I welcome to the 11th meeting in 2005 of the Finance Committee the press and the public, although not many members of either are in attendance. I remind people to turn off their pagers and mobile phones. We have apologies from Elaine Murray, Alasdair Morgan and Jim Mather.
Thank you, convener. Good morning to you and to assembled members. Thank you for inviting us here today to give evidence on the infrastructure investment plan. This is a good opportunity to contribute to the committee's review. I stress that we are at the start of an important process. I regard interaction with the committee as extremely important in refining our approach to the plan. From the Executive's point of view, it is important to listen to what the committee has to say and to take that on board as far as we can as we develop the plan over the months and years to come.
Before we move on to questions, I highlight the committee's view that the infrastructure investment plan represents a positive innovation, which will enhance the scrutiny process in relation to the budget and which reflects the Executive's commitment to increasing capital expenditure and to moving towards more strategic targeting of that expenditure, as the minister indicated. Such issues were raised in the committee's report on its cross-cutting expenditure review of economic development.
Very large sums of money are involved in the infrastructure investment plan. What percentage of the projects that are included in the plan has been subject to pre-expenditure assessment?
All projects will be subject to pre-expenditure assessment as they come up. That happens as a matter of course in the Executive.
The green book of option appraisal guidance, which has been used in the public sector for many years, has always been based on the principle of assessing projects in advance of procurement—by considering the various options and value for money, for example. Such an approach is not new. However, a more rigorous process of assessing projects in advance was introduced fairly recently, whereby the delivery risks that might be involved and the support mechanisms that will be needed to see projects through to delivery are more closely examined.
Is it the intention or the reality that all projects will be assessed?
It is already the reality that all major projects are assessed in the way that I described, although the methodology is still developing.
A main criticism of such an ambitious expenditure programme is that, although it looks fine on paper, in reality there are delays, some of which might be significant. Are such delays due to a lack of funds or planning, or to physical constraints within the construction industry?
We do not anticipate delays due to a lack of funding. We have not yet settled on the most appropriate funding vehicle for every project. Such decisions will be taken, particularly on transport projects. I know that the committee will speak to my colleague the Minister for Transport in the near future, although I do not know exactly when—
Next week.
Of course, in a sophisticated, regulated economy a number of factors can lead to delays. For example, we had to have a public inquiry into the M74 extension. However, it is important that the Executive should address delays in the proper fashion, by showing resolve and the determination to ensure that important projects for Scotland are carried through to conclusion.
You mention a flagship project that is likely to be subject to delay. Another major item of capital expenditure, the Markinch interchange, has been on the books for two years but keeps slipping away. I do not seek a response on that specific project; I just point out that, in general, major projects can be subject to delays not of months but of years, which can throw budgets into a cocked hat. The plans look good, but the reality can be different.
I am appalled at some of the delays that we encounter—I think that I can speak for the Executive in saying that. We are determined to grow Scotland's economy and so must ensure that we speed up the implementation of programmes for the delivery of major infrastructure. If we identify serious gaps in the economy's physical infrastructure, we must find ways of supplying that infrastructure faster than is currently happening. The M74 extension provides a good example: it has been identified as being extremely important because it can provide a critical link and create an economic corridor that can generate employment, but it has taken too long to make necessary progress on the project. We must take proper cognisance of the checks and balances in the system but, whether we are talking about the Markinch interchange, the M74 extension or any other infrastructure project, we need to be sharper about producing the infrastructure.
You said that you will set up an infrastructure investment group. Will it be part of the group's remit to oversee the implementation of the expenditure plan? If so, how will the group work? To which authority will it report? Will it comprise just officers or will it include members, too?
We are still finalising the details of the group, as the minister said. Currently, the intention is that the group will comprise Scottish Executive officials, who will oversee the major projects in all the portfolio departments and report to the Minister for Finance and Public Service Reform. We must have further discussions with local authority interests, to ascertain whether we can capture that sector in the process.
It might be appropriate to widen out the reporting mechanisms. Our minds are not closed on the matter.
