“Scotland’s key transport infrastructure projects”
Agenda item 2 is the section 23 report from the Auditor General for Scotland entitled “Scotland’s key transport infrastructure projects”. I welcome to the meeting the Auditor General and her colleagues from Audit Scotland’s performance audit group: Angela Cullen, assistant director; Carolyn Smith, project manager; and Dick Gill, portfolio manager. I hand over to the Auditor General to introduce the report.
Thank you, convener. The report assesses the current progress of five major transport infrastructure projects. Members might recall similar reports on the management of major projects; this one is very much in the same mould. Like them, it deals with some important questions about the control of and accountability for major infrastructure investment.
Thanks very much. I suppose that the key thing that comes out of the report is the disparity between Audit Scotland’s figures around the cost of the projects and the publicly reported costs that we have seen previously. I want to explore a couple of elements of that to be sure that I am clear about what Audit Scotland is saying.
That is right. Because of its commitment to keeping up the level of investment at a time when the capital budget is reducing, the Scottish Government has explored other means of financing investment. That is entirely appropriate. There is no reason not to be using a revenue basis for funding capital investment. However, it is obviously important to make sure that that revenue commitment is affordable, because it extends for a very long period—30 years, in these cases. It is important that that is apparent to the Parliament in decision making and to the public more generally. That is the reason for the difference that we are seeing.
So you have constructed that figure. I think you calculate that the revenue costs are around £255 million a year over that 30-year period. That is a long-term financial commitment that the Government is entering into. Has that ever been reported anywhere publicly or to the Parliament?
The figure is £225 million from our estimate. It has not been pulled together anywhere in a way that is readily accessible to the Parliament or can be scrutinised over time. It is worth saying that the Government has made a positive move in setting a cap on the amount of the revenue budget that it is prepared to commit to this sort of investment funding—the cap is 5 per cent of departmental expenditure limit spending. What we now need to see is how much of that cap the commitments that have already been made account for over the time that they will last, along with other commitments to NPD and other financing models.
But we cannot possibly know whether those commitments come within the affordability criteria if we do not know what they are.
That is why we are saying that greater transparency against the cap is now important.
I refer to the summary of costs on pages 10 and 11. By coincidence, the committee has before it today the regular six-monthly Scottish Government progress report on capital projects. Not surprisingly, these five projects all appear in that report. I was very struck that even setting aside the revenue costs over 30 years and looking just at the construction costs—the completion costs—there is a pretty wide disparity between the figures contained in pages 10 and 11 of your report and the figures contained in the report that the Scottish Government has provided us with today.
In broad terms, that reflects the other finding that I highlighted in my introductory remarks: the information that is reported about individual projects in the six-monthly updates is sometimes not complete, with elements of cost not included in it, and sometimes not consistent, for example on the cost base that is being used. If you would like more detail about individual projects, Dick Gill and Carolyn Smith can give it to you. We have made a recommendation about greater consistency and completeness in the costs that are reported to this committee and more generally in relation to progress on the projects.
To be clear, you are saying that the six-monthly progress reports on capital projects that the Public Audit Committee receives are not complete and not consistent.
We are saying that there has not been a consistent approach to the information that is included. For example, on the Scottish Borders railway, £54 million-worth of preparatory work and other costs outside the regulatory asset base funding have not been included in previous reports. It is important that there should be completeness for all the projects, and there certainly should be a consistent base for the key stages that are reported to you, and for the treatment of such things as inflation, risk allowances, optimism bias and so on. It seems to us entirely appropriate that the Government should consult you about what you require and then make sure that you get it consistently.
Perhaps I am naive, but I would have assumed that when a Government reports on projects, one of which involves £1.5 billion-worth of expenditure, there would be a standard methodology for reporting the costs. Are you saying that there is no standard methodology for reporting on major capital projects’ costs?
Interestingly, the FRC project is the one that is most complete and consistent, and it has been over time. We are saying that it would be in everybody’s interests to agree a standard template for reporting and to make sure that information is reported consistently to you in line with that.
However, that template currently does not exist.
It does not at the moment.
I will be very naive and ask you a question that I need to understand before I can go further. What is the difference between NPD and PFI?
I will ask Dick Gill to give you more detail on that but, broadly, NPD is based on an agreement over the life of the contract in which the costs of construction and some aspects of management are paid back on a fixed basis. In PFI, there is the potential for the contract to be sold on to other investors over a period, which means that more significant profit can be extracted from it than was originally foreseen.
