Official Report 233KB pdf
“The First ScotRail passenger rail franchise”
The second item on the agenda is a section 23 report. Last week, we started our discussion on the extension of the First ScotRail franchise. Today, we will take further evidence from the Minister for Transport, Infrastructure and Climate Change, Stewart Stevenson MSP. We will then hear from Robert Black, the Auditor General for Scotland. Minister, I welcome you to the committee. I am aware that you need to attend another committee, so we will try to stick to our agreed time. I invite you to make introductory comments.
I apologise for the change of supporting personnel, which is due to illness. I hope that that does not influence the committee—I do not believe that it should. Thank you for the invitation to be here.
Thank you, minister. I have a couple of general questions to ask before I open up the discussion to other members of the committee. Were you aware that investigations were being undertaken by Transport Scotland into complaints about Mr Houston in relation to other contracts and other pieces of work?
I was not aware of that.
Okay. Did you or Mr Swinney make known at any time to senior civil servants or to senior officials in Transport Scotland that you believed that Mr Houston should leave?
I am not prepared to discuss that subject, convener. Matters to do with the employment of civil servants are for the permanent secretary, not for ministers.
I understand that. I am not trying to pursue any line of inquiry into the employment contract; I am asking whether you or Mr Swinney indicated to senior civil servants or Transport Scotland that you, as ministers, believed that Mr Houston should leave his post.
The beliefs of ministers are quite irrelevant to the employment situation of any civil servant.
That is as may be, but I am asking whether you indicated either to civil servants or to Transport Scotland that you thought that Mr Houston should leave.
Convener, I am simply not going to be drawn on a subject that is a matter for the permanent secretary.
No, I am not asking about the permanent secretary's decision. I am asking what you and Mr Swinney said in your capacity as ministers either to civil servants or to Transport Scotland in relation to Mr Houston's employment. Did you indicate that you, as ministers, felt that he should leave his post?
Convener, ministers have absolutely no evidence to suggest that any malfeasance occurred to justify action being taken to force that man to leave office. I am not going to discuss the matter further, as employment matters are for the permanent secretary.
But Mr Stevenson, I am not asking about employment matters. I realise that such matters are the responsibility of officials. I am merely asking whether you or Mr Swinney indicated either to senior civil servants or to senior officials in Transport Scotland that Mr Houston should leave his job.
Convener, I am going to keep repeating that we had no evidence of any malfeasance or dereliction of duty that required us to make comments to the civil service. At the end of the day, the performance and employment status of civil servants are entirely matters for the permanent secretary and others in the civil service. If I may say so, convener, we are heading into very dangerous territory if we are suggesting that ministers—or members of the Scottish Parliament, for that matter—should be involved in any way in the employment status of civil servants. The separation between the political decision-making process and the employment of civil servants is important, and I think that, like me, people in this room wish it to be preserved.
I agree entirely, and I do not suggest that there is any evidence of malfeasance. I am asking a simple question: did you or Mr Swinney indicate either to civil servants or to officials in Transport Scotland that you believed that Mr Houston should leave his job?
I am not prepared to put myself in the position, in any answer to this committee, of suggesting that there were any grounds for taking action to cause that man to leave employment. I am simply not prepared to respond further in any way that would suggest that there were grounds for terminating the employment of any civil servant.
I note what you are saying, Mr Stevenson, and I will seek further advice on your unwillingness to reply to the specific question that I asked. I am not trying to draw you into any of the wider areas to which you referred. I will leave it there for the moment.
The convener's raising of that point with Mr Stevenson reminded me a lot of the Jeremy Paxman interview with Michael Howard. As you will recall, he was asked repeatedly whether he played any role in the sacking of a senior civil servant. I would have thought that this situation—
Excuse me, convener.
Can I let Mr Stephen—
No. Convener, if I may—
Mr Stevenson, I am chairing the meeting. I will let Mr Stephen finish, then I will allow you to respond.
Everyone on the committee understands your point, minister, which is that ministers should not play a role in issues relating to the contract of employment of a senior civil servant, whether disciplinary action has to be taken or whether there requires to be a dismissal. However, as we all know, ministers may state their views and opinions, and they may raise issues with senior civil servants. You have gone out of your way to emphasise your belief that there should be no ministerial involvement in such matters. I would think that it would be very easy to give a direct and honest answer when the convener asks you whether you or Mr Swinney got involved, played any role or expressed an opinion on the removal from office of Mr Houston.
In his remarks, Mr Nicol Stephen used the words
I entirely accept what you say about impugning anyone's integrity. However, if you could assure us that neither minister was in any way involved, there would be no need to explore the matter further.
Exactly, convener. Mr Stevenson could simply state, "No, ministers did not get involved in any way and did not seek to influence the civil servants." If you were able to give the simple, straightforward question a simple, straightforward answer, Mr Stevenson, the matter would be resolved. The problem is that you seem unable to give such a straightforward answer—in the same way that Michael Howard was unable to answer the question that Jeremy Paxman asked 13 times over. I do not understand why you cannot give that simple assurance this morning. Unless you can explain that, I will continue to be bemused by the matter.
I hope that I can be direct and unambiguous. A former minister of Mr Stephen's experience should understand that the employment status of any civil servant is entirely a matter for the civil service—ultimately, it is for the permanent secretary. I have already seen the real dangers of our opening up this discussion in any way, shape or form, given Mr Stephen's use of the words
We will reflect on that.
No discourtesy is intended, convener—please accept that.
I do accept that.
Good morning, minister. You can perhaps appreciate the committee's difficulty. When we took evidence from him last week, Malcolm Reed of Transport Scotland put up a robust defence of his actions and the actions of Transport Scotland in relation to the way in which the renewal of the ScotRail franchise was handled and in relation to Mr Houston's role. Mr Reed was quite clear in his evidence, which is all in the Official Report, when he said:
I absolutely acknowledge what Mr Fraser says. I must say that I have absolutely no knowledge of the decision-making process that was involved in the departure of a senior member of Transport Scotland staff. The answers that were given by the permanent secretary must stand on the record.