Are you saying that there is little potential for delay in the investment strategies? The committee recently considered submissions that raised the concern that the planning framework is not speedy enough or flexible enough to be able to respond to proposals.
It would be less than judicious of me to suggest that there is little scope for delay. The history of major infrastructure projects tells us that there can be substantial potential for delay. As I said, the minimisation of delays is a major aspect of our determination to grow the economy. As members know, we are engaged in a fairly radical review of the planning system in Scotland, the outcome of which will be announced in due course. We hope that the review will make a major contribution to the elimination of delays by reducing as far as possible those delays that are caused by unnecessary bureaucracy and by creating a planning system that complements rather than hinders economic growth.
Are we investing in the right places?
We think so. As I said, the infrastructure investment plan represents the start of a process. The initial work produced by the plan will feed into the spending review 2006 process. It is important that we complement that work by trying our best to maintain levels of investment in public infrastructure, to make up for the ground that was lost in previous years. We must also ensure that we are sufficiently aware of developments elsewhere in the world, so that we can improve our competitiveness and ensure that we are in as good a position as possible to be able to provide the maximum opportunity to people in Scotland.
In his briefing paper on the infrastructure investment plan, the committee's adviser describes
You make a number of points. Thinking on the Executive's involvement in regeneration is developing. I hope that, before this year is out, we will be in a position to make a more definitive statement on how we intend to approach regeneration.
The committee warmly welcomes the infrastructure investment plan, because it is absolutely a step in the right direction. As ever, my question is probably one for officials, but I will pursue a couple of issues that were raised in the budget adviser's report. You have already talked about one of them, minister—if we are to minimise delays in the future, which is clearly the ambition, we need a sense of where the delays arise. There is not currently a commitment in the infrastructure investment plan to monitor outturn against planned budgets, but such an approach would allow policy makers, committees and parliamentarians to say on a planning issue, for example, "These are where the delays arise." Will the officials say whether they think that the report could be strengthened in the future by having some data about recent trends on planned expenditure against outturns? Might that be something that is reflected on in advance of the conference?
Two separate issues arise, both of which are worth addressing. One is monitoring the delivery of projects, which is different from monitoring actual spend. To be honest, we care about the projects a lot more than we care about the spend—Sandy Rosie might say more about that in a moment.
We regard the two ends of the process as important. We have touched on the first, which was identifying almost in advance of projects proceeding what the risks are and the likely bits of preparation that people should be doing. I suggest that some projects go to procurement too early—some of the problems that are encountered in the middle of procurement might have been better dealt with at an earlier stage. On the other hand, as has been said, we do not want to delay projects that will contribute to economic growth. We need to get that balance and all the other aspects right.
It is a point for us to reflect on collectively. I take the point that the data on the extent of underspend in individual departments are available elsewhere. However, given that capital infrastructure underspend is accounted for as being between a quarter and almost half the budget—43 per cent—of total end-year flexibility, for which we have new arrangements in the run-up to SR2006, some clarity about where the worst offenders lie might be helpful in improving not so much the internal monitoring at the Executive, but the quality of policy making in the Parliament as a whole when it takes into account policy or legislative decisions that might impinge on our ability to deliver any of the projects on time. That is why some comparison of who is not managing to deliver against budgets and where outturns are lagging would be helpful in the medium term. I leave that on the table.
That point is well made. I said at the start that we are keen to take on board the thoughts of the committee as the plan evolves and we have listened to what the committee said on that point.
Wendy Alexander talked about monitoring, but is there another issue about programme planning? From my experience, and I suspect from the minister's, in local government, big capital projects characteristically experience delays—there is a built-in expectation that they will happen. I do not want to stray into the transport area, but one can anticipate that legal and other processes are likely to cause delays in some of the significant on-going capital projects.
