with no fees forthcoming”,
which it believes is unacceptable. What is the situation with regard to fees?
It is an area that we put quite a lot of focus on as hubs developed. Initially, we expected that, in the tendering, the bigger organisations—the main contractors—would take on some of the cash-flow risks associated with the early stages of design development through the hub process.
We found out, through feedback from architects and other bodies, that the big tier 1 contractors were pushing more of the cash flowing of costs down their supply chains and into smaller design organisations than we would have liked or had anticipated. We have changed the guidance and the way that the hub development process works, so that the designers can be paid on an on-going basis as hub projects are developed, rather than having to take that as a fee at the end of the development process. It is an area in which we recognised that we had to do more work. We have changed the way in which that is working, and if that continues to be a feature of feedback that anyone hears from the design community, we would like to hear about it, because that should not be the case any more.
That is very helpful. I have one final point before I open out the session to colleagues. You will not be surprised by this question, because I ask it every year.
For 2015-16, your estimate for the capital investment programme has been reduced from £954 million to £787 million. You will know yourselves that it seems that every year the estimate for one year is reduced the following year. The reductions have been of more significance in some years than in others, and next year you will say that the 2016-17 capital programme will be £909 million.
As I said, I have asked you this question a number of times over the years. There seems to be an optimism bias in what you are doing—there has never once been a year in which you have said that you will spend, say, £600 million and it turns out to be £800 million. Every single year there seems to be a reduction in the amount of money that is actually invested as opposed to what you say will be invested.
What can you do to bring your estimates more into line with what is actually happening? There seems to be a wee bit too much wishful thinking. Although the gap is less than it was before, it is still a fairly substantial £167 million reduction on what was suggested last year.
There are two reasons for the reduction from £954 million to £787 million in the 2015-16 figures that you gave.
The first is that whenever we model what the cash flow is going to be, we use a fairly standard S-curve that is a generalisation. The S-curve is the graph of spend; it starts off and spending then accelerates—that is why it is called an S-curve. Within the construction industry there is an assumed standard shape of that curve. What we do at the financial close of a project is to replace the standard curve with the actual S-curve that the contractor has put into the financial model.
If the contractor has taken a slightly different approach, such as deciding not to work so much during one winter and more the following winter—there is a whole series of things that people can choose to do to be competitive—replacing the curve has an impact, because we go from an assumed S-curve to an actual S-curve. That is one of the reasons why the 2015-16 estimate has gone down.
However, the biggest reason for the reduction in 2015-16 has been the European system of accounts 2010. A dozen hub design, build, finance and maintain projects had to be paused from the start of the year, as they were getting ready to go to financial close, until they got the clearance to move forward. That is the reason why movement has been quite so big in certain areas, such as—
I would understand if this was the first time that you had come to the Finance Committee with such figures, but every year we get the same issue—that is my concern. If it was a one-off we would say, “Well, that’s fair enough.” However, I asked you the same question last year, and I am pretty sure I asked it the year before and the year before that.
My concern is that there is a level of optimism bias in your projections because the bias is always one way—it is always that you will spend X, but when we see the actual figures the following year they are always significantly less. As I said, the reduction last year was not as much as in previous years, but the difference was still significant. That is of concern, certainly to me and I am sure to colleagues round the table.
This year, the European system of accounts 2010 has had a very big impact—that is a different reason and a new factor in comparison with previous years. We now know that there is a way ahead with hub design, build, finance and maintain projects; we did not want to hold up financial close on those projects, but we had to work through the new ESA10 approach and send the matter to the Office for National Statistics before we had the green light to go ahead. Having been given that go-ahead, we have now pushed ahead. As I said, the set of circumstances this year has been quite different.
However, we have always made it very clear that what we are talking about is not a budget in the traditional sense. There is no pot of cash sitting waiting to be spent; instead, the money follows the projects. As a result, spend depends on project progress, and having to pause 12 projects because of the ESA10 issue will have a big and unexpected effect.
I understand the issue with the 10 schools and two health centres, but this is a matter that seems to come up annually.
I will not ask any further questions, because I want to give colleagues the opportunity to ask their questions. I call Gavin Brown, to be followed by Jackie Baillie.
First of all, I reiterate the convener’s comment at the start of the session and say that I, too, was struck by the positive tone of the responses to our consultation.
I want to start where the convener left off, because I understand the ESA10 issue entirely. Well, I say “entirely”—I do not think that anyone understands it entirely, but I understand how it has held things up.