But, as minister with responsibility for transport and for Transport Scotland, would it not be a matter of concern to you if civil servants who were involved in that agency's employment matters were using public money as, for example, a pay-off to a member of staff who had become an embarrassment?
I can make no comment whatever on any financial issues around this matter. I have no knowledge of them. Ministers are responsible and accountable for the decisions that are made. That is the proper responsibility of ministers. Issues of employment are, of course, a matter for the permanent secretary.
Surely matters involving public money are of concern to you, as minister.
Of course money is a matter of concern to me, as a minister, but I have absolutely no knowledge of the circumstances of the departure from Transport Scotland on which you are trying to draw me. The person of whom you could ask the question is the permanent secretary. You did that last week, and his answers are a matter of public record.
Indeed they are. You appreciate my concern: we are dealing with public money, yet nobody is prepared to give this committee of the Parliament an answer as to whether or not public money was spent in this connection.
I have no knowledge of whether any money was involved at all. It is entirely a matter for the civil service.
So you deem it acceptable that the matter is entirely secret, and that there is no public transparency at all about how public money may or may not have been spent.
It is an issue that you must pursue with the permanent secretary.
We are all trying to seek out what actually happened. I am uneasy about this situation. Are we in danger of asking you, as minister, to breach confidentiality? Is that the basis of your reluctance?
You have to understand that I know nothing of the circumstances of the departure of an individual from Transport Scotland. That is a matter of his employment status with the civil service, and all questions on that matter must be directed to the permanent secretary. However, you are correct: if I were aware of the circumstances, I would be bound by the same laws to which the permanent secretary referred when he spoke to the committee last week.
I do not want to ask about the circumstances of Mr Houston's departure, but when did you first become aware that he had shares in FirstGroup, the holder of the ScotRail franchise?
It was a matter of public record. I signed off the annual report for Transport Scotland, which indicated that such a declaration had been made.
So you knew that he had shares in FirstGroup. Because of that, did you worry at all about his involvement in the discussions on the franchise extension?
As has been made clear, Mr Houston's involvement post-dated the decision.
Were you worried about it at all? I would have been if I were in your position.
Given that it post-dated the decision, no.
Not at all?
No.
Why not?
Because the decision had been made without Mr Houston's involvement.
But he was around. He was part of the establishment and the structure at the time. Did you not think that it was strange that he was taking part in discussions and procedures around the extension of the contract?
You were told last week by the chief executive of Transport Scotland that Mr Houston played no part in the decisions.
But I am asking you—
Forgive me, Mr Foulkes, but you are asking me whether I was worried about something that did not happen. I was not worried about it, because it did not happen.
Imagine the public perception of the situation: a senior executive of Transport Scotland has shares and share options in FirstGroup and you, as minister, know that the franchise is being discussed. The public perception would be that that was strange. Did you not feel that perhaps you should have taken some action and intervened in some way?
Given that Mr Houston was not involved in the process, no action required to be taken. In addition, I think that ministers are entitled to rely on the existing proper process for managing interests in the civil service, just as in Parliament.
Did you inquire at the time whether he was taking part in the process?
It was very clear that he was not taking part in the process.
How was that very clear?
It was very clear because the work was being done in a different functional area of Transport Scotland from the one that Mr Houston worked in.
But he was still involved very much in the work of Transport Scotland in relation to the rail franchise, was he not?
No.
Not at all?
That was the responsibility of Bill Reeve.
So he had no part whatever in the franchise extension.
Until the decision was made, he had no involvement.
Although he was a member of the investment decision-making board.
I simply have to go back to the evidence that the chief executive gave you last week. I think that there is no evidence whatever of Mr Houston's involvement in the decision-making process. In any event, there were processes within Transport Scotland, as there are throughout the civil service, for managing interests. I note that the Audit Scotland report does not suggest in any way, shape or form that Mr Houston was involved in the decision-making processes. That is something upon which we should rely, together with the existence of the appropriate processes and the public declaration of interests that ensured that the information was in the public domain.
Given all the answers that you have just given me, were you not surprised when Mr Houston resigned?
It is not a matter for me to be surprised or unsurprised about the employment status of any member of the civil service. If you will forgive me, I will not comment further on that subject.
But I have heard you comment on so many other things about your brief. All I am asking you is, when you heard about his resignation or read about it—or however you found out about it—what was your reaction?
My brief does not include responsibility for the employment status of a single civil servant.
I am not asking you about your responsibility. You must have had a reaction. Were you surprised, pleased or shocked? Did you take any action as a result?
I am not going to respond to questions about the employment status of a civil servant.
You say that you regret feeling discourteous to the committee. I put it to you that you are not being discourteous; you are being evasive.
I am not supplanting the proper role of the permanent secretary in civil servant employment. I do not have that role. It is not for me to take over any of the responsibilities of the permanent secretary in that regard. I do not think that anyone is suggesting that I should do so. Given that that is the case, you should simply accept that it is not for me to make the kind of comment that you wish me to make.
I want to pursue one issue. You say that there is no evidence of any malfeasance and you state categorically that Mr Houston was not involved in the franchise extension in any way and therefore did not influence the decision in any way. Given all that, would you agree that there was probably no reason for Mr Houston to leave his post with Transport Scotland?
People leave posts for a huge variety of reasons, and I have no knowledge whatever of Mr Houston's thinking when he left Transport Scotland.
Yes, and I presume that the decision was his, without any influence or interference from elsewhere. However, my point is that there was no reason relating to the franchise extension for Mr Houston to leave his post. If he had other reasons to move on, that is entirely for him, but, as far as the franchise extension is concerned, there was no reason for him to leave his post.
I am entirely unaware of any such reason.
Can you confirm that the first that you knew of Mr Houston's shareholdings in FirstGroup was through Transport Scotland's annual report?
I do not want to give false certainty. I was certainly aware of the issue at that stage. I cannot recall it being brought to my attention prior to that.
When you were asked to sign off the annual report, for how long had Mr Houston been in office?
Again, I do not wish to give false certainty. I simply say that I believe, based on what I have read elsewhere, that Mr Houston had been in office since 2006.