The central unallocated provision mechanism might make a financial contribution in that respect. Public-private partnerships on schools are a good example. They are not experiencing significant delays, because the requirements were clarified up front and have been stuck to. One of the big lessons that we must learn in public sector procurement is how to decide what we want and stick to it. In my experience before I came to the Parliament, some of the most significant delays were experienced in projects on which the architect's instructions flowed thick and fast. It might even be said that we are sitting in one example of such a project.
We are particularly interested in the mechanism, whether net present value or some other mechanism, by which the Executive seeks to identify which project allocations are justified. We will pursue the Minister for Transport on some of the transport projects next week, so I do not want to get into the detail of those now, but do you, in your role as the Minister for Finance and Public Service Reform, look across the range of projects in health, transport and the other portfolios and try to establish criteria against which you can decide whether the case for the allocations that a particular minister is making is justified? How does that work within the Executive?
The spending review process makes a contribution towards that. I was less involved in SR2004, but I hope to be much more involved in SR2006. I hope that, as we engage in SR2006, we will develop an approach that ensures that the projects that are coming to the fore are considered more strategically.
Will that approach be taken throughout the Executive? One of the concerns that we identified was that different departments within the Executive seemed to be adopting their own approaches and there did not seem to be a clear role for a strategic view of the investment package as a whole. In the context of SR2006, if in future a minister proposes a project that you do not think fulfils a proper set of investment criteria, will that minister be asked to go away and think again?
There is certainly a need for a strategic approach to investment. I would not pretend that the final decisions would be wholly in the gift of the Minister for Finance and Public Service Reform, but the view that I and the officials who support me express should carry considerable weight and at least contribute to the wider debate in the Executive about how we establish priorities. As I said, I hope that, not only in SR2006 but as we move forward, we will continually refine the way in which we make judgments on how infrastructure projects gel throughout the Executive.
What proportion of investment is allocated on grounds other than those that follow from ranking projects according to the criteria that are used in the pre-expenditure assessment? That is perhaps a question for Richard Dennis.
I am not sure that there is an answer, I am afraid. The aim of a pre-expenditure assessment is to ensure that a particular project achieves a positive cost-benefit ratio, that it is good value for money relative to other approaches and that it uses the best delivery mechanisms. If we were to boil down the trade-offs between, for example, a new rail link and a new hospital to the individual cost-benefit ratios alone and the relevant figures were seven and six, that would not give us the right basis on which to make a decision. I am not sure that we could ever produce a cross-portfolio ranking of projects and just tick off the top ones. If we were thinking about where to put a new hospital or which new road to build, we could make a more direct comparison of the costs and benefits, but I do not think that it would be possible to do that across the Executive.
I appreciate that there will always be matters of judgment and that the factors that balance out spending in rural areas against spending in urban areas cannot be numerically assessed in quite the way that other issues can be. However, we go through an elaborate process of making assessments, so how do we monitor the decisions that are made when the numbers do not point to a particular decision but it is made anyway?
Those decisions are for politicians to stand up and try to justify.
Do you agree that, when a decision is so far outwith the parameters that you have set out, there must be some way for the committee or the Parliament to say that the politicians should come under particular scrutiny?
Yes. The committee has the opportunity to speak to different portfolio ministers and, if it has a specific concern on any portfolio, I am sure that it will not miss that opportunity.
I am sure that we will not. We are agreed that there should be arrangements for monitoring the scale and cost of spending that does not fulfil the normal investment criteria, but how could we strengthen those arrangements so that the committee's energies could be directed towards projects that require stronger scrutiny?
We could continually strive to satisfy ourselves that all the indicators that are fed into that process are appropriate. The need to address shortfalls and deficiencies in all of Scotland skews consideration. If we were taking a narrow view, we would probably invest a lot more in the central belt on the basis that by doing so we would improve the infrastructure where the mass of the population is, but that would be inequitable and unfair. There are times, therefore, when other considerations must be factored in and that is when some of the difficulties arise. We need to strive to ensure that the different pieces of information that feed into the indicators and measures are as appropriate as possible.