As has been mentioned, the overall projection for 2015-16 was £954 million, and it looks like the actual figure will be £787 million. Most of that can, I think, be explained by ESA10, but I want to go through the four largest individual changes to ensure that they are all down to that factor. First, the schools element of the budget appears to be down by about £170 million for 2015-16. Is all or most of that £170 million down to ESA10, or are there other factors in there?
It will always be a combination of factors that leads to a change in numbers.
Sure.
In this instance, the impact of ESA10 will overlay a number of project-specific issues as time goes by. However, we are not in a position to look through all of that and say, “Well, if this issue hadn’t arrived, would any other issues have come up?” As Barry White said, ESA10 has held up 10 of the schools projects—it led to quite significant delays on the projects throughout the year.
Is it not possible to put numbers on that? Are you able to tell us that, say, £150 million of the £170 million is down to the effect of ESA10 on those 10 schools, or are you simply not able to go that far?
We have not looked at how much, if any, of the change in timescales for each project was down to ESA10 and how much of a delay might have happened had ESA10 not been a factor. In areas where different reasons overlap, we have not needed to go into the question of which bears prime responsibility. Instead, as an organisation, we are focused on getting those issues resolved to ensure that those projects can go ahead, and that is what we have been doing with our local authority and hub-co partners to ensure that they can go ahead as soon as possible.
Let us move away from schools, then. I am not sure, but it might be easier to answer my questions with regard to other projects. The budget for the Edinburgh sick kids hospital project appears to be £60 million lower than planned for 2015-16. Is that down to ESA10 or something different?
The spend profile for that project has been unaffected by ESA10. As Barry White said, as far as that and a number of the other larger projects are concerned, the issue relates to contractors’ profiles during construction—in other words, how they plan to do the works and profile construction activity through the phases of the project—compared with the more standard curve that we would have applied earlier.
That deals with the Edinburgh sick kids hospital project.
The “Community Health” line has gone down by about £55 million. Is that down to ESA10, profiling by contractors or both?
Most of that will be down to ESA10 and a number of specific factors in the smaller community healthcare projects through the year.
13:30
The figure for NHS Dumfries and Galloway is about £70 million or so lower. Is that down to ESA10 or profiling by contractors?
That project was not held up by ESA10 at all; it is more to do with contractors’ profiling of their expenditure.
Thank you. That was helpful.
I would like to go back a year to 2014-15, the figures for which are included in the budget document. I will not go through all the various categories again, but the total for 2014-15 was meant to be £614 million although the outturn appears to be £538 million, so the figure is about £76 million lower than was planned. In your submission, you say that that was “principally” down to ESA10. Do you mean that most of that £76 million reduction is attributable to ESA10? Can you be more specific?
We said that the differential was
“largely due to the AWPR financial close”.
Again, the points about the difference between contractor spend profile and assumed spend profile as well as ESA10 apply.
In addition, as we get more detail on projects, we refine the model. We have been doing a group-based funding technique, which involves combining the funding streams for two projects, both of which start off as partly revenue funded, in such a way that one becomes capital funded and one becomes purely revenue funded. That is partly how we have addressed the point about capital contributions. That will be very helpful as we go forward with ESA10. The refining of that technique has contributed to the differential, too.
You have outlined your projections for 2016-17, which the convener touched on. As far as you can tell, are any of those projections at risk from future or existing ESA10 investigations?
I would say that the majority of the lines for 2016-17 are now on contracted projects. The key areas for us are around schools and community health. Having unblocked the pipeline of hub design, build, finance and maintain projects in terms of ESA10, we have 12 projects, one of which has already reached financial close, and there are others coming down the tracks. Getting those projects through to construction is a critical part of securing that level of investment.
We are aware that Eurostat will update the ESA10 guidelines. The update of the “Manual on Government Deficit and Debt” is due to come out in late January or early February—it is hard to say for sure when it will come out. We do not believe that that will have a significant impact on hub design, build, finance and maintain projects, but until we see the final document, we cannot be certain. If Europe updates the rules, we will have to take those changes into account and move forward from there.
So there are no existing issues, but that could change in January, depending on what Eurostat comes out with.
Yes.
In your submission, you say in relation to ESA10 that the ONS has offered the view that hub projects
“would be classified to the private sector.”
I presume that that is the result that you wanted, and that it allows things to go ahead.
What sort of interaction did you have with the ONS? Was it willing to give you views off the record in order to speed things up? What was your relationship with ONS like?
