Transport and the Environment Committee, 24 Oct 2001

Meeting date: Wednesday, October 24, 2001

Official Report 319KB pdf

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Budget Process 2002-03

I reconvene the meeting, although that means that at least one other member will have to join us while the minister makes his opening statement. I apologise for the delay. The committee has set itself a fairly massive undertaking and has lost some time. I appreciate that the minister has a pressing engagement and must leave us at 12.15. It is useful that that time scale is externally imposed, as that will ensure that members obey it. If we do not pursue some matters with the minister, I am sure that we can correspond to clarify issues as we have done before. Does the minister wish to make an opening statement?

No. Perhaps there was some confusion between the clerks and my office. It was not entirely clear what would be discussed—the range of subjects seemed broad. We did not narrow the definition of the discussion. However, given the time scale, it is preferable anyway that we proceed straight to questions. I appreciate the difficulties, but I think that you share my view that it would be enormously helpful if the committee narrowed the scope of the discussion, as it would make such exchanges more valuable and productive.

The committees and the Executive continue to work hard at making the budget process more effective. I hope that, as the years go on, we will do that. I appreciate the minister's comments. We share that view.

John Scott will ask about foot-and-mouth—an issue that we raised in correspondence.

Does the minister have up-to-date figures on the impact of foot-and-mouth in Scotland and its effect on Scotland's rural economies? Is the minister taking mitigating measures, particularly in the farming sector, which has suffered greatly this year?

As the member knows, I am taking such measures. I am with the Transport and the Environment Committee today, but I was with the Rural Development Committee yesterday, and I now think that I had my papers in reverse order.

The figures that have been provided continue to be current. We have not allocated further funds, but we are in constant touch with the two groups of bodies in Dumfries and Galloway and the Borders. We have people who are covering the impact throughout.

As the committee knows, Dumfries and Galloway Council and Scottish Borders Council submitted recovery plans to the Executive. Some elements of those plans had different time scales. Dumfries and Galloway's plan was slightly more comprehensive and had elements with long time scales.

Officials in my department are in close touch with various bodies, because matters do not centre only on the local authorities, the local enterprise companies and the tourist authorities. My understanding of the reports that I receive is that we continue to make satisfactory progress with all the parties involved. It is slightly surprising that that is a question not only of money, but of finding in difficult times some projects that need that resourcing.

I am also conscious of complaints, which I heard when I was down in Dumfries and Galloway, that some of the money was being directed far too much into paying for supervisory advice, rather than going direct. I have taken that criticism on board and we are ensuring that the answer to a person's question is not, "Please speak to a consultant," but that funding goes to genuine projects that need it. I do not have total figures on that matter with me, but I am happy to provide the committee with them later.

The impact surveys, however, have been printed and are on the Executive website, but I do not know the web address. I hope that you will forgive me for that, convener. We will continue to ensure that the impact surveys are put into the public domain.

Regarding the actual progress in Dumfries and Galloway and the Borders, our approach is to stay right on top of the groups that are carrying out those recovery plans. I am well aware that progress is slow, particularly in the tourism industry, and is not being helped by other world events. Regarding whether we are alert and alive to that issue and whether it will change our judgment, the difficulty is that, as you know, we allocated substantial sums of money across the Executive, not just out of this department's budget, to deal with tourism promotion. I have no doubt that Wendy Alexander and her team are looking closely at where that money should be best spent in what are now dramatically changed circumstances.

In the light of those dramatically changed circumstances, do you not envisage a need for a Scotland-wide recovery plan? Adjoining areas are being affected.

We in Scotland think dearly of different areas, such as the Borders and Dumfries and Galloway, but the first point for the tourist is whether they will come to Scotland at all. The strategy must be, first, to get tourists to come to Scotland before one sells the next part of the package. The recovery plans, therefore, apply Scotland-wide.

The money that I have given to Quality Meat Scotland is purely and simply to try to restore consumer confidence in the red-meat industry. I believe that doing it that way will have an impact from the northern tip of Shetland to the southern part of Wigtown. One has to approach it that way to restore consumer confidence. There are elements that involve us in looking at the local plans, but there are also areas of Scotland-wide expenditure, particularly in tourism and in the livestock sector.

We need to be careful about straying into other committees' responsibilities and areas. The Enterprise and Lifelong Learning Committee and the Rural Development Committee come to mind. We must be conscious of that and of the fact that we have fairly limited—

I am not responsible for asking questions.