That is right. I am interested in what would happen, especially post Fraser, if any investment decisions were justified not by the pre-expenditure assessment but by other criteria. It is in our interest to ensure that those criteria are properly explored and identified, to ensure that the numbers arguments do not undermine the interpretation of those other criteria and to identify what mechanism there might be for reallocating funds if priorities change or it becomes apparent that the cost-benefit ratios are not as favourable as they were forecast to be. I assume that you would want to consider those issues as well.
I would.
In an extreme situation, in which a project does not, on the face of it, appear to be justified in cost-benefit terms but there is an overriding political imperative for the project, the accountable officer of the department would need to seek a direction from their minister. The accountable officer is responsible for securing value for money for the public and, if the officer has concerns about a project's value for money, they can seek a direction from the minister, which would be reported to the Parliament. The only such case in which I have been involved arose during my days at the Treasury when we were discussing the purchase of the land on which the millennium dome was eventually built. Ministers are very hesitant about issuing such directions.
You have just underlined the point that that circumstance is extreme. I recall it happening only once in my experience. We want a mechanism that caters for a less extreme eventuality, but which might nonetheless involve appropriate monitoring. Is the level of flexibility to reallocate funds in the light of new information an issue? For example, it might turn out to be cheaper and more effective to build a new flyover in Aberdeen rather than a ring road. How quickly can the Executive respond to new information that suggests a cheaper and better way of achieving the same benefit?
You will be as aware as I am that such decisions can be difficult. If politicians have committed themselves to a way forward and objective information suggests that they need to do something entirely different, it can sometimes be difficult to unhook oneself from the pin. That is a question of the Executive, or any political executive, having the maturity to face up to new information and circumstances and to react accordingly.
You mentioned regeneration in an answer to Andrew Arbuckle. I agreed strongly with you about considering regeneration in the context of opportunity and linking infrastructure expenditure to that. That is what regeneration properly should be. However, it is interesting that elsewhere in the Executive, the social inclusion partnership fund has become the community regeneration fund. That is about not opportunity, but distributing resources in line with criteria that relate to multiple deprivation. Do those different interpretations reflect a lack of clarity throughout the Executive about the meaning of regeneration?
With the best of intentions, the term "regeneration" has been used loosely. Regeneration may have different meanings in different portfolios and in how we use resources. Clarity needs to be introduced in that regard. I hope that when our thinking on the Executive's involvement in regeneration is concluded and we are in a position to make a definitive statement, much of that clarity will be introduced.
We must have more clarity on the issue, because the terms "deprivation" and "poverty" are used interchangeably for different purposes; the adviser's report that we will discuss later makes that point. To an extent, that makes the monitoring process and the policy development process very difficult.
We have heard that big projects tend to overrun and to increase in price. As the minister suggested, no better recent example of that exists than the grotesque overspend on the Parliament building, but there are other examples in information technology, defence and elsewhere. What arrangements are in place for monitoring the delivery of infrastructure investment?
Sandy Rosie will comment on that, but in case there is any risk that I am misquoted, I will say that the considerable overspend produced a beautiful result.
In some people's view.
In many people's view.
I will elaborate on what I have mentioned already. Public authorities have their own governance and accountability arrangements, so when they commence projects, they are fully expected to follow best practice for project management arrangements, to establish the appropriate skilled project teams and overseeing project boards and therefore to conduct directly the monitoring of their progress and to report that up through the appropriate accountability lines. That has largely been the arrangement throughout the public sector.
What proportion by value of infrastructure investment in recent years has been delivered on time, to specification and for the agreed price?
We do not have those figures to hand. However, we will examine the figures that we have and get back to you.
It would be useful to drill down into that and to have percentages on investment that has been delivered.
I return to your previous question on the facts. The most recent relevant report of which I am aware covers the United Kingdom and was commissioned from Mott MacDonald by the Treasury. That report related to so-called optimism bias and concerned delays and cost overruns on conventional projects. The report, which is available, shows a wide range of figures by sector, cites high figures of 20 to 40 per cent in some cases and gives the track record as far as it could be established. However, many issues about definitions and other matters relate to that.