The ONS has a policy of not giving guidance because it is a body that gives opinions on structures rather than one that helps people to achieve a particular outcome. There is, however, the opportunity to put forward a policy proposal to the ONS and, following the ruling on the Aberdeen western peripheral route over the summer, we developed and put to it a policy proposal as to how we could amend the hub, design, build, finance and maintain arrangements to reinforce private classification. We put that policy proposal to the ONS, we had a clarificatory discussion with it and it then provided a ruling on how it would classify that policy proposal. We have now taken projects forward and, as Barry White said, we have contracted the first project following the arrangements that we put to the ONS in a policy proposal.
That is helpful. Thank you.
You mentioned the AWPR, which was classified the other way, as a public project. Is there any on-going appeal process, discussion or dialogue, or should we just, for the purposes of the next few budgets, accept that we are stuck with that ruling? Are you in active dialogue with the ONS?
On the AWPR, we have accepted that a rapid reversal will not be possible.
Did you say that it will be possible?
Sorry—it will not be possible. That is because, with the update of the “Manual on Government Deficit and Debt” due to come out, we could not put a policy proposal to the ONS in the autumn of this year, have that considered by the ONS and then negotiate those changes with the contractors—we are dealing with signed contracts, which we would have to negotiate—and have them in place before the new manual came out. The timeline of events is that we will have to wait for the updated “Manual on Government Deficit and Debt” to come out, consider the options and look to see what we could put to the ONS. If there was an option that was acceptable to the ONS and the Scottish Government, we would then have to negotiate that with the private sector. A rapid reversal will not be possible because we are caught by that update of the “Manual on Government Deficit and Debt”.
That is helpful. Thank you.
Unsurprisingly, I want to stick with ESA10. I accept that the changes were very difficult to manage for councils, health boards, yourselves and contractors, who were quite exercised by the stopping of work that they expected to proceed. I am glad that we have got through it, but I think that lessons need to be learned from what happened.
Given that ESA10 was launched in 2010, why were we so taken by surprise? Whose job was it to have some of the discussion in advance—yours or the Scottish Government’s? How did we get to a situation in which projects suddenly had to be stopped?
ESA10 is slightly badly named in that it came into force in September 2014. The “Manual on Government Deficit and Debt”, which is the technical guidance that sits underneath it, was issued in shadow form in November 2013. That version of the shadow guidance did not seem to raise any substantive issues for projects of the nature of those that we were carrying out. It was an update of that guidance, just before the standard came into force in September 2014, that really made the changes. Those changes can be seen in black and white, but it is also a matter of the way in which Eurostat and the statistical bodies around Europe interpret the guidelines. The rules came into force in September 2014, and we became aware of them through discussions with the Treasury in November, which kicked off a process of our gaining a detailed understanding of how they would be interpreted.
This issue has been played out across Europe. In a number of pretty substantial programmes of activity in Belgium, England and other jurisdictions, infrastructure investment projects have faced issues because they expected to be budgeted in a particular way. However, there was a change in the rules and interaction with Eurostat, as both the interpretation and the rules changed. That has caused a number of people across Europe to have difficulties with projects and programmes.
In Scotland, some projects were at a very critical stage when the rules changed, so for very good reasons this issue has, as you have said, probably become more high profile. The situation has impacted on a number of projects, building contractors and public authorities that were expecting to get new schools and hospitals. A change in the rules at a particular point in a procurement or project development causes substantial difficulties; if things had been stable all the way through the project development process, we could, as we have done with the hub, have come up with a structure that complied with the rules and took that all the way through. However, that has not been possible for the projects concerned.
Other commentators would suggest that, although the rules were devised in 2010, people simply did not see the changes coming, but that is not an excuse that we can hide behind. I think that you have said that the first indication came in November 2013 but that it was not until November 2014 that you engaged in discussions with ONS. Did you do anything before that?
The November 2013 “Manual on Government Deficit and Debt” did not contain the substantial changes to the guidance on control and reward sharing that were contained in the later guidance. A very detailed set of interpretations of the words in the 500-page guidance has affected the projects concerned. We spent a year discussing the interpretation of those words, but they emerged only in the August guidance that was published before the rules changed in September 2014. I agree with you that ESA10 has been discussed for a long time, but there has really been no change at the level of the law that is ESA10; change has come at the level of the guidance that sits below it and the interpretation of that guidance by the statistical authorities that write the rules and interpret them across Europe where the substantial changes have occurred.
Did you take any external legal or professional advice on that?
I note that in its written submission in response to the committee’s call for evidence, Allianz Global Investors, which is a very big investor of pension fund money in projects across Europe, said with regard to the Scottish Futures Trust:
“In this context we note that SFT, like many other European infrastructure procurement bodies, is now facing new unexpected challenges ... arising from Eurostat having changed the evaluation framework used for PPP classification”.