When were you asked to sign off the annual report?
Again, I cannot give an absolute date. We can get the publication date for you. I certainly would have signed off the annual report in advance of that, for rather obvious reasons.
I understand that.
It would have been early autumn at the latest.
I presume that you can provide the dates to the committee.
Oh yes, we can certainly do that.
Either before signing off the annual report or subsequent to it, were you at any point given advice on how to handle Mr Houston's interest? For example, it would obviously have been inappropriate for you to raise issues with him relating to FirstGroup. Were you given any such advice?
It would not have been appropriate for me to be given such advice because, under the civil service code, it is for the person who has an interest to handle their interest, just as members of the Parliament have responsibility for handling their interests. The responsibility is an individual one within a framework that is set down.
So in any meeting at which Mr Houston was present, you would have expected him to raise the issue if you strayed into areas of discussion that involved FirstGroup, which you could normally and innocently have done. Is that how you would have expected the situation to be handled?
Any civil servant or member of the Parliament must recognise when they are at a point at which an interest has to be declared or other action taken. I would expect that to be the case with any civil servant and any member of the Parliament.
My difficulty is that the civil service code does not state that. It makes it clear that it is for the individual to declare the interest—
Yes, that is my point.
But it goes on to say that the department should take appropriate steps to handle that interest. I would have thought that a fairly obvious appropriate step to take would be to ensure that a minister was informed of an interest, and that it would be inappropriate to discuss with an individual the interests of a significant transport company if he had a shareholding in it. Will you confirm that that did not happen in this case? Nothing was explained to you and you did not set down at ministerial level a procedure or protocol for handling the interest.
It is not for me to handle the interest; it is for the individual, just as we as MSPs handle our interests.
As I just explained, that is not the case under the civil service code, which makes it clear that the department must respond to the interest and decide whether, for example, shares should be sold—that is an option under the ministerial code—or whether other action should be taken. What other action were you aware of Transport Scotland taking in relation to Mr Houston's interest? It is clear that Transport Scotland did not require the shares to be sold.
The committee questioned Transport Scotland's chief executive and the permanent secretary on the subject last week. Their answers described the processes and procedures that were in place to deal with civil servants' interests.
Are you concerned that the first that you knew of that important interest was when you were asked to sign off the annual report?
It is important to return to the point that there is absolutely no evidence that the existence of an interest had a material effect on anything. It is also important that civil servants at all levels—who may have a huge variety of interests—take responsibility for managing their interests. The situation would be impossible if they did not have individual responsibility for which they were accountable.
I am surprised that your view continues to be that the matter was solely for the civil servant involved. I am trying to find out whether you are concerned by any aspect of the situation, but I am not receiving clear answers.
I was informed of the fact of his departure, but I do not recollect in what circumstances or who told me.
Am I correct in saying that you can provide that information to the committee?
I expect so, but I do not want to give false certainty. I think that the issue came up in conversation in another context, rather than in a formal notification to me. I am preparing the ground in case I cannot provide absolute certainty, but I can say with certainty that I was informed that Mr Houston had left Transport Scotland.
That information would be helpful. I assume that, irrespective of whether the issue came up in conversation, Transport Scotland formally notified the permanent secretary or ministers of the position.
I cannot comment on what the permanent secretary was told—that is a matter for him.
We can find that out.
I would not normally expect a formal notification to ministers, but I accept that it is clear that ministers were told about the position in this case. A formal note to ministers is not normally provided on such a subject. As the former ministers in the room know, civil servants leave all the time, and I do not think that there has ever been a formal process for making ministers aware of that. When another senior civil servant left I was told about it, but I do not believe that I received formal notification.
If you can check e-mails and letters, that will be fine.
We are content to do that.
Surely ministers should know about an official's declarable interest. We are talking not about any official but about a key official and about the finance for and organisation of a major project. The minister will understand our concern. We keep hearing that the director of finance and corporate services played no part in decision making, but he was present at meetings at which decisions were discussed, so he was privy to confidential information.
I simply fall back on what the chief executive said to the committee last week, which was that the organisation recognised that it had to consider the recording of people's presence or absence at particular points in meetings.
I suggest that ministers should know about such interests because they may end up in front of a parliamentary committee, being answerable to Parliament—as is happening to you. That issue should be thought about deeply.
Ministers will always tak tent of audit reports and what the committee has to say.
Andrew Welsh makes a valid point. What we are saying today and what we said last week is not a criticism of you or your actions per se; it is a concern about a system that puts ministers in an invidious situation. To some extent, whether ministers were involved in other matters is neither here nor there—we can pursue that. The important discussion is about the implications of the role of the individual concerned and how that clouds the wider issue. We have raised our concerns with the permanent secretary, but I hope that you will convey to the Cabinet Secretary for Finance and Sustainable Growth and the First Minister the concerns that we have articulated so that the process is given some consideration to ensure that ministers are not placed in such a situation in future.
It might be useful if I say to the committee that it can be absolutely assured that this minister, the cabinet secretary and all members of the Government will take very seriously what a senior committee of the Parliament—it is appropriate to describe the Public Audit Committee in those terms—might say. As with all reports, we will ensure that, if opportunities emerge for us to improve and tighten procedures, we will seek to do that.
Thank you, minister.
I would like to clear up one issue in regard to Mr Houston's role. The minister stated that Mr Houston had no input on the franchise extension until that decision had been made. We should bear it in mind that an extension was being considered because the existing arrangements were no longer fit for purpose. When new arrangements were considered, an appraisal process would have had to take place that involved analysis of the financial impacts for Transport Scotland and included a review of performance-based payments. Are you telling us that Transport Scotland's finance and corporate services division had no input into that process?
As the Audit Scotland report says in paragraph 71:
Are you stating that Transport Scotland's finance and corporate services division had no input into the process? Are you trying to separate Mr Houston's role from that of the division?
I am being asked about Mr Houston and I am making it clear that the Audit Scotland report reinforces what has been said by others: Mr Houston played no role in the decision-making process. It was for the rail part of Transport Scotland to pursue the issue and it did; it also engaged external consultants to assist it.