Absolutely. My remarks were addressed to committee members, not to the minister.

Fiona McLeod has a follow-up question on renewables.

Again, there might be a bit of crossover.

We will listen closely.

We received a letter from the Deputy Minister for Environment and Rural Development, Rhona Brankin, in reply to some of our questions about renewables. We understand that it is her responsibility, and that of the Scottish Executive, to promote renewables, but that the Department of Trade and Industry, which is responsible for energy, provides a lot of the money.

I have questions about some the comments in Rhona Brankin's letter; I will come to the specific one about the wind farms in the Solway later. The deputy minister says that the Scottish Executive

"is supporting the work being done by Highlands and Islands Enterprise on the development of a Marine Energy Test Centre in Orkney."

How is the Executive supporting that work?

We support it in the sense that we supply almost all of Highlands and Islands Enterprise's essential expenditure and in the sense that we have made it clear to all the enterprise agencies that environment and energy are among the expenditure elements that they should prioritise. I suppose that that support is slightly indirect.

Fiona McLeod has put her finger on one of the essential difficulties: we have the role of promoting such projects, but the funding for their research and development has been retained at the Department of Trade and Industry, which is responsible for energy. I make no bones about the fact that that split is slightly awkward. The way in which the renewables obligation has fallen out is that it drives us to consider some of the cheaper forms of renewable energy. There is nothing wrong with that—we need to do more of it—but we also need some of the more complex elements. We have an interest in being involved and in expressing our wish to promote renewables projects, and we are making it clear that, if we get such applications across our desk, we will give them priority.

If the application comes across your desk?

We are a single department; Ms Brankin and I do not sit at the other end of an office—

I do not mean your desk; I mean the environment desk.

Ms Brankin acts as my full deputy; there are matters for which she has day-to-day responsibility. However, at the end of the day, I am the Cabinet minister and Ms Brankin enjoys the luxury that, if she gets it wrong, I get sacked. I have to read all the correspondence and be well aware of what is going on in my department. That is how departments are run.

Perhaps I can put it differently. The applications come to the environment department, but you do not have a budget line that allows you to put money into those applications.

We could. Take wave energy, for example. If the promotion of wave energy required assistance through the marine energy test centre, it is my department that would consider giving additional assistance from our budget. It is important that we are involved in such projects, even if they are being run in co-operation with the enterprise agencies. There are other agencies—I simply cite the marine energy test centre as an example.

Where in your budget would that assistance come from?

It would have to come straight out of the environment line. We are not necessarily talking about huge sums of money; we are talking about assisting a range of projects for which we have allocated sums.

I am conscious that we are dealing with a specific area. You will have time to reflect and correspond with us on those matters, minister.

Fiona McLeod is looking for an answer to her question about which budget line assistance for the marine energy test centre would come from.

And how much you would have to give.

That would depend on the request, but I will take the generality of that.

That would be useful. We move through the budget process in interesting ways. We are as concerned as you are, minister, about the need for focus. I hope to get greater focus now, because we move to questions relating to the water industry, which will allow us to pursue some areas that are relevant in legislative as well as budget terms.

Given that the minister has not had notice of my question, he might not be able to answer the detail of it, but we still wish to explore the general principle.

Between the publication of the annual expenditure review and the draft budget, there have been a small number of changes in the environment budget. One such change that we have noted is that, for 2003-04, there is a reduction of £10 million in the planned funding of water. Is that reduction generated from some of the planned savings that will be achieved in the water industry as part of the Water Industry (Scotland) Bill? Does the Executive expect to benefit from those planned savings or will the savings all be retained in the water industry to keep costs low for consumers and to improve the competitive position of Scottish Water?

To deal with the first question, the adjustments were all part of what any Government must do, which is to make difficult choices in reordering priorities, particularly in relation to health and other departments. Every department and every minister had to review where they were. On this occasion, we had some flexibility in examining the levels of accounts in the water industry—I will ask Mike Neilson to deal with that.

The situation was slightly exceptional. We have to hope that we can contain the level of increases in charges and try to reduce the total amount of public spending. That will not be easy to achieve, but we will have to try to do it. At least, we have to provide that, on a revenue basis, we are allowing the full capital programme to proceed.

In terms of the capital spending and surplus of the water authorities, the assessment that was made was that, given the decision to set up Scottish Water and the growing efficiency expectations, we should expect to see a flat profile of public spending. That means that the public spending for 2003-04 will now be flat, compared to 2002-03.

