Good afternoon and welcome to the 21st meeting of the Finance Committee in 2009, in the third session of the Scottish Parliament. Apologies have been received from Jeremy Purvis; there are no other apologies. I ask everyone present to turn off mobile phones and pagers, please.
Thank you. It is a pleasure to be in front of the Finance Committee for—unless my memory fails me—the first time as a minister.
Thank you, minister. I welcome Margaret Smith, who is substituting for Jeremy Purvis—
I am here as a local member.
I beg your pardon. I invite questions from members.
I welcome the minister to the meeting. On whether the arrangements are unique in Scotland, I refer to the Official Report of last week's meeting, which is publicly available. At that meeting, I asked Ainslie McLaughlin:
I am saying that this is the first time that a proposed contingent liability has had to be brought to the committee. There was a brief period in relation to the upper Forth crossing when we examined the position carefully and had a modest contingent liability.
The point that I was making is that the situation is unique in Scotland, in that this is the first time that a contingent liability of more than £1 million has been reported to the committee and that approval has been sought.
That is correct.
It is helpful to be clear about that.
I concur with what Ms Baillie has said on Parliament's view. Of course, it is entirely possible that the Parliament could take another view at another time, as it is entitled to, although that seems a relatively remote prospect. The greater risk in the eyes of the bidders is that, particularly in difficult economic times, circumstances will change and cause the project to be postponed and moved back—in effect, cancelled. It costs the public purse not a single penny to provide cover for that through a contingent liability that enables ministers to proceed in the way that they wish to proceed. It is simply a piece of insurance that companies have. The existence of the contingent liability—debated and recognised in the form that we are taking it forward in the committee—gives bidders that confidence at no cost to the public purse. Therefore, it is a particularly valuable instrument for ensuring that we keep the procurement part of the project moving forward.
How long could the Scottish ministers delay before a contingent liability kicked in?
The bids that bidders will make will be, as is normal, time limited—they will have an expiry date. It is always possible to negotiate with bidders, but the date cannot simply be pushed out indefinitely without the bidders' consent. Therefore, there is a clear time line within which the decision must be made. If we went beyond that limit, the decision to progress would, by default, not have been made and the bidders would be entitled to reconsider their bids and rebid or choose not to rebid.
We expect the bids to be received in December 2010. They normally come with a three-month acceptance period. As the minister said, and as Mr McLaughlin said at the committee's previous meeting, it would be possible to go back to the bidders to ask whether they would be prepared to extend the period marginally. However, if it was extended beyond six months, we would run into difficulties with procurement regulations and, possibly, people's willingness to proceed with the project.
I will point out some of the implications of that. It means that the agreement to proceed on the basis of the bids that are submitted, assuming that the contracts are affordable—the caveat that I mentioned—would be made around the time of the next Scottish Parliament elections. Of course, I expect to be there making the decisions at that time but, on the overall environment, there would be slightly more political uncertainty surrounding the project. That gives the context as to why the provision of a contingent liability reinforces our ability to keep the project moving forward. In broad terms, we are looking at around Easter 2011.
I would always advise ministers not to get too comfortable in their seats.
That is correct, but we should bear in mind that the shortest period over which the bridge can be constructed is, we think, about five years. Obviously, the tender process and the bids will confirm or contradict that, but experience tells us that a project of such magnitude will take a period of that order and cannot really be done in much less time. There is a civil engineering law called Boehm's law, which members could have a look at offline if they wished and which might inform them helpfully on the subject.
I call David Whitton, to be followed by Joe Fitzgerald.
Minister, last week, your officials told us that there had been more than 30 expressions of interest thus far and that, in all likelihood, those would be boiled down to a number of consortia, with perhaps four or five companies in each consortium, all of which I presume would be multinational companies. Therefore, the risk would be spread. My question to your officials was why on earth we would provide a contingent liability when the risk to the companies was much less.