So, if you take out the potential to sell on—which is only a potential—are they pretty well the same?
Dick Gill is our expert on this. I ask him to talk you through it.
Caroline Gardner has put it quite accurately. The essential feature of NPD projects that is different from PFI projects is that the return to the private sector investors is capped as part of the contract, so there is no opportunity for what are sometimes referred to as superprofits for a project’s investors.
It is the non-profit distributing model.
That is correct.
So are there no profits to be made by anyone? If it is non-profit, does that mean that there are no profits to be made? Is it only social enterprises and charities that build these projects?
There are profits, but there is a cap on the level of profits that may be distributed from the NPD company.
There will be a cap on PFI profits, depending on the contract that is entered into.
I am sorry; I did not quite catch that.
There would have to be a cap on PFI profits, depending on the contract that is entered into. No one has limitless profits.
The same contract mechanism has not been present in PFI contracts as is present in NPD.
So, there is no cap on PFI profits—the companies can have any profits that they want. Under NPD, there is a cap on profits. Is that what you are saying?
The profits under a PFI contract are determined by the company’s performance. If it performs well, the profits are the difference between what it earns from the public sector for providing the service and what it pays to provide that service. Historically, other audit organisations have highlighted the significant profits that can emerge from that arrangement.
It is the same type of model, except that there is a potential to sell on the contract with PFI, and there is a cap on profits with NPD. Are those the basic differences? They do not seem like big differences to me.
It is a similar model. As Caroline Gardner has explained, it is a way of finding additional finance to finance significant investment—
So, NPD is a similar model to PFI.
Yes—I think that that is fair.
I refer to pages 10 and 11 of the report. The bottom line of exhibit 1, headed “Public reporting”, says that there is
The costs of the four individual projects concerned are still commercially sensitive, because of the procurement stage that has been reached in each of them. It is appropriate for that information to be kept confidential, to avoid weakening the hand of the Government or Transport Scotland in negotiating with potential bidders.
You are asking the Government to report more accurately. You are describing what you have worked out as being potentially “the likely commitment”, to use your own words.
Yes.
The £225 million per year over 30 years in these PFI contracts for the four major building projects is just indicative. It is not an actual amount. The truth is that we do not know how much we will pay over 30 years. Is that correct?
That is correct, and it is unavoidable at this point. Until contracts are actually let and finalised, there will be an element of uncertainty. I ask Dick Gill to give you a bit more detail about that.
We talk about the estimated commitment in the report. They are not our estimates. We have published them and nobody else has, but they are derived from privileged information that we have received as auditors for the individual projects. We believe that they are robust estimates of the expected costs that will be incurred, assuming that each of the contracts is satisfactorily completed.
So, it is possible to have a robust estimate. Previously, it was a “likely commitment”. There is £225 million to be paid per year over 30 years, but the truth is that the figure could go up. Is it possible that it could be less?
Absolutely. At this stage, that is the best estimate that is available. We have pulled it together to give you an overall picture. Until each contract is let over time, however, the detailed figure will not be clear.
The truth is that we do not know what the figure will be.
I will let Dick Gill take you through the figures in detail.
The £5 billion figure that you refer to is the total estimated cost of the revenue commitments for the four revenue-financed projects. I do not see any inconsistency, as that figure is included within the £7.5 billion that is mentioned on page 4 of the report.
But some of that is also included in the £3.8 billion. Is that right?
Yes.
I think that that is where the disparity lies.
I am looking at the summary on page 4. The total of the capital costs is £3.798 billion. I am subtracting that from the total cost of £7.5 billion, and I am left with a figure of £3.7 billion. Perhaps I am oversimplifying things, but I am saying that that £3.7 billion is the figure for the long-term PFI payments. I may be wrong.
Ah, yes. I see what you are getting at.
When I go to exhibit 9 on page 39, I find a figure of more than £5 billion rather than one of £3.7 billion for the long-term PFI payments.
I would like to clarify something. I know that Ms Scanlon is trying her hardest to conflate NPD and PFI, but I ask her to call NPD what it is, as opposed to what she would like to pretend that it is.
Dick Gill said that it was a form of PFI.
He did not say that it was a form of PFI.
He said that it was a model of PFI.
No—you said that it was a model of PFI.