Do you not agree that in pursuing the issue it would have had input from the finance department and that, as the director of finance and corporate services, Mr Houston would have been responsible for that input and therefore involved in the process?
It was a matter for the rail part of Transport Scotland. The directorates involved were rail delivery, and strategy and investment—neither of which was the responsibility of Mr Houston.
Convener, we have spent 41 minutes asking basically the same question on the same subject, and we have limited time in which to ask the minister other questions. As you know, some of us arrived in plenty of time before the meeting to prepare for the session; it is a wee bit discourteous that the agenda has been, to an extent, grabbed by members who came in very late and have used up valuable time asking the same question.
Mr Coffey, the time at which members arrived at the meeting is irrelevant to the questions that they have asked. Given your concerns, you could put your question now.
I will focus on the business case. The Audit Scotland report stated that
Paragraph 56 of Audit Scotland's report states:
It was suggested that the presentation to you was no more than a set of slides, but Audit Scotland's report described the appraisal process as "rigorous". It is difficult to see where the middle ground may lie between those two positions. What was the nature of the documentation and so on that you were given to enable you to make the decision?
It is true that a set of high-level slides was used to focus the discussion at the decision-making meeting, but you should be clear that the meeting was by no means the first engagement of ministers. As you would expect, given my personal interests, detailed figures had been examined at various stages. Ministers have looked at a number of the underlying assumptions and workings over a period of time. The presentation at the decision-making meeting pulled together the key facts that had been drawn out from the work of Transport Scotland and the external consultants, so that ministers could see that the decision that they were about to make was sensible.
Paragraph 73 of Audit Scotland's report states:
It was a legitimate course of action. In my professional life I have become extremely familiar with the issue of market sensitivity, as have other members of my family who have worked in financial services. It was no surprise to me personally, as a minister, when that issue was raised as something that inhibited our ability to go public at that stage.
I accept much of what you say, particularly with regard to the financial regulations that are in place, but we are discussing a large project that involves a large sum of public money. Are there any other instances within your department or other Government departments in which further external information or advice has been sought before awarding a project?
Projects come in all shapes and sizes. On Friday, for example, we signed a £320 million contract for the 11-mile M80 extension, and we have also signed a contract worth more than £400 million for the M74. Each project is dealt with in the most appropriate way.
James Kelly has a question about the role of the Cabinet.
You have acknowledged that the contract was significant. What role did the Cabinet play in taking the decision?
The decision was made by ministers.
Did the Cabinet have sight of the documents relating to the contract? Did it authorise the decision?
The decision was made by me.
So the matter did not go to the Cabinet—the decision was made by you, as the Minister for Transport, Infrastructure and Climate Change.
The decision was made by me.
Without any discussion in Cabinet?
That is correct.
You mentioned that, before you made the decision, you considered alternative options. What were they?
There were three main headings. One was simply to do nothing, which is a standard option that one would expect to consider in such circumstances. The second was to seek to renegotiate the contract as it stood, with the franchise running to 2011. We saw that in 2006-07 First ScotRail had looked to reduce spending on advertising, for example, so there were already warning signs that the approach of the point at which 80 per cent of new revenue would be returned to the Government was starting to change behaviour in the company. That was a key issue in turning us away from doing nothing.
You seem reasonably confident that your decision was robust. Why did you rush out the announcement during recess, instead of making a statement to Parliament?
The original franchise was also announced during recess. We looked at the processes and procedures that were followed at that time, and we followed them to the letter. We were concerned about commercial confidentiality. Today's newspaper reports that an Edinburgh company has been fined by the Financial Services Authority in relation to disclosure—disclosure of a different character, I hasten to add. We thought that there was no reason to delay and that there was a reason to proceed. We followed exactly the same processes that were followed when the original franchise was announced during recess.
In retrospect, do you not think that it would have been better for you to have made the announcement to Parliament and answered questions on it?
I did answer questions on it, and there was also a statement. I have seen nothing to suggest that we should not have announced the decision when we did—immediately before the start of the new financial year, which was a matter of some importance for decision making.
I have a related question. Are the procedures of Transport Scotland different from those of any other department of Government?
I am not sure that I am equipped to answer that very general question. It is perhaps a question that the permanent secretary could more readily answer, although individual departments will clearly have to do certain things in different ways. I do not think that I can be more specific than that unless you make your question more specific.
Well, can I just ask—
Sorry, George, but the minister has to leave. Nicol Stephen has another question, but we do not have time—
I have another question, too.
If we have further questions, minister, we will put them to you in writing. I am aware that you have another parliamentary commitment and that we need to conclude our questioning. We will reflect on your earlier comments and your unwillingness or inability—however you want to describe it—to answer the questions. I acknowledge some of the points that you have made, but we will have to seek further advice on the matter. Thank you for your time and evidence this morning.
Thank you, convener.
I suspend the meeting for a minute to allow a changeover of witnesses.
Meeting suspended.
On resuming—
The next part of our discussion on the First ScotRail passenger rail franchise will be with Robert Black, the Auditor General for Scotland. He is accompanied by Barbara Hurst, director of public reporting at Audit Scotland; Angela Cullen, assistant director of public reporting; and Mark MacPherson, portfolio manager.
It might be helpful to the committee if I quickly touch on the issues that arose in Dr Reed's evidence. I would be happy to answer the committee's questions on those issues, and this might help your consideration of them.
Thank you for that helpful clarification of the clearance process for the report. For absolute clarity, I take you back to Dr Reed's comments. He said that, just before going to print, "significant further revisions" were made to the report that had not been discussed previously. Is that the case?
The only issue that arose was the matter relating to the shares and share options that were held by the director of finance and corporate services. That issue was not brought to the attention of the Audit Scotland team as they were doing the work; it emerged relatively late in the process when the team were doing the due diligence check of everything around the project. The team drew my attention to the fact that there was a declaration of interest accompanying the accounts. The Audit Scotland team discussed that with Dr Reed and his colleagues. I took the view that it was most certainly a material interest and therefore required it to be introduced into the report. It is factually accurate and the judgment to include it in the report was mine.