The risk is not less as a proportion of the costs of preparing the bid—it remains constant in relation to the proportion of the overall consortium that an individual company has. We expect that not all the companies that will join consortia will be of equal size. There is likely to be scope for specialists in the consortia. The bids will be for the immediate approach roads and the bridge crossing. The road engineers who build the approach roads will have a different skills set from that of the design engineers who will do the calculations on the loads on the cables that will hold up the bridge. A series of specialist engineering and civil engineering activities are associated with the project, so potentially a wide range of companies will be involved in the consortia.
You said in your opening statement that a view had been expressed that the barriers to participation needed to be removed. What do you mean by that?
It is very simple. We are seeking multimillion-pound, eight-figure bids from consortia in an environment in which there are fewer major civil engineering contracts around. Historically, in this business, a company would have typically expected to win—to give very broad-brush figures—one in three contracts for which it bid. Given that there are fewer contracts at present, we would expect—although the evidence is not comprehensive—that that ratio is currently falling; in other words, a company might win only one in five of the contracts for which it bids.
I will paraphrase that slightly—I know that you will correct me if I am wrong. Are you saying that one of the reasons why we are putting forward the contingent liability is so that the multinational companies can have a good relationship with their bankers?
No, that is not the point that I am trying to make. I am simply saying that, in general terms, companies—big and small—throughout the world have less access to borrowing than they once had. In those circumstances, they are following a strategy to reduce and minimise their risks by bidding for fewer contracts that they might have a greater chance of losing.
But there is a cost to the public purse. We heard evidence from officials last week on the subject, and we discussed a potential situation in which three companies come forward; the bid goes ahead, one company wins the contract and the other two companies lose. The officials told us that in that event, the two companies that lose would be given their expenses up to the limit of £5 million, so there would still be a £10 million hit on the public purse.
No—that is a misunderstanding of what we are talking about. That is not a contingent liability—it is a liability, which is an entirely different issue. We are talking about a contingent liability, which depends on a future decision or action being taken.
Okay, I get you. I note that about £30 million is set aside for the bridge this year. Is that the contingent liability that we are talking about or is it something else?
No. Contingent liabilities never appear on the balance sheet—that is the whole point of them. Only liabilities—in other words, commitments that have already been made—appear on the balance sheet.
So the £30 million is for something else entirely.
Correct. It is for progressing the project.
Okay, that is fine.
Just for clarity, the whole point about contingent liabilities in a business sense and in Government is that they only ever appear in the accounts as footnotes; they never appear in the numbers. It is for precisely that reason that it is proper that we draw it to the committee's attention; you will never see such contingent liabilities in the Government accounts otherwise.
I call Joe Fitzgerald.
FitzPatrick. That is three times that he has done that to me. [Laughter.]
It would be likely to have the effect of suggesting to a potential bidder—or to me at least—that there was uncertainty. I take this opportunity to reinforce what Jackie Baillie said at the outset: the Parliament has made it clear with only two dissenting voices that the Forth replacement crossing has to go ahead. We will have some robust debates on the detail when we introduce the bill, which is right and proper and part of the normal parliamentary process. Were we not to make it clear that we are registering a contingent liability, uncertainty would increase, which is unlikely to be helpful.
We heard in last week's evidence that the bill will be introduced to Parliament in November and that it is expected to be approved by March next year. We heard today that the tendering process will run from December 2009 until December 2010. You say that one of the risk elements is failure to get parliamentary approval and that you are seeking a contingent liability fund of £30 million, which is based on having three bidders. Why are we being asked to approve a full contingent liability of £30 million when parliamentary approval—one of the risk elements—will be complete by next March, a full eight months before the end of the tendering process?
Generally, I view risk as having two parameters. The first is to assess the likelihood of risk crystallising into an event. The second is to consider the impact of that crystallisation on those who are affected by it. The £30 million relates to the latter. In other words, the impact on the bidders of the project not proceeding is independent of where the risk has come from.
I note your comments on the parliamentary timetable. What you say seems to be different from the indications that we received last week.
No, we have not taken such advice. Remember that contingent liability does not have a financial cost if it does not happen. It is—and I speak from my professional life—a normal part of project management to consider what the contingent liabilities associated with a project might be.