Obviously, many of the efficiencies that are being put in place are designed to prepare the industry to be able to compete effectively against new entrants to the market. Is there a danger that the fact that the Executive's budget is benefiting from the efficiencies to the tune of £10 million this time could act as a handicap to Scottish Water?

I hope not. When setting charges, we are required to set out a number of factors, such as the quality and standards that we expect from the industry. Ministers have to retain the ability to set out the water quality that they expect to be achieved and that will be one of the advantages of having the new company under public control. Once that is set out, ministers must decide what the necessary capital investment would be to deliver that quality, which might be the same as or more than the existing level of investment. Following from that would be the difficult juggling act of the setting of charges and public expenditure.

That all has to be dealt with in any review of strategic charges. It is crucial that the first element is not forgotten. Clearly, if someone else were in charge, that element could be eliminated but that is not what we want to happen so a compromise must be struck to square the circle. However, the quality standards must not be compromised. I cannot withdraw money as it suits me; that could be done only if all of the objectives that are involved in providing water at the highest possible quality and the most competitive price had been met.

I have two specific questions. I will understand if the minister cannot answer them today and would rather answer them in writing.

The financial memorandum to the Water Industry (Scotland) Bill states that transitional costs of between £3 million and £5 million are anticipated and that the Scottish Executive will propose funding of £3 million by way of a budget revision this autumn. From where in the Scottish budget will that money come?

It will be contained within the total amount of expenditure allocated to the water industry.

The financial memorandum implies that the Scottish Executive will limit transitional funding to that one-off grant. Is that correct? It is understood that there will be savings from the sale of property and reduced waste costs if Scottish Water is created. Will those savings be created after other transitional costs have been incurred?

Yes and no. We have to remember that two things are happening.

The process of examining and trying to respond to the level of performance within the water industry was started two and a bit years ago, with the report of the water industry commissioner. That report set challenging targets and suggested that the water industry in Scotland had not progressed at a pace that was consistent with the rest of the United Kingdom and elsewhere. The three companies are working to meet some of the targets that were set by the water industry commissioner. As the member knows, the companies got together and decided that the only satisfactory way of meeting those targets was to have a shared resource. That decision led to the discussions on creating a single water authority.

There are already obligations on the water industry to make savings. We expect some of those savings to be made in the transitional period. I accept wholly the point that we will not be able to deliver on the total quantum of those savings until the three companies have been put together.

Bruce Crawford will ask his question next. We are running short of time, so the question will need to be short and sharp, as will the response.

It will be, convener.

I refer to the letter that the minister sent to the convener on 12 October and draw the minister's attention to the page on which what I take to be the signature of one of his staff appears. I am intrigued by the terminology and by the effect that the water authorities' profit has on the budget. The letter states:

"The reason why the DEL total for the Environment Portfolio is lower than the Capital Budget is that the Water Authorities' profit has a negative effect on the Resource Budget."

Will the minister explain that to me? The terminology is unusual and I do not understand how there is a negative effect on the resource budget. Perhaps that will have to be explained in writing.

My expert in resource accounting is sitting next to me. You and I will both hope to understand his answer, Bruce.

Another way of understanding the figures is by seeing them as profit surplus. That surplus is taken away from the £513 million for water in the resource budget, leaving the aggregate departmental expenditure limits for water of £302 million. That is how the water authorities' profit has a negative effect on the resource budget.

The figures do not refer to £10 million as a surplus; they refer to about £300 million. I am having difficulty following the correlation between the £10 million that we were talking about a minute ago and the surplus of £200 million, which has an effect on the overall capacity of the DEL budget that we are now talking about.

Are you talking about the difference between £533 million and £398 million?

The official was talking about the difference between £533 million and £201 million.

There seems to be confusion here. Even I have spotted the fact that we are talking about a capital budget, not a revenue budget.

Okay.

I ask Michael to clarify.

Two basic figures appear in the DEL. One is the size of the capital programme of the water authorities. The second is the surplus that they generate on their operations. The £500-odd million is the capital programme figure; the £200-odd million is the surplus that they generate.

The logic of resource budgeting is that the surplus that is generated by the use of public sector assets cancels negative public spending because it is not the consumption of public resources—money is being put back into the pot. It should be emphasised that the internally generated surplus is less than £200 million, compared to an investment programme of more then £400 million. The difference is finance from borrowing, as was discussed earlier.