So, had Transport Scotland made your team aware earlier of those facts, there would have been no need to make a revision to the report.
That is correct. Had the Transport Scotland people drawn the attention of the Audit Scotland team to the matter earlier on, it would have been in the draft report that went for clearance at an earlier stage and it would have been in the draft report that came to me.
Once you decided to make the revision, was there any discussion with Transport Scotland about it?
Yes, there was. Barbara Hurst, the director of our performance audit programme, had conversations with Dr Reed and possibly some of his colleagues.
How do you or your colleagues respond to the claim made by Dr Reed that Transport Scotland did not have the opportunity to engage fully with Audit Scotland on the matter?
I am satisfied that it had a full opportunity to engage, but I would be happy for Barbara Hurst to fill in the background to that more fully.
Dr Reed is absolutely right that the late revision to the report concerned the shares and share options of the director of finance and corporate services. We discovered the situation late in the process when Mark MacPherson was reviewing Transport Scotland's annual accounts. I need to say to the committee that, when we discovered that, our immediate thought was, "We cannot publish a report without including this in the report." That was before we had spoken to the Auditor General. We were all clear that it was a significant issue—I could rerun the movie of when we discovered it, but I will not do that because I am sure that members are not interested. It was so significant for us that we knew that we had to tell the Auditor General.
So, on Transport Scotland's behalf, the chief executive had a clear opportunity to have a discussion on that point.
Absolutely. We had several discussions on that point. In addition, I alerted Dr Goudie's office to the fact that our report would include a paragraph that made reference to the shares and share options of Transport Scotland's director of finance and corporate services.
Is Dr Goudie the accountable officer?
He is director general for economy within the Scottish Government.
I seek a little more clarity on this issue as—my wife is the auditor in our family—I do not fully understand the audit process. It would be helpful to hear a little more explanation on how the audit process works. At what point would one normally expect a client to disclose material information such as a shareholding? Barbara Hurst said that Mr MacPherson discovered Mr Houston's interest when looking at the annual report. Would one normally expect a client to be proactive in disclosing such material information to the auditors?
Given that we thought that the shareholding was of such significance, we would have expected it to have come up very early in the day. Our initial meetings were with the director of finance and corporate services. We should remember that we were involved in an unusual project. When we kicked off the project, it was about the management of the rail franchise. Halfway through, we added in an objective about the rail franchise extension, which was announced while we were undertaking the audit. There were a number of occasions on which the interest could have been disclosed, but we picked it up only from the annual accounts.
The point that I am trying to get at is this. In the normal course of events, would one expect a client to be proactive in disclosing such a material piece of information?
Personally, I think yes.
Let me just support Barbara Hurst on that point. The answer to that question is unequivocally yes. We expect audited bodies in Scotland to operate to the highest standards of governance, which they generally do. I would reasonably have expected the Transport Scotland team to draw our attention to such a significant matter, not least because I know that a number of the conversations and exchanges that took place with the Audit Scotland team were with Mr Guy Houston.
Before I bring Nicol Stephen into the discussion, I want to clarify something. We have been told by Transport Scotland and by the minister that Mr Houston had no involvement in the franchise process. Why was Audit Scotland discussing a report on the franchise with Mr Houston?
As part of the process of undertaking an audit, the general practice in Audit Scotland is to have a point of contact—or perhaps a series of points of contact—with the audited body with whom the auditors can engage as they do the work. Mr Houston was one of the people with whom the audit team engaged.
When we kick off an audit, the director of finance is often our initial starting point, just because that is the process—
Before Barbara Hurst goes any further, let me say that I understand that that would be the normal process. However, we are not talking about a normal contract or a normal process. We are talking about a situation in which, according to Dr Reed, the individual was specifically excluded from the franchise process. If he had no part in the process and no knowledge of what went on, why was he involved in the discussion?
That question is best answered by Transport Scotland. As I hope we have indicated, we certainly had no knowledge of the director of finance's particular private interest in the issue. That would certainly have affected how we suggested to the Transport Scotland team that they should engage with the auditors.
I think that we need to follow that up with Transport Scotland, but—
I should clarify that, after the discussion with the director of finance, he immediately passed us on to the people from whom you have taken evidence: the rail franchise team dealing with the issue.
Okay. Did he at any point say anything about his shareholding?
No.
Convener, as your questions have covered the issues that I wanted to begin by asking about, I will ask a couple of follow-up questions. With the benefit of hindsight—or at least with the benefit of the knowledge that you now have about Mr Houston's shareholdings—do you think that it was appropriate for him to be involved in the initial meetings?
That is a hard one to call. We would have expected Mr Houston to have said something at that point. As I think Mark MacPherson can confirm, he was not involved in the detailed discussions that were undertaken as part of the audit.
That is correct. We had no real dealings with Guy Houston beyond the very initial meetings.
So there were several meetings.
During an audit, there are lots of meetings with different individuals.
But there were several meetings with Mr Houston.
I am not sure that I can offer you a certain answer to that, because I was not directly involved at that stage. There might have been one meeting; there might have been a couple. I can say for certain that Mr Houston was not involved in the meat of the process.
Given that Mr Houston attended at least one of the meetings, given that you, as auditors, were unaware of his investments in FirstGroup, and given the adjustment that you made to the report—which you say was the only substantive change that was made and was not one of a series of changes—were you shown during the final stage in the process or have you since been shown the conflict of interest arrangements that Transport Scotland put in place as a result of Mr Houston's shareholding?
I refer the member to paragraph 71 of our report. In my conversations with Dr Reed, I explained the significance of the issue and why we felt that it needed to go into the report. I asked him about the arrangements that Transport Scotland had in place to ensure that the director of finance and corporate services was not involved in the decision making. I realise that English is a very rich language, but we were very careful with the language that we used to reflect that in the report. You should remember that we were at a late stage of the process; we made it clear that the issue had to go in and Dr Reed told me about the systems that Transport Scotland put in place. In paragraph 71, we very specifically used the phrase
Did you see a written version of the arrangements, or did you receive only a verbal explanation of them from Transport Scotland?