You wrote to MSPs over the weekend about the Glasgow airport rail link and said:
I make the point that that is about liabilities and not contingent liabilities. It is an issue of another character and I suspect that the committee will wish to return to it and consider it in a wider sense. However, it does not touch on the issue that is before us today.
I have one final question, because I want to be clear. I understand the difference between liabilities and contingent liabilities that you described in your answer to David Whitton. What liabilities are in the £30 million that you announced last week in relation to payments that might be made to unsuccessful bidders?
We have not yet made that kind of commitment. We are looking to do as was done in the case of the London tube bids, for example, where John Prescott made payments of £134 million to cover one bidder's expenses and £116 million to cover another's. It is standard to make allocations for such payments in certain circumstances, in order to gain support for very big projects. We seek to do that—indeed, that is already in the budget that Parliament has approved, but it is not a matter that is directly related to today's subject. Clearly, it concerns the same project and you should quite properly seek to get the right answers, but it is a different matter altogether. Making payments to unsuccessful bidders is about supporting the process, not about contingent liabilities, which crystallise if the project is cancelled or suspended before the expiry of bids.
I wanted to be clear about the matter. Regarding the £30 million figure in the budget, what figure has been set aside for liabilities for bids that are not successful?
We have not yet done that.
But you have published a budget—are you saying that there is no such figure included in that sum?
No. You should bear it in mind that the figures that we are talking about come at a later date. However, they are part of the normal budget lines of the Government, which are put in front of Parliament.
So you are saying that there has been an inclusion within that £30 million, but you do not really know what the figure is at this point.
Given that we have not yet received any bids, it is not possible to give you the certainty. However, we are very clear what our cap is.
But you have published a draft budget.
We are clear about what our cap is. I return to the point that—
But what is the cap?
You have just stated it.
I think that we have gone as far as we can in relation to that line.
It would be worth putting on the record today something that we touched on last week. In the unlikely event of the replacement crossing not going ahead and our becoming liable for contingent liability, it will not necessarily be a cost of £30 million that will be applied. I think that it was Mr Howison who said last week that the costs that come in under contingent liability funding would have to be interrogated, with a fair sum given for work expended. Could we have an outline of the steps that would be taken by those in control of the tender process at our end to ensure that any costs paid out under contingent liability were justified?
The member describes the process extremely well, and I associate myself with that. We have a general duty in everything that we do to ensure that we are paying out against work that has actually been done. Were we to find ourselves in the circumstances of the project being cancelled, with contingent liability converting to liability, with money actually having to be paid—that is what happens—you could bet your bottom dollar that we would examine extremely closely the work that had been undertaken by the bidders. The bidders know that that would be the case in those circumstances, and they would require to keep an adequate audit trail, both for their own auditors—as they would in the normal course of business—and for us, should they find themselves in the unlikely situation of the contingent liability crystallising, in order to justify any sums that would then fall to be claimed, within the cap that we are setting today.
I want to go back to something that you said earlier, minister. The contingent liability before us is a one-off—it is the first time that it has been done. I am not particularly bothered what happens in other legislatures—they have to do what they have to do. Are you telling us that, given that there is a reducing number of such contracts, and that life is pretty tough for contractors, we will have to have such a contingent liability for every major construction project from now on?
Bear it in mind that this particular project requires a greater proportion of specialist skills, with a smaller pool to fish in. If we had, for the sake of argument—and I would love this to be the case—£1 billion to spend over the next five years on roads, we would be in a much wider market, with many more companies available to do that work, with its more standard procedures. That would not be considered a one-off construction.
I will allow a quick question from Jackie Baillie before the final question, which will be from Margaret Smith, who is the local member.
I just want to understand the timescales. As the tender process takes one year, if the process is started now, it should be completed by the end of 2010. Given that there is no uncertainty associated with the parliamentary process or with ministers or with the level of interest—that has been positive, which is most welcome—it strikes me that the only uncertainty arises from the fact that the minister wants to announce the project in March 2011 and that Scottish Parliament elections are uncertain by their very nature. Given that the minister has taken the long view by pushing the tender process back, might not the certainty that we all seek be delivered by pushing the process back by three months?