No—
It is NPD, and the important thing is that it is called what it is.
Mr Dornan, colleagues’ contributions are up to them. Ms Scanlon has used both terms, and I think that that is reasonable.
Forgive me—I am struggling a bit.
I think that I can help Ms Scanlon to unpick the figures.
Ah, but would you agree that, with the type of financing model that we are looking at today, it is right for us to be concerned about the amount of revenue that is being committed in the long term because, as you say in the report, that can crowd out opportunities for spending at a later date?
I should begin by saying that there is no fundamental reason not to fund capital investment through revenue financing models. After all, we all do it when we buy a house with a mortgage or a car with a car loan.
Absolutely.
However, it is also important in any case and particularly at a time of pressure on budgets to demonstrate that such a revenue commitment, which is locked in for a long period, is affordable. The Government took an important step forward by setting its own cap of 5 per cent of the DEL budget for the amount that it would commit through such mechanisms; the next step, which we have not yet seen, is a full demonstration of how the commitments that have already been made and those in the pipeline line up against that cap. We know that the five projects in the report will account for about 14 per cent of the cap in 2014-15. However, we also know that other commitments have been made and that there are other projects in the infrastructure investment plan pipeline. That is why we are recommending such transparency as the next step in demonstrating affordability and ensuring that the investment is sustainable over time.
That is what I am trying to get at. I have to say that I have found that very difficult, because as my questioning has made clear we do not know whether we are at 2, 5 or 10 per cent of DEL. I know that the Government has made the statement about 5 per cent, but when I looked through the report I could find no indication of where we are in that respect.
You are absolutely right—the report contains no such indication. Instead, what we are demonstrating is that the five projects in question account for 14 per cent of the allocation and are therefore recommending that Government transparently report its overall commitments and therefore the affordability of these projects and any future investment decisions.
On EGIP, page 11 of the report says:
Colleagues will give me the reference in a moment, but we say in the report that Transport Scotland provided information to ministers through presentations and in other forms to allow them to make a decision about the revised approach to EGIP. Obviously that is important, but we also think it important for business cases to be kept up to date, particularly at such key decision points. Paragraph 58 of the report will give you a bit more information about that.
But is it your view that the outline business case should have been updated at the same time as those presentations were being given?
In general, we think it good practice to keep business cases up to date to ensure that when significant decisions are made, the information is available in one place to demonstrate affordability, value for money and sustainability.
Ministers have yet to confirm the revised target date for EGIP and will do so only after receiving the full business case from Transport Scotland. According to the report, that business case was due in May 2013. Has the Government received it yet?
We do not know. We have not updated this since the completion of our field work at the end of April.
Did the fact that the Scottish Government’s original announcement on changes to reduce the scope and to the phasing of EGIP was made while Parliament was in recess have an impact on the audit and scrutiny of the changes to the project?
I cannot comment on the timing of announcements to Parliament; instead, we have focused on the information that was available when decisions were made. Affordability was clearly an important part of the changes to the scope of the project that were put forward and it is entirely appropriate to review the scope in that way. However, we have concluded that it would have been better to update the business case to provide in one place a summary of all the factors that were needed to work that through rather than the information being provided to ministers in a different way. It is also important for the business case to be in place now to provide a strong foundation for commitment decisions in taking through the project’s revised scope as phase 1.
We are in danger of obscuring the fundamental good news in this report that among the biggest capital projects ever carried out in Scotland are happening at this moment. I had considerable experience of large projects in my past life and as far as I can see the report on the whole represents a pretty good news story.
First, we make it clear in the report that Transport Scotland has good governance arrangements in place and that all five projects are currently scheduled to be delivered on current cost estimates and four of them on current time estimates, so I agree that there is good news in there.
That is probably fair enough.
I will ask Dick Gill to respond to your question about timing. It is clearly appropriate to examine whether funding rail projects through RAB is the best method, and we have no concerns about that.
But we are at a relatively early stage in that project.
We are, but planning has been going on for a long time on the basis of the original £1.1 billion, and there was quite a short time period between the announcement of the project and the subsequent announcement of the reduction in scope.
Okay.
We include in appendix 2 an outline of the broad approaches that are used to fund the projects here. We have not included in that other types of private financing, because they are not in play. In any of the approaches, there is a trade-off between cost, risk and time, and it is not possible to make broad assessments about which model is better value for money or better in other ways without looking at the specifics of an individual project. There can be good and bad PFI contracts.