It was a verbal set of arrangements. It might well have been included in some of the e-mail traffic—I do not remember—but we did not see a formal document. [Interruption.] Sorry—my colleague has just reminded me of the register of interests, which is the key document.
As you probably understand, I am looking beyond the register of interests, which is what triggered the knowledge, to the next stage. What action did the agency take with regard to this interest? Was it set down in writing for you, or was it simply explained to you verbally by the head of Transport Scotland?
I will unravel that a bit. The issue was verbally explained to me by the chief executive of Transport Scotland. We have not seen a formal document saying, "This is the arrangement," but I am not saying that such a document does not exist.
I understand that. We asked for that document last week and were told that we would be given it. I am just trying to clarify that it was never shown to you as part of the audit process.
No, but you must remember that we raised the issue with Transport Scotland pretty late on in the process.
I understand that and the explanation that you have given.
I seek some clarification to ensure that we are absolutely clear about all this and that it is on the record. Is it the case that, until Mr MacPherson came across the reference to Mr Houston's interests in the annual report during his stage of the audit process, the information had not been drawn to your attention by anyone in Transport Scotland—and specifically not by Dr Reed?
Yes, that is the case. What I have learned from this experience is that I should pay a bit more attention to organisations' annual reports, which, I have to say, I do not drill down into in great detail when they cross my desk.
When you discussed with Dr Reed the late revision to the report, did he think that the comment should be included, or was his preference that it should not be put in?
I remember that I did not want to make the phone call because, as you will appreciate, I knew that the conversation was going to be difficult. However, it was not as difficult as I had expected; I think that Dr Reed understood where we were coming from. You will need to ask him whether he would have preferred the comment to have been put in or left out.
But he did not express any preference to you.
Not at that stage. Later on, he said to us what he said to the committee, which was that he did not think that this was a material issue.
He indicated to you that, as he did not think that it was a material issue, it should not be included.
I think that he was very keen for the wording to be very precise if we were going to include it. I understood his reasons for that, which is why we shared the wording with him.
My questions are on the same theme, as it is of concern to members. The role of the director of finance and corporate services is discussed in paragraphs 70 and 71. I realise that you have probably answered this question many times now, but did Transport Scotland receive the text of those paragraphs for its response, or was there simply a discussion of the issue?
I can categorically tell you that Transport Scotland got those paragraphs. I sent them directly to the chief executive by e-mail and received a response acknowledging that e-mail.
That clearly raises an issue, convener, because Ms Hurst's response conflicts with what Dr Reed said last week. I should say, though, that Dr Reed was not specific or clear about the issues that were being raised at a late stage; he simply said that significant issues were raised at a late stage that he had not been given an opportunity to discuss. If this was not one of those issues, what were they?
On a general point, the procedure that I expect Audit Scotland to follow—and which has stood the test of time and received the support of the Public Audit Committee and the former Audit Committee ever since we started in this business—is that a draft of a report, including all the key findings, goes to the accountable officer no less than three weeks before we want to commit to publication. In other words, accountable officers have three weeks to consider the report. We also try to ensure that there are no surprises. The department, the agency or the organisation in question has a general indication of how the process is moving along, which should make the clearance process easier.
Helpfully, Audit Scotland always produces a summary document as well as a main document. I see the issue discussed in paragraphs 70 and 71 of the main document—I mentioned them a moment ago—but I see no mention of it in the key messages in the summary document. Is there a reason for that? Was there a timing issue?
It is always difficult to get the right balance in an executive summary. Over the years, we have found that people welcome the publication of an executive summary, but it tends to be more challenging to produce one when we are considering matters of governance.
Audit Scotland has a duty to report all significant issues to the Public Audit Committee and to Parliament without fear or favour. The case that we are discussing is a surprise because, for the first time, basic facts are being questioned by the audited organisation. Audit Scotland has always been involved in a two-way, detailed process with the organisations that it audits, and its reports are always produced with great care about the wording. Perhaps the case is a wake-up call for us to remember what the committee and indeed Audit Scotland are about. To my mind, important issues have been raised, including the accuracy and efficacy of the advice that is given to ministers and the Government and openness in decision making.
I ask Angela Cullen, who is closer to the detail of the audit, to answer that.
As we say in paragraph 68, the original contract did not specify the criteria. Transport Scotland told us that criteria had been established and approved, but we could find no formal record of who had approved the criteria or when.
I will add a little more detail on that. There is clear evidence from our review that criteria were developed. All that we are saying is that it is not clear at what stage and by whom they were approved. That fits in with our assessment that there was a rigorous appraisal process and that management had all the information that we considered they would need to make the decisions that they made.
There are lessons for us, lessons for the Government, and lessons for every organisation that is audited by Audit Scotland about the standards of conduct that we should all expect in looking for best practice and value for money. Our ultimate duty is to the public of Scotland.
The minister and all our witnesses from Transport Scotland said that all Mr Houston's involvement was post hoc—after the event—so why are you worried about it?
Dr Reed has given us assurances that Mr Houston did not take part in the vote on the project—I think that that was the phrase he used. Given the insufficiency of the records, on the basis of the evidence available to us, the audit team cannot provide a positive assurance on that.
Why do you not accept Dr Reed's assurances?
Because it is the nature of the audit process for us to proceed on the basis of the evidence that is available to us. That is the robust basis on which all our work is undertaken. I am not sure whether you have the report in front of you, but exhibit 10 on page 20 sets out the project's timeline. We know for a fact—because it is documented—that on 19 March, Transport Scotland agreed the proposal to seek ministers' views and that Mr Houston was present at that meeting. I understand from the briefings that I have had from Audit Scotland that, prior to that late stage, the documentation was not all that it should have been. Therefore, we do not have a reliable record of which meetings took place, which of them Mr Houston was present at, or what role he played. As I record in the report, we have had to rely on the assurance of the chief executive, Dr Reed, on those matters.