Broadly, I associate myself with Jackie Baillie's remarks that the likelihood of such risks crystallising into actual events that matter is pretty low, but it is not zero. In providing the proposed contingent liability at no cost to the public purse—forgive me for repeating that as often as I have done—we seek simply to tick the box against a particular source of risk that will be eliminated. The contingent liability—which will have a financial cap, although people can still spend what they like on their bids—will simply oil the wheels of the process and help us to focus on other areas in which those who take forward major projects will always need to engage, debate and discuss with bidders and others.
However, there is no technical reason why the project announcement could not be pushed back by three months.
That is correct. However, I am not entirely certain that pushing the project back would provide us with a free lunch. My project management guru is Professor Fred P Brooks, who writes about information technology. He advises: "Take no small slips". He also states:
Convener, I will stop after this question. Our shared objective is to try to minimise risk and to use the opportunity to save the public purse £30 million, which I am sure that the minister would sign up to. My suggestion is simply about ensuring that we minimise that risk.
As someone from Fife, I discovered when I went to university that the people of Aberdeen thought that the Fifers were mean. Well, they were right.
Is that a yes?
Yes.
Minister, the mere mention of elections simply reminds us all of our mortality.
The mere mention of uncertainty about what happens after elections reminds me of Edinburgh trams and the Edinburgh airport rail link. Elections can be very uncertain times for transport infrastructure projects.
Bear it in mind that there is a qualification process that should exclude inherently unsuitable bidders from what we hope will be a final list of three. There would be little point in sitting down with people with whom we already knew, for whatever reason, we did not wish to do business—that would be bizarre. If we manage the process correctly, we should get there.
We must draw this session to a close. Before we do, minister, do you have a final statement to make?
From my point of view, the subject appears to have been thoroughly covered, and I thank the committee for its attention and engagement. I look forward to your decision, whatever it may be.
Do members have any further comments?
I am sorry, convener; I did not realise that you meant to put the question when you asked whether there were any further comments.
I have put the question, but you may comment.
The minister was asked whether he had taken advice from the Auditor General. The matter that we are talking about is a fairly unusual occurrence that involves a large sum of money, and I wonder whether we should have the advice of the Auditor General about whether the course of action that is being proposed is reasonable. Of course, that would delay our decision by a week.
Is that in the earlier agreement between the Finance Committee and the Government?
We have been through a long process, Mr Whitton, and your point could have been raised much earlier in the proceedings. We have reached the vote and I have asked the question.
With all due respect, the minister was asked whether the Auditor General had been asked to give a view, and the minister said that he had not. I do not want to hold up the proceedings—if you want to press the question, that is fine. I simply raise the point.
What you are really saying is that we should wait until we get a response from the Auditor General. However, if we operated on that basis, we would be here forever on all the questions.
I take guidance from you, convener.
In terms of the functions of the Finance Committee, we should take scrutiny of all these issues very seriously. This is the first time that we have considered a contingent liability of this nature. I have been much more persuaded by the minister this week than I was last week—I say that with all due deference to his officials.
I suggest that it is up to the minister to take further advice. Does the minister wish to comment?
We are at a sensitive stage of the process—remember, people are already engaged in the bidding process—and the suggested action would not help. I would not suggest that it would be unhelpful, but it would certainly not help. However, if the committee feels that the matter is important, I am happy to proceed on that basis, take that advice, and share it with the committee. That will be in advance of the bill being lodged, so I do not think that that would be an unreasonable way for us to proceed.
I would have preferred it if all this had arisen when I asked for comments.
Can I clarify whether, leaving aside the issue of advice from the Auditor General, we will proceed to make a decision? I am confused.
I have put the question, but I have suggested that if the minister wishes to contact the Auditor General, that would be up to him, regardless of any decision that we make.
That would happen in conjunction with our taking a decision.
I have put the question and I propose to go to a vote on it. The minister has commented.
I clarify that I am happy to consult the Auditor General and to share the results of that consultation with the committee, but it would be extremely helpful if a decision could be made today.
I hope that that is quite clear and satisfactory.
Members indicated agreement.
May I make a post-comment?
No.
Meeting suspended.
On resuming—