A change in the green book was introduced a few years ago to tackle optimism bias. That reflects the fact that, 10 or 15 years ago, we were all too optimistic that everything would run to time and to budget. Now, the appraisal process builds in contingencies to tackle that.
From memory, can Sandy Rosie say whether the projects that were examined in that Mott MacDonald report performed satisfactorily in respect of time, specification and cost?
From memory, I think that the report did not analyse projects to that extent. It was an attempt simply to record the facts, which your original question sought, on delays and cost overruns. I would need to revisit the report to find out how much analysis it offered.
If we do not know whether performance was satisfactory, one presumes that we cannot know whether it is improving.
I do not know the answer to that. The report was published perhaps only two years ago, so not much time has passed between then and now.
Can you outline what the current arrangements are and what arrangements are being considered for monitoring the delivery of projects on factors such as price and delays?
Mr Rosie has already explained, in deep detail, the arrangements that individual organisations put in place to monitor the progress of projects. Do you want him to restate that?
I am more interested in finding out what the Executive believes about such matters. Is it happy with the current situation?
No, it is not happy. If this or any other Executive were not to pursue a policy of continuous improvement, it would rightly be subject to severe criticism. We seek continual improvements. As I mentioned earlier, some of the school PPP projects are producing procurement processes that are far more satisfactory in respect of time, specification and cost than the processes for previous projects were. In those areas, we need to consider why that is the case and what lessons we can learn.
Given the considerable emphasis that the Executive has placed on improving procurement processes, including the making of new appointments, the committee might find it useful to receive a report on what steps the Executive has taken and what the previous performance record was on issues such as time, specification and price. Given the scale of the increase in capital expenditure, it would be particularly useful to find out what positive steps are being taken to manage the process to ensure that improved performance on those issues is being achieved. We know that there is a continuing problem. Will you report to us on the steps that the Executive is taking to deal with both current and anticipated performance issues?
We will come back to you on that.
By what process does the Executive measure asset performance? That is a bit of a technical question, which might be best picked up by one of the officials.
I am not sure that I completely understand your interest in asset performance. Will you elaborate a little on what you mean by performance?
In the investments that are made in housing or roads or schools—I think that the latter is Sandy Rosie's particular area of interest—does the Executive monitor the annual performance of the assets that are created? Is there a mechanism for dealing with that, as would be customary in a business context?
Do you mean whether, say, in Glasgow City Council's substantial schools investment project, we monitor the educational outcomes over a period of time?
Glasgow's schools project is probably a good example—both Frank McAveety and I were involved in its development—of significant expenditure being made on the basis of particular returns in improved educational performance and in the increased use of the assets relative to what happened previously. Are those figures monitored and assessed by the Executive in a co-ordinated way?
For any major investment programme, no matter whether the procurement route is conventional or PPP, the issue is how the building project performs in terms of life-cycle commitments on maintenance and sustainability. Whereas conventional procurement might involve the maintenance of the building being revisited from existing resources two or three times over a period of 30 years, a key element of PPPs—irrespective of the ideological debate about that method of procurement—is that they involve someone else taking on that risk. The question is about whether the Executive monitors that kind of performance and other outturns, such as whether the project has improved the attractiveness of the assets. Given the issue of educational choice, that issue has been a particular challenge for Glasgow City Council over the past five or six years.
Our contract monitoring arrangements for projects such as schools and hospital PPPs are pretty involved. The process involves important judgments being made on whether the asset is maintained to the same standard 10 years into its life as it was at the start of its life and on whether the asset is as productive as was anticipated. For me, a major benefit of the process is that it will ensure that public buildings, whatever their intended use, do not demoralise people after a period of time but encourage and enthuse people as much 10 years into their life as they did on the days that their doors opened.
I have a follow-up question on the same issue. The minister said in his opening remarks that all investments, not just education projects, would be subject to value-for-money scrutiny. By what mechanism will that scrutiny be undertaken?