The committee was caught somewhat flat-footed, because we pressed very hard on the impropriety of Mr Houston's involvement, and we got repeated assurances from Dr Reed that Mr Houston was not involved in any way in any of the material decisions, the vote or any considerations, and the minister backed that up. Are you still worried—because you, as auditors, do not have the evidence—that Mr Houston may have been involved?
I am afraid that I must say that I have nothing to add, because we have stated all we can on the basis of the facts that are available to us. We have also recorded the advice that we received from Dr Reed on the matter.
Are we therefore justified in being suspicious about this, given the nature of Mr Houston's departure from Transport Scotland?
That is a judgment that you must make in light of the difference of view that exists between Dr Reed and me about the material significance of the shareholding that Mr Houston had at the time.
The other issue that we pursued strongly was the business case, to which my colleague Andrew Welsh has just referred. We had some discussion about the difference between a business plan and a business case—which I did not quite understand. Stewart Stevenson made a convincing argument today that he was involved in a whole process, that he was being briefed continually and that, therefore, when the final decision-making meeting—as he called it—took place, he did not necessarily need to have a business case document. Is that not a valid defence from the minister?
Absolutely. I fully accept that. I think I said in my opening remarks this morning that I fully accept the position taken by Sir John Elvidge at your previous meeting, which is that it is for the minister to determine what information he or she feels is absolutely necessary to take a decision. However, as we have all said this morning, the contract is very large indeed—it is one of the biggest contracts in Scotland. It is worth up to £2.5 billion and the extension alone was worth about £900 million. Therefore, I think it entirely reasonable to expect, at an early stage in the process, but well after the ministerial decision had been taken and the contract had been announced, that the Audit Scotland team would be immediately offered a document that contained the full business case.
I have a final question. The minister did not understand, and I had no further time to pursue the question because he had to disappear—allegedly—to give evidence to another committee immediately, but—
No, he did.
Well, I have just had a look at the timetable. Let us find out when he actually gave that evidence before we conclude on that either way.
I am sorry, but I do not think that I can help the committee with that. The audit did not look more widely at those issues.
Just before I bring in Nicol Stephen, can I clarify something that you said? You mentioned a meeting on 19 March.
Yes.
When was the actual deal struck, to use Dr Reed's phrase?
Our report records that the minister approved the extension on 27 March. There was a meeting the day after of the investment decision-making board to confirm the extension.
I just want to clarify something. Dr Reed said that Mr Houston was a participant only at a very late stage in the process. He attended two meetings after the deal had been struck, one of which was to discuss handling the contract. The second meeting was held after ministers had taken the decision to proceed with the extension. Was the meeting of 19 March held before the deal was struck and before the decision was made?
I ask Angela Cullen and Mark MacPherson to help you with that. I believe that they might also wish to say something about my earlier comment.
I will clarify the earlier comment. Going back to the minister's evidence this morning around on-going dialogue with ministers throughout the process, I do not dispute that that happened. My point of clarification is that, again, Transport Scotland did not inform us of that or provide us with any evidence that that had happened.
That was my understanding of the internal process in Transport Scotland. Notwithstanding Dr Reed's comments at last week's committee meeting, my understanding is that the relevant members of the senior management team had been involved throughout the process and had been given documents and information throughout to allow them to make a decision at the end of the process, without necessarily having to have a huge pile of papers in front of them. Therefore, they had done all the work up to that point.
I return to the issue of the status of the meeting of 19 March. Was that before the deal was struck?
Our understanding is that the minister approved the extension at the presentation that was made to him on 27 March.
The report, including the exhibits, has been cleared factually with Transport Scotland.
So Dr Reed may have been mistaken when he told us that Mr Houston attended two meetings after the deal had been struck.
Mr Houston may have attended those meetings, but we know from the minutes that the director of finance was at the meetings of 19 and 28 March.
Okay. We need further clarification of whether Mr Houston was involved in any meetings to discuss the issue before the deal was struck and, if so, why.
My understanding—I am sure that my colleagues can assist you further—is that the phrase
So it is possible that, notwithstanding the fact that Mr Houston did not vote, he may have participated in the discussion and contributed to the meeting.
It is possible, but we do not know that from the minutes. We know only that he was there.
The minutes provide you with no evidence. We need to clarify the matter with Transport Scotland. It is unfortunate that its minutes do not record whether Mr Houston participated in the meeting, but that is as may be.
Angela Cullen clarified the process of briefings in Transport Scotland, which kept individuals informed of the progress of the extension negotiations. You suggested that that information was provided to ministers and senior officials. Is that correct?
No. My understanding is that the process was internal to Transport Scotland. It was not brought to my attention that there was on-going engagement with ministers. I was aware—as Transport Scotland indicated last week—that Transport Scotland had briefed the new Administration when it came into office and had made presentations to ministers in December 2006 and March 2008. Other than that, I was not made aware of on-going dialogue that may or may not have taken place.
The minister referred to such on-going dialogue this morning. Is that your recollection?
I was not made aware of that.
It is important to distinguish between information that was supplied to us and the assurance that you have received from the minister. All that we are saying is that Transport Scotland did not advise the Audit Scotland team explicitly of what may have been done as the weeks and months rolled by to keep the minister in touch with developments. We would not necessarily expect it to provide us with that level of detail.
So you do not know whether communications were recorded; if they were, the information was not provided to you. Is that a fair summary of the position?
That is correct, but I urge you to be cautious about attaching too much significance to the issue. It is probable that senior civil servants brief ministers regularly on all sorts of matters. There would be no difference from any other major on-going project in that respect.
Indeed. I understand that regular verbal briefings are absolutely normal. I just wanted to clarify the issue of recording and what information was provided to you.
I did not discuss the matter with Transport Scotland, other than in the context of the initial announcement that the contract would be extended. The committee has asked me whether I knew about the extension before the announcement and I have said that I did not.
The minister came up with the concept of post hoc consultation. Every committee member prefers prior consultation, if that is possible and appropriate. We need to understand better whether openness and transparency about the contract extension might have been possible. You say that you feel unable to give direct advice on that.
That is correct.