It also hopes that, with the €300 billion Juncker plan in Europe,
“SFT will receive the clarity it needs from the statisticians on a timely basis”.
The issue is therefore part of a much wider European one. Even in the UK, Network Rail, English housing associations and the UK Government’s financing aggregator model for schools have been reclassified as part of the public sector since ESA10 has come into effect. A lot has changed, but the change was brought in at the last moment in the guidance.
Forgive me for pressing this, but, given that the area is clearly complex, did you take any external advice on it?
In addition, I do not think that you answered my earlier question about whether you or the Scottish Government should negotiate. Who is responsible for making decisions in this area?
We have taken advice on classification at different times in the process. For example, we took advice on ESA95 when it was in operation, and advice was taken with regard to some projects that were coming in during the run-up to ESA10. However, that was based on the older guidance. It was only when the new guidance emerged that we realised that the advisory market was not in the best position to give us advice.
We have therefore led the work with the ONS to get the hub up and running and get clarification, because we think that, as Allianz has made clear with regard to the situation across Europe, the advisory market has been caught slightly off guard by the significance of the change. As a result, our work of late has been led by us rather than by external advisers, and we believe that that is the right course of action, given that the in-depth knowledge that we have gained puts us ahead of what the advisory firms could have provided to us.
13:45
To ensure that I do not misrepresent your position, you are saying that, for the reasons that you have outlined, no advice was taken.
During the course of the non-profit-distributing programme, we took advice on particular projects at different times.
Yes, but I am talking about ESA10.
Some projects were assessed for ESA10 prior to its introduction, but those assessments were carried out under the old guidance, and ESA10 itself was introduced with new guidance. We have worked through the detail of that with the ONS. The AWPR project was submitted, and when its classification was clarified last July, we responded by putting to the ONS our policy proposal on the hub to allow that to be driven forward. It was the SFT rather than advisers that put the policy proposal together, because we had to immerse ourselves in the matter, and I would argue that as a result our level of knowledge is now greater than what the advisory community could have offered us.
Okay, but is that your job or the job of the Scottish Government?
It is probably a joint responsibility. At the end of the day, the Scottish Government along with the UK Government enforces the budget rules. That is just a practical issue, and it is the case practically.
As for responding to the change, we give advice to the Scottish Government, but it is the Scottish Government that makes decisions on the basis of that advice.
As I am sure you will appreciate, the issue is so serious because the designation of projects as public sector ones means that, instead of its being used in different financial models, more than £1 billion could now become part of the normal capital budget that the Scottish Government has to spend. The Aberdeen western peripheral route, which the Government is committed to, will now go on the books instead of being off balance sheet, and the same applies to all the projects that Gavin Brown mentioned. It applies to Dumfries and Galloway royal infirmary, the Royal hospital for sick kids and the Scottish National Blood Transfusion Service. Because all of those valuable projects will have to be paid for by capital budgets on the books, less will be available for other things.
Yes.
Okay.
I want to ask a question that supports the convener’s earlier request. Saving £777 million is a wonderful achievement, but who audits that? Who can tell me whether that is real? There is something in the suggestion that you constantly compare your models with other models that are out there. They might not be local authority or public sector models, but in any case that sort of thing should form part of the challenge function that you should have. I would be interested in hearing further thoughts about how we unpick that £777 million and how we can get better at doing what we do.
I am sorry, but I did not quite pick up the point about models.
The convener suggested that you should maybe test your model against others. You suggested that such models would simply be local authority approaches or public sector models, but the fact is that there might well be other financing models out there. You have quite substantially increased private sector involvement, which means that it is putting in all the capital, and the unitary charge goes up for the public sector. We should probably be concerned about that, because collectively the amount of debt that the country bears is increasing substantially. I understand the reasons for that, but there might be other models out there that we should constantly be comparing what we do against in order to secure the best possible deal. What testing has there been of those alternative models?
First, you asked about the benefits number. We provide our benefits figures to the London School of Economics and Political Science and Grant Thornton for validation, and on page 15 of committee paper 1, I have tried to give practical examples of the benefits and what the number actually means.
The number is important because it quantifies things. It is about building 67 schools on a budget for 55—that is a tangible demonstration of the work—and it is about the £365 million of housing, with £265 million of that coming from the national housing trust and £100 million through the new housing charity, the LAR Housing Trust. Those houses are being built and developed. If we are talking about benefits, I can tell you that on Friday I visited a housing estate and saw tenants moving in to their new flat. That flat would not have been there had we not provided that funding route. The benefits are real and tangible and are making a difference to people’s lives.