The whole question of resource accounting is not helping. It might be helpful if the convener and I were to discuss whether a detailed briefing could be given on resource accounting. Members will not be able to perform their function properly and ask ministers the questions that need to be asked if they are having difficulty with the terminology and the way in which RAB differs from conventional accounting.

Perhaps the clerk and Mr Neilson could arrange a briefing, if that would be helpful to the committee. It seems to me that the process is not being helped by a change in accounting methodology, which is not easy for those who are unfamiliar with accounting terminology.

We have discussed that in the past. We are in a dark room and not finding each other. We need to ensure that we understand each other's way of doing business. That applies to the overall budget process, in terms of how we interrelate with the Executive.

A briefing on RAB is taking place at lunch time today, which many members will attend. In addition, it would be useful to have those discussions with you, minister.

Members of the committee have a legitimate task to perform. If we simply do not understand the basics, we will not get a clear understanding of where we are.

I have heard the explanation, but it seems that £200 million less capital will be available to the water authorities. However, from the minister's reaction, I can see that that is not the case.

It would be worth corresponding on that specific point.

The offer of a briefing is genuine. I recognise what the parliamentary committees ought to be doing and they should be doing it on a basis of knowledge, not of ignorance.

I am happy to take up the minister's offer. It is a good offer and we will discuss it.

As you have to leave now, minister, we will correspond with you on our other questions. We will also take up your kind offer of a further briefing on the RAB.

I welcome Sarah Boyack, the Minister for Transport and Planning, and her officials. Do you have an opening statement or would you like to go straight to questions?

I am happy to go straight to questions. I know there were other issues following on from the first set of answers.

We continue to have a fairly tortuous budget process. If you speak to Ross Finnie later, you will find out how difficult it has been for us. We strive to get clarity from the Executive with regard to priorities and budget allocation, but we are not yet getting there. I hope that we will do a bit better in this session.

Can you identify how we may begin to understand your process of prioritisation between competing projects and priorities within your portfolio? An example would be the publication of the annual expenditure report and other budgetary reallocations in the Scottish Executive. Will you explain how that process takes place and how we can track it and the way that budgets are put together and transmitted to us?

I suppose that the strategic roads review is one of the major exercises that the Executive has carried out since it was established in 1999. We had five key criteria for deciding which road projects it was appropriate to proceed with. If you remember, we started off with a list of 18 projects. From that list, we prioritised five roads on the basis of the policy indicators of safety, integration, environment, economy and access. We weighted those different policy objectives and had a fairly thorough analysis of all the road projects.

At the time, the northern extension of the M74 came No 1 on the list, but it did not get the go-ahead in 1999. Subsequently—after the last spending review, when I received more money for the transport budget—I was able to prioritise that road into our roads programme.

For each budget, there is a process of setting priorities. In the past year, we have published our Scottish transport appraisal guidance—STAG—which lets us begin to evaluate across different modes of transport. Historically, we have always prioritised within modes of transport. On the technical side, that helps us with a clear set of policy objectives, which flow through from the programme for government and give us overall objectives. Within the different budget lines, we have measurements that let us prioritise projects.

I hope that that gives you a sense of how, practically, we prioritise projects and policies.

I have two follow-up points. A lot of the criteria are set in generic terms. Clearly, they are translated into quantifiable measures in your department. Is there any intention of beginning to show what kinds of criteria are applied and what kinds of quantifiable measures are used in establishing policy priorities?

The second issue is how the weighting between the priorities is set out. On the face of it, when different kinds of criteria are applied and different kinds of judgments are made, it can be difficult for people to track through the process to find out how decisions are finally arrived at.

It is probably fair to say that that requires some effort. For example, an awful lot of supplementary information came out on the strategic roads review, which gave a sense of how we thought through the different projects.

I was just talking to Bob Tait to enable the committee to discuss the STAG approach. We consulted on STAG over the summer and have now properly published it. If the committee wanted to follow the issue of privatisation another step forward, it could do so. The most recent project that we used STAG for was the Larkhall to Milngavie railway line. We used our traditional value for money indicators, as well as the policy choices that are set out in STAG for evaluating a major project—so we have started to apply STAG in day-to-day decision making. Following that up might help people to get a better sense of how we arrive at such project decisions.

I think that would be helpful.

End-year flexibility follows on almost directly from that.

Last time you came to the committee you said that end-year flexibility applied to worthwhile projects. We would like to hear what criteria you use to determine which projects deserve end-year flexibility.