The value for money and performance of an asset are closely connected. Two thoughts occur to me. First, when people propose an investment, they are expected to produce a business plan that sets out the point of the exercise and the value of the investment to the public authority's policies. Therefore, the business plan includes the asset's expected performance in supporting education or health or whatever. Its purpose is not simply to deal with the value-for-money numbers that we mentioned earlier, but to define the purpose of the asset. That creates a basis for monitoring.
Does the Executive intend to perform any kind of needs assessment for capital expenditure? In a sense, the project assessments that we have talked about identify appropriate projects and decide what their priorities might be. Does the Executive consider the condition of existing assets, such as hospital buildings or roads? Classically, local authorities and other agencies have performed periodical condition surveys, which examine the state of such assets and work out what investment might be required in them. Does the Executive have a mechanism for doing such an exercise or for co-ordinating such an exercise across the public sector?
We take on board the results of exercises that are performed by public authorities such as councils and health boards. We do not build a new hospital just because we think that it is a good idea. Obviously, an individual health authority will consider its existing stock of goods and the future requirements for delivering health services in its area when it considers to what extent a new hospital might contribute to its achieving the broader targets that the Executive has set for health improvement in Scotland. Similar processes go on in local authorities. We take account of those things.
As part of our general approach to risk management, we in the Executive recognise that estate management plans and planned preventive maintenance are best practice approaches, and we adopt them. We expect anybody who comes forward with a major proposal to have that background in place. For example, the work that local authorities have done on the condition of schools is feeding into the Executive in estate management plans and supporting decisions.
That is fine; I am comfortable with that answer. The question becomes more difficult when you are talking not about schools, for which local authorities clearly have responsibility, but about areas in which responsibility is shared, for example between the Executive and local authorities or local enterprise companies. Is the Executive fleet-footed enough in relation to the strategic acquisition or disposal of land, or other mechanisms that are needed to make infrastructure projects come on stream as quickly as possible? That point might be addressed in the planning bill in due course, but it is not just a planning issue; it is a co-ordination issue throughout the Executive, which was raised in our report on economic growth.
You are right to say that some of that will be contained in the review of planning, which, as I said, will be announced later this year. It is also an important part of our wider consideration of regeneration. Being fleet of foot will be important, because if we are serious about identifying specific areas that will produce economic opportunities for regeneration, we need to have the levers at our disposal, for example to acquire sites where necessary. That is an important part of the thinking on the Executive's overall involvement in regeneration, which we will conclude later this year.
I appreciate that rural Scotland has a different set of arrangements and concerns. However, central to effective infrastructure planning is looking at city regions—particularly in the west of Scotland and perhaps the Lothians—and finding a way of driving forward the key projects that are required, not on a local authority basis but across local authority boundaries. The real economy operates on a conurbation basis, rather than within local authority boundaries. You may not share my view that local government reorganisation 10 years ago had a severe adverse effect on the capacity of conurbations to plan, co-ordinate and respond, but only the Executive is in a position to make good some of the co-ordination shortfall, perhaps through a leadership role rather than a delivery role. There is a gap, which has affected infrastructure planning adversely.
I do not think that our views on the 1995 local government reorganisation differ greatly. Our agenda for public sector reform is predicated on addressing some of the structural deficiencies and on doing so without over-concentrating on boundaries, but instead concentrating on the way in which public authorities can work together administratively and in a policy sense. I agree that we have a reduced capacity to take a more regional view. The retail sector provides a good example of an area in which developments crop up that have a detrimental impact on footfall in major city centres. We have to take a wider view and ask whether we want to continue to go in that direction and what impact the regionalisation of retail is having on our city centres. Taking a city region view will help to address that.
We have no more questions, so I thank the minister and his officials for coming. As I said, we have the Minister for Transport here next week, so we can ask him about specific transport issues that concern us.
Thank you. What I said at the start was genuine—we want very much to interact positively with the committee as we progress the plan. We will take on board what you say.
I am sure that the committee echoes that sentiment and wants to engage in the process.
Meeting suspended.
On resuming—