Likewise, as I said in my opening statement, for projects such as the St James quarter development in Edinburgh, we count among our benefits part of the £61 million that Edinburgh will invest as additional investment that we have helped to unlock. We do not count the £850 million of private sector investment that that public sector investment will help to catalyse. As for how we capture the benefits, I would argue that our benefits are actually much greater than what we have set out. In our table, we have tried to highlight some of the wider benefits with regard to the tangible meaning of our work for people and its impact.
We might well have had a discussion about models in 2009, when Angus Grossart and I appeared in front of the committee. We are not wedded to any model; we really are ecumenical about what we do. If there is a better way to do things, we will do it. I think that in our evidence to the committee last year and in our evidence to the Smith commission, we said that it would be good if the Scottish Government had greater borrowing powers so that a choice could be made, and I very strongly believe that it would be better if we had that choice. I have to say that I do not know what borrowing powers the Scottish Government will end up with after the implementation of the Smith commission recommendations; some borrowing powers exist already, but having greater borrowing powers would be a helpful tool in the box.
We are very open minded to other approaches that might be out there. We started off with tax increment financing. As it developed, we moved in and tweaked it to unlock the growth accelerator model. Likewise, with national housing, we started off with the national housing trust and then moved to the national housing trust council variant; from that, the thinking behind LAR emerged. We are not wedded to one approach or model; we will do whatever works best and provides the best value for money. We are very open minded. We are not wedded to one approach at all.
I will stick to that general area. If something such as the AWPR is reclassified to the public sector, we as the public still end up paying exactly the same amount in cash terms. Is that correct? Whichever way it is classified, we are still paying for the same infrastructure and so on.
That is correct.
So there is no cash impact. From what you just said to Jackie Baillie, the impact is that, because the project is being reallocated and because we have a fixed capital budget, that restricts the rest of the capital budget. In previous evidence to the committee, I think that you argued that that was a bit of an artificial limit and that, if we just had freedom to borrow, it would not matter so much.
The effect of the item being on balance sheet is that its additionality is removed, so you are right that, in cash terms, it does not make a difference. If there were different opportunities beyond the capital budget, more choices could be made about how that was handled. However, the way in which things work at the moment, with the capital budget being restricted, is exactly as you have described.
In my opinion, the limit is artificial. We used to talk about finance leases. When someone bought a photocopier, it was on either a finance lease or an operating lease. The split was totally artificial—it was just to keep the accountants happy that someone was either leasing or buying. In reality, exactly the same thing was being done in either case—you were still paying £100 a year or whatever it happened to be in cash terms.
It seems to me that the artificial limit on capital expenditure is the problem. You are probably the wrong person to ask about this; I should ask the finance secretary. It is an artificial limit and there is no logic to the capital budget being restricted as it is. Is that right?
That is more a matter for—
That is fair enough.
The fact that the investment estimate has fallen from £954 million to £787 million means, on the one hand, that projects are not happening quite as quickly as they might. On the other hand, I presume that our repayments are being delayed because, if a project starts a year later than scheduled, all the payments will be a year later. From a cash point of view, is that quite a positive thing?
Your summary is right. A delay moves everything back, including when the payments start. It all moves back in time.
Do you see a delay as being negative, positive or neutral?
We would have liked the dozen projects that we had to pause because of ESA10 to have gone ahead as planned, because people’s expectations would have been met. We have had to work hard with local authorities to explain why the delay was necessary and why we had to pause those projects.
The great thing is that those projects can now move forward. The pause was necessary because of ESA10. It was the right thing to do and we can now move forward at pace with that green light.
It was a strange case because there was no benefit from the delay; it was just a technical or legal thing. I presume that other delays have a benefit, because you might pay a bit more if you had to settle today, whereas if you waited and carried on negotiations with contractors, the price might come down a bit. Is that right? Might a delay sometimes be a good thing?
In previous evidence, we said that we know that, in the past, some public sector projects suffered if a deadline was met but people entered into a contract before they were ready. In a case such as that, false progress ends up being made, because the loose ends that are left behind come back to haunt you. We therefore say that it is better to sign the contract when it is ready to be signed and not to impose an artificial deadline, because that changes people’s behaviour.
We are fully subscribed to getting the right deal drawn up as quickly as possible. ESA10 was a slightly different circumstance because it created a pause. In other projects, it is right to bottom out the project’s specifics and tighten it up as a project before signing any contract. That is why, in the hub for instance, the outturn costs at the end of a project are very close to the contracted costs. In some projects, there may be a small change during the life of the project, but the outturn and the starting point are broadly in line. That is because up-front work is done to secure that rigour, so that the project is delivered within its budget.