The Minister for Finance and Local Government sets the overall objective that the projects must be worth while. They must also be deliverable. We have to look across the transport policy objectives for developments that we would like to take place. I refer to the announcement on the Caledonian MacBrayne ferries that I made yesterday. That was the kind of project that fitted those criteria perfectly. It was a high policy objective for us to improve lifeline ferry services and two new ferries were needed, so that fitted the bill for an EYF bid.

I understand that the Minister for Finance and Local Government will issue the full list of EYF projects in November, which will show the range of projects that have come through that process.

STAG is your set of criteria, which you apply to your budget. Do you apply the Minister for Finance and Local Government's criteria to determine suitability for EYF or do you use the STAG criteria and then the EYF criteria?

Effectively, we use both. A project must meet our transport policy objectives as well as broader objectives for the whole of the Executive. A project is not guaranteed EYF support just because it is my No 1 objective. The top transport objectives have to be evaluated across the Executive.

That sounds like "STAG-EYF" criteria.

Please do not.

I am aware that the department has done a lot of work on appraising the existing route action plans for trunk roads and that a lot of schemes are being re-evaluated. What happens when you bring in the new appraisal guidance? Will all the appraisal work that has already been carried out have to be revisited, or is the recent system of assessing projects broadly compatible with the new STAG? Does the new system make that much difference?

Bob Tait might want to answer in a bit more depth. My understanding is that projects that have previously been through the policy process and been approved at the other end will not be re-evaluated, but new projects will be assessed under the STAG process.

That sums it up. There will not be a fundamental reappraisal of work in the pipeline.

So if something is approved, it will remain in the framework for possible implementation. Presumably, prioritising means determining a running order within specific RAB programmes and using STAG to select projects on a year-to-year basis.

STAG will have most effect on projects such as those that emerged from the transport corridor studies, such as the A8 transport corridor. Those projects will be assessed from first principles using STAG.

Some of the schemes from the route action plans are fairly modest and we will not seek to go back to first principles. For any new work, which will include the next round of public transport fund bids, STAG principles will be applied.

I want to ask a few questions about Highlands and Islands Airports Ltd.

The events of 11 September meant extra security, even at small Highland airports. Did HIAL have to absorb the extra security costs or was it able to access another funding stream for such emergencies?

That is a detailed question that I will have to get back to you on. I do not know whether HIAL has asked us for extra grant support for that. Such a request has not crossed my desk. It would be best to ask for a specific answer in correspondence.

I also wanted to ask you about the economic role of HIAL. You will be aware that one operator has called for special treatment on airport charges from HIAL. Although one operator cannot be given preferential treatment, what scope is there in the HIAL budget for providing economic development by supporting airlines that want to come into Inverness?

I think that HIAL is keen to talk to airlines, particularly budget airlines, to examine new services that could operate in and out of the HIAL airport network. Sandy Matheson is keen on new developments and there are opportunities—which are budgeted for—to attract new companies. It is a question of making sure that those companies align with the available opportunities. I know from discussions that attracting new business, whether for passengers or for freight, is high on HIAL's agenda—the company is examining the issue carefully.

My question is a general one on the future of the ScotRail—or rather, Scotland's passenger railway—franchise. At what stage and how do you envisage engaging the Transport and the Environment Committee and the Parliament on the longer-term commitments that will be involved in any new franchise, which might extend for another 15 or 20 years? That will involve the Executive in spending commitments for a long period.

The original round of franchising was based on the existing network, or on having 85 per cent of the existing network guaranteed as part of the franchise. I would expect a new franchise in Scotland to expand services—I imagine that that is the minister's and the Parliament's aspiration—and that that expansion would incur financial costs. How will that process work between the Executive and the Parliament?

There are two elements to that question. First, the figures are not in the current budget round that takes us up to 2003-04. As, based on current estimates, the ScotRail franchise will be replaced in 2004, a new approach will have to be made. There will be parallel discussions on the spending review in the Scottish Executive next summer and our continuing discussions with the Strategic Rail Authority on our overall priorities for rail expenditure. Secondly, when we get further on with the ScotRail franchise, we will be keen to ensure that the committee is played into that whole issue.

As members do not have any other questions on the budget, I thank the minister for attending this meeting. I appreciate the specific nature of the questions on which you will get back to us. I do not therefore expect a response on every aspect of the budget. We look forward to your correspondence.

Our next step will be to consider the terms of our response to the Finance Committee. We will consider that draft response at our meeting next week, when a draft report will be issued to members. Does the committee agree to consider the draft report in private?

Members indicated agreement.