To enable us to respond more authoritatively, could we obtain advice on that from another source?
I do not wish to dissuade the committee from doing so, if it feels that that is essential, but whether financial sensitivities require to be observed is a matter of judgment on the basis of the best professional advice. Unfortunately, we cannot advise you further.
On market sensitivity, if disclosure and consultation had occurred, and if consideration of extending the contract with FirstGroup had been announced to the stock exchange, could the process have been adequately managed and appropriately defended?
I am not sure whether I am in a position to help you. If I were in such a situation, I would wish to take the best advice that I could before making the decision. The answer depends on the circumstances.
My final point is perhaps the most important. Andrew Welsh was right to emphasise that the issues are serious and important. Was any aspect of the evidence that we heard last week misleading or inaccurate?
I simply refer back to my opening statement this morning. The report is accurate in all factual respects. There might have been two or three issues of emphasis and interpretation that I required to correct but, beyond that, I have nothing to add.
The meeting on 19 March is crucial to determining Mr Houston's involvement. The minister told us that Mr Houston's involvement post-dated the agreement on the franchise extension, but we have established that Mr Houston attended the meeting on 19 March. Transport Scotland's chief executive said that Mr Houston did not vote in any part of the process. How do the minutes that Audit Scotland has seen record any decisions that were taken on 19 March? Does a record exist of who had a vote at that meeting?
I ask the team to help.
There is no record of any vote. The decisions that were made were reflected in terms of action that was to be taken.
Paragraph 73 in the report makes the point that Transport Scotland did not take external advice on the contract extension. Mr Black, your office has produced many reports in the past eight or nine years. Do you have examples of other public bodies securing advice from external sources before major decisions were taken to spend public money?
There are many, many projects in which decision takers in Government seek, and might rely on, expert advice from outside the organisation. In relation to paragraph 73, I recall Dr Reed saying to the committee that he felt that there was no need for separate advice, because he had many years of experience in the business. He was clear in his mind about the commercial sensitivities relating to the contract extension. I must acknowledge that that is his professional judgment and I do not wish to take issue with it.
I fully respect Dr Reed's experience and background and agree that the judgment was for him to make. However, bearing in mind the cost implications for the public purse and the size of the project, personally, I think that it might well have been a good idea to take external advice. Can Audit Scotland point to another project in the past eight or nine years in which a public body has taken external advice before committing to major expenditure of public money?
I cannot help you with that one. We must realise that the contract is fairly unique, as it is a service provision contract that is worth £2.5 billion, which is different from most other contracts. I offer one additional thought, which is that, in Transport Scotland, there is a great deal of expertise in that field. At last week's meeting, one of the people supporting Dr Reed discussed Transport Scotland's concerns about the impact that knowledge of the contract process might have had on FirstGroup's share price and how that might have made it more difficult to negotiate the best deal for the public sector. I have to respect that view and I have no comment to make on it.
I return to the issue of a business case or plan. You have said several times that you did not see a business case or plan. Is that correct?
That is correct. When the Audit Scotland team engaged with Transport Scotland in the early stages, although after the contract had been let, Transport Scotland did not offer to Audit Scotland a fully documented business case brought together between covers that would explain, in the terms that I have outlined, everything from the aims and objectives through to a plan of how the project should be managed. I know from the team that it took a considerable amount of work to analyse the process and reach our finding, which is that the process was robust and based on good evidence.
I am coming to that. If you did not see a business case, what led you to the conclusion that a rigorous process had been gone through? What paperwork did you see that led you to that conclusion but then to comment that a business case or plan should have been presented? What would have been the difference, if rigour had been applied—
I will answer the second part of the question, and I must repeat what I said earlier. For a contract of this magnitude, there is absolutely no doubt that good practice requires the agency to have a documented business case, brought together in one place, which an auditor could sit down and examine. In this instance, that was not done.
I go back to what the report says about the provision of the business case to ministers. Notwithstanding the comments that I made earlier about whether we were aware of the on-going dialogue, when we undertook the review we were, ultimately, provided with a range of documents that, when taken together, could provide us with assurance. They reflected all the issues that the Auditor General spoke about earlier, and on which Transport Scotland made some points last week. All the information was available, but it would have been very helpful to us to have had it available in a single volume, instead of having to spend time putting it together.
That is what I am trying to get at. All the information was available. Are we arguing about whether it was all clipped or stapled together in a document? Was there actually anything missing? It seems to me, from what everyone has said, that there was a sufficiency of preparation and analysis of information—it just was not clipped together in a single document. Are we splitting hairs about that?
I repeat what we said in our report: there was a rigorous process, which was backed up by a great deal of evidence. We said that a single document was not provided to the minister.
Could Mr Black comment on that point from Willie Coffey about splitting hairs? You emphasised earlier that you accepted that rigorous work had been done.
That is correct.
You also emphasised, however, that, from an audit perspective, it would be best practice to have a business case put together. Do you think that it is a matter of splitting hairs?
No, I do not. For a contract of such a magnitude, it should be possible, after the event, for the auditor to go in and look at the documented business case containing all the critical information—the aims and objectives, the options that were being considered, the evidence that was being used to develop those options, the financial management arrangements, the risk management arrangements, how the project was to be monitored and implemented, and the exit strategies. That would be best practice. Perhaps that is a high test, but I am in no doubt that, in order to safeguard the proper use of public funds, the expectation was not unreasonable.
I think that you are saying that such a business plan does not exist. What on earth, then, was the rigour that was derived from the process? You have said that a rigorous process was gone through. Were processes not carried out? Whether multiple documents were presented is neither here nor there as far as I am concerned. In your view, were any actions or processes that should have been carried out not carried out? For example, was a risk assessment not carried out?
I reiterate the point: as we have said, a business case was not provided to the minister. Dr Reed said last week that a business case was "available". However, it was not made available to us at the point of our review. Therefore, we had to draw the information from a range of other documents, which, had they been placed together, could have constituted a business case.
I intend to draw the discussion to a close there. For the record, the minister started his evidence to the Local Government and Communities Committee at 11 o'clock, which was immediately after he left here.