It strikes me that sometimes waiting is a good idea.
I will touch on the interesting case studies that are in your submission. The case study on page 26 is on the national housing trust and mentions a site in Rosyth. Will you give us more detail about that? You say that the site was suitable for 390 homes. I do not know whether the submission says exactly how many homes the national housing trust built, but it was not the full 390. How did that work? Why did the fact that the trust built some of the houses make it more attractive for other builders to come in?
The trust is a joint venture between us, the local authority and the private sector. One of the key things that it does is agree to purchase a certain number of houses from a project once it is built. If a builder tells its bank that it needs funding for a site, but it has not pre-sold any houses, it may struggle to raise the finance to open the site.
However, if a company has 60 or 70 pre-sold units on the site, its ability to borrow to put in roundabouts and the site infrastructure and to build the site is enhanced, because the bank can lend in the knowledge that it will get a certain amount of income quite quickly. Having a pre-purchase agreement or a purchase agreement signed up front helps to unlock not only those units but the wider units.
14:00
Are we talking about a cash-flow guarantee? I presume that there is no cross-subsidy, because all the houses on the site contribute to the cost of the roundabout that you mentioned.
Yes—the houses all contribute to the infrastructure for the whole site. We do not guarantee anyone’s cash flow; rather, we agree to buy a number of houses. That gives the company a cash flow, which makes it more creditworthy in the bank’s eyes. Therefore, between the company’s own resources and bank lending, opening up the site becomes much more economic. The company will phase the infrastructure across the site rather than put it all in immediately, but having the initial infrastructure in can be enormously helpful in unlocking future parts of the site, too.
When I read the case study, I wondered whether it meant that the houses that you were buying were paying for more than their share of the infrastructure and the rest were not, but I am getting from your answer that that is not the case.
We buy at market prices; the houses are bought at market prices. They do not take more than their fair share; the issue is just the certainty about them being sold.
I am with you.
Normally, when a builder opens up a site, it might have no pre-sold units. The pre-purchase part of the agreement is the key element.
That is helpful. Are the houses for what we might call mid-market rent?
That is what the national housing trust deals with. It relies on mid-market rent income; it has no grant subsidy.
You have cited a rent of £485 a month, while people in the private sector pay £695 a month. I presume that, in rented social housing with a subsidy, the rent would be even less.
Yes. I think that housing associations get grants of up to £70,000 a house. If such a grant were put in, a lower rent could be charged. What we do is in addition to what housing associations do; we are not replacing that. Housing associations will continue to do their grant-funded social housing. They also do mid-market rent properties, which are very much our focus.
Is the ratio of £485 to £695 the kind of level that you would normally expect?
The rule of thumb is that mid-market rent is about 80 per cent of market rent. People often move from energy-inefficient houses to energy-efficient houses, so they get not only rental savings but lower fuel bills.
That is great; thank you.
I will return to the Reiach and Hall situation. It seems as though a number of renowned architects are facing difficult times in Scotland, although you have cited a couple of buildings for which architects’ individual designs have received awards.
You said that Reiach and Hall’s comments concerned you. The company has said that the situation calls into question whether it should consider bidding for work. How can you bring such companies on board? Do you see that as important or as neither here nor there?
We are keen for architects—not specifically Reiach and Hall, but architects like it—and other, good quality—
I mentioned that firm because it is referred to in committee paper 1.
Indeed. We are keen to involve good-quality architects that do good work. We are always looking at ways to improve processes. Like contractors, architects will make their choices about which projects to bid for. I reiterate that the process that we have put in place over the past round of projects is acknowledged to be a big improvement on historical ways of doing business. Can we make further improvements? We are looking at doing that for the next round of investment and at whether we can do something that is better still.
More widely, in the implementation of the construction procurement review, we are keen for the industry to move on to using building information modelling. That puts the designs online, which allows the architect, the services engineer and the structural engineer to collaborate online. That is another important part of how the public sector can encourage participants to make the process more efficient. Sharing information in that way will be better.
We want good designers to work on our projects. I think that, if you visit Inverness College, City of Glasgow College or any of the other projects that are under way, you will see that we have achieved very high design standards in them.
I agree that the submissions are largely positive, but I note that the evidence is largely from local authorities and so on and not necessarily from the end users of schools, for example. I also note that our paper talks about public-private partnerships; I have experience of PFI, and I see that you are still looking at design, build, service and maintain projects. That sort of thing has resulted in frustration for end users, with organisations setting fees for opening classrooms for extracurricular activities or maintaining the school building. Is that issue ever open for discussion? Do you see it as a problem—not for those who build the schools but for users?
When we launched the investment programme, one of the big changes that we made to help users was to unbundle cleaning, janitorial, portering and catering services from the service bundle and say, “What we really want is a building that is built, maintained and financed rather than fully serviced.” That gives building users much more flexibility in how they use the building.
That was one of the lessons that we took from past projects. For example, something as simple as the headteacher wanting the caretaker to open the school one evening for an extra parents evening became expensive and difficult to organise, because a change process had to be gone through. That was not satisfactory and we think that, by leaving those services with the school or local authority and ensuring that maintenance is the only service that is provided, we are giving a lot more flexibility than was available in the past. That is the right approach, and in the end it is better for users.
In that change, we took on board much of the detail and many of the points that have come up in the past. For example, we heard about teachers not being able to use Blu-Tack on walls because of the paint job that they would put Blu-Tack on to. In most of our contracts now, the local authority is responsible for a school’s internal redecoration, so it can allow people to pin things on to the wall. We have really reacted to user concerns about the very early PFI deals, and we have contracts and buildings that are much more flexible and buildings that are fantastically designed and great environments for users.
I have two more small questions, the first of which relates to the fact that we in Scotland have not achieved our climate change targets. I note that page 15 of your submission refers to
“Total investment in LED street lighting spend-to-save measures”.
What is the current position? I believe that you have mentioned your ambition for LED street lighting in previous reports. You say that there is “£1.2bn to be saved”, but has anything been saved to date or is that all for the future?
That figure refers to the savings under the whole programme. Over the past year, investment has quadrupled; of course, I am talking about local authorities, but we are working with them on unlocking that with a toolkit that shows how savings can be produced and which makes it easier for people to put together the case for making that investment.
LED streetlighting investment has quadrupled from about £7 million a year and will rise quickly to about £50 million. There is a payback period of perhaps six, seven or eight years against that investment. However, the saving flows beyond that, because LED lamps might last 15 to 20 years. The £1.2 billion therefore comes from the whole-life saving rather than just the short-term saving. In that case, we are using a short-term spend-to-save measure that reduces the carbon footprint and produces in the long run a cash saving, because the LED lamps last a long time.
I want to be sure that I understand this. Has none of the £189 million for spend-to-save measures been spent so far, or has some of it been spent?
That is being spent. Local authorities are running investment programmes that were at £7 million last year, are at about £28 million or £30 million this year and will rise to about £50 million. By about 2020, the total will be about £190 million but, in the five-year to six-year period that runs up to then, that will be the investment to unlock the overall saving.
So the money will be spent during the next five years.
Some of it has been spent already, and it will continue to be spent over the next few years up to 2020-21. Investment has started and will go on in a rolling programme over the next five years.
I thank the witnesses for the evidence that they have given. I have only a couple of things to add.
I was pleased to see the pie chart breakdown of spend on hub projects, mainly because it shows that the highest spend is in north Scotland, which covers my patch. Knowing that will come in handy the next time that I am told that all the money goes to the central belt.
I will follow up Jean Urquhart’s point about LED lighting. On page 24, you go into some detail about how that is being rolled out. I note that you say that
“over 80% of Scotland’s councils are actively using the Toolkit”,
which suggests that one or two are not yet on board. I will not ask you to name and shame, although if you want to do so, feel free. How likely is it that we will get full buy-in from all local authorities? Is the £1.2 billion saving based on the current 80 per cent uptake rate or does it depend on every local authority using the toolkit and rolling out the LED lighting?
I will not name the authorities, but the chap who runs the programme described it as being a bit like the grand national, in that everybody has crossed the line and started, but some runners are slower. Some are charging ahead, but a few are just getting over the starting line and getting moving.
That will always be the case when a work pattern is being mobilised. People have different priorities and it is up to local authorities to prioritise in their own areas. Some are doing other things that have a higher priority right now.
We wanted to help local authorities to frame the case. Unlike other capital investment, investment in LED lighting will pay for itself fairly quickly and reduce the carbon footprint. We have therefore been working to help those who are not that far over the starting line to accelerate, while we stand back and let the others gallop ahead. We have focused our efforts on mobilising everyone.
The overall figure relies on all local authorities getting to a much higher percentage of LED lighting than they have at the moment. It is a pan-Scotland figure.
I note that the £1.2 billion covers 20 years and I recall that Paul Johnson of the Institute for Fiscal Studies said last week that any number is big if it is measured over a long enough period. That still equates to about £60 million per annum, which is a significant saving across local government if there is full uptake. How has that been modelled? Has the likely saving over the 20-year period been modelled in partnership with the Convention of Scottish Local Authorities? How did you arrive at the figure?
14:15
We used our toolkit, which has also been adapted and used elsewhere in the UK. It is useful for calculating what needs to be invested to achieve a particular saving. The toolkit’s purpose is to help to frame the case for saying that the LED programme is a worthwhile investment. We have worked with COSLA on the matter, but our focus is very much on working with individual local authorities.
When we started the work on the LED programme, an LED lamp typically cost twice as much as a standard lamp, but that comparative difference has come down to 150 per cent. Having a rolling programme for investment is the right thing to do because, as demand for LED lamps goes up, the unit price comes down. Across the rolling programme, the case for investing therefore becomes stronger, because the unit cost will come down as volumes go up.
To make things easy for people, we used Scotland Excel to set up a framework. We are using the existing collaborative framework with Scotland Excel and saying that local authorities can use it, which makes it easier for local authorities to purchase the LED lamps and to run that on a programme basis. The programme relies on Scotland mobilising as a whole, but we are not seeing resistance to it; it is just a case of how big a priority it is locally.
Have you, or has anyone out there, done work on how the saving splits between revenue and capital? There is a capital saving on infrastructure replacement and there is a revenue saving on the energy cost. Have you worked out what the split is, or is that not available?
I do not know the answer to that question. You are right that there are two components to the saving: there is the long-term energy saving and, because LED lamps last longer, there is the life-cycle element of saving and the maintenance saving. The saving will consist of both those elements. I can certainly see whether figures for both are available and pass them to you directly, if that would be helpful.
It would be interesting to see the figures. I note that your submission refers to making better use of space in order to secure efficiency savings of about £50 million per annum. It would be interesting to know how that figure was arrived at and how you modelled it. I am always intrigued by how costs in terms of space utilisation are measured. I do not know whether you have that information to hand or whether you can provide it later.
I do not have the information to hand, but I am happy to send you it directly, if it is of interest to you.
The preamble to your submission refers to areas such as SFT invest and SFT connect. Under SFT place, you refer to disposals. I realise that the hub and other things are about developing new facilities, but the disposal of assets that are no longer required is also an element of estate management. What support does the SFT provide on that, particularly when a new facility is being developed to replace an old one? How involved is the SFT in supporting the disposal side of things, from which the proceeds can be reinvested through capital?
The SFT gives two levels of support. We have a number of people who are embedded and working in major national health service bodies. For example, we have staff working in NHS Greater Glasgow and Clyde and NHS Lothian alongside NHS staff to help to look after their disposal programmes. The work is under NHS management, but our staff’s property expertise and commercial skills provide an extra resource to take some very big sites forward. Sites that have been dealt with in that way include the Victoria infirmary in Glasgow and Bangour village hospital in West Lothian, which are really big sites with the capacity for 500 and 900 homes, respectively.
On the second level of support that we give, following the redevelopment of its city centre campus and its Riverside campus, we have worked with City of Glasgow College and supported Iain Marley, the project director, in taking those sales forward. He submitted evidence on the college’s behalf in response to the committee’s call for evidence in which he stated that the college worked with the SFT in shaping the disposal strategy. The college is doing the disposal, but we helped to shape the strategy.
That support involves things such as spending a bit of money up front on testing the frame of a building to make sure that it is reusable, for instance. That means that the college can sell the building as a package on which some of the diligence has been done, which means that the sale process should be smoother, as opposed to the developer coming forward with a long list of caveats. There will always be a few key issues to distil after an offer has been made, but condensing those to a small number of points because much of the pre-work has been done by the public sector allows the sale process to be smoother.
How much of that involves the SFT proactively saying to health boards and local authorities that you can pair up with them and provide expertise? How much of it is about those organisations saying to you that they would like to tap into your expertise?
There is a bit of both, because the work is collaborative and both sides have different expertise. The people whom we employ are typically from a property development background, which complements the skills in the health board or in City of Glasgow College, for example. The key is combining those skills. To answer your question, there is a bit of both, because people are aware of what we can do and we sometimes go and offer our help.
That concludes questions from the committee. If you have no further points to make, I thank you very much for your submission and for answering our questions so comprehensively.
We will have a brief suspension until 2.30 to allow a changeover of witnesses and give members a natural break.
14:21 Meeting suspended.