On the face of it, however, I would say that it is pretty good for NPD.
I am so tempted, but I am not going to.
We would like to see the development of a regular approach to reporting what the cap is, first of all, and how that is calculated over time. The way that it is expressed will change over time as a percentage of budget, which we only know a maximum of three years ahead, and then what the known and likely commitments are against it. A batch of pre-existing NPD and PFI commitments already count towards it. Those projects and others are under negotiation, and we have likely or estimated costs that will firm up over time as contracts are committed, and there is then a pipeline of planned projects, some of which will have revenue consequences if that is the way in which they are funded.
Thank you. On the 14 per cent of the cap that the five projects on which you have reported today represent, if we ask the accountable officer of the Scottish Government for the complete figure, or 100 per cent of that cap, will they know it and be able to tell us?
We know what 100 per cent of the cap is by calculating 5 per cent of the DEL budget.
I am sorry; the better question is what is being used.
Ah, sorry. Sixteen per cent of the cap is accounted for by those projects. We do not know how much of the remaining 84 per cent is accounted for by other projects.
You do not know that. Does the Government know? Does anyone know?
That is a question for Government. We cannot answer that.
Across all Government spending that is done using these various financing models that involve year-on-year revenue costs to the taxpayer, we simply do not know what that number is at this stage.
Through our audit work and the access that we have to that information, we do not think that the Government has fully demonstrated it, and it is certainly not publicly available in ways that the committee could scrutinise and inquire into.
That is really helpful. How do we deal with the point that Colin Beattie made about some of the information being commercially sensitive? How does the taxpayer understand their long-term, year-on-year commitment to this spending, if the only answer that they get is that the information is commercially sensitive?
That is very much why we have recommended that some of the reporting might need to be done on a portfolio basis rather than project by project. We do not want the Government to weaken its hand in negotiating with potential private partners or providers by being explicit about what it thinks the outcome might be. However, that is not a reason not to be aggregating estimated costs on a portfolio basis or on some other basis that gives an indication of the likely outcome.
It is a way of gaining information on behalf of Parliament.
Government needs to decide that. The infrastructure investment board has been a good innovation since it was established in 2010, and we have made some recommendations for how it can become more effective in scrutinising and key decision making. However, it would not need to do it; it could be the finance directorate. There are other ways of doing it.
Yes, I accept that it is for Government to decide where it does it. However, there is logic behind the idea that an infrastructure investment board would know what the numbers were and would report on them, is there not?
I think that Dick Gill would like to answer that question.
It is an important and influential body but it is, fundamentally, an advisory body. We make the point in the report that its function is to advise decision makers, not to make decisions itself. The question of what we can afford in the DEL budget is another decision.
So we should ask the accountable officer, who is the senior civil servant responsible.
Yes.
That is helpful.
I do not think that we have done the work that would let me answer that question, but we say clearly in the report that its broad governance arrangements are effective. Two of the projects here have got strong governance arrangements in place. The other three need to be updated to reflect changes to them. You can draw some conclusions from that without there being a blanket assurance about the management of the organisation overall.
So, based on the analysis that you have done, the establishment of the principle that there is a slight separation—only a slight one—between civil servants providing policy advice to ministers on building a new road or railway and advice about the practicalities of contracts and so on, which is the role of Transport Scotland, has broadly been successful.
That is not the question that we were asking in the audit work, but it is clear that planning and managing major investments on this scale require specialist skills, and we have seen nothing to suggest that the broad approach to that is not working effectively.
In many ways, this meeting of the Public Audit Committee seems to be clutching at straws. This is a good report. Everything in the message that the Auditor General has delivered is good, and her wise advice, which is welcome, relates to issues that we—[Interruption.]
Carry on.
I am sorry, but I thought that there was an interruption from the Conservative and Liberal Democrat members of the committee.
Not at all.
As the Auditor General has said, the report shows quite clearly that all of the projects are expected to come in on budget, and that four of them will come in on time. The one that is not coming in on time has been reprofiled in a way that will save the public purse £350 million. If those are not good messages, I do not know what is, particularly when we compare these projects, managed by Transport Scotland, with some of the spectacular failures that are happening elsewhere.
He is giving a speech, convener.
There is an issue about how the Public Audit Committee can get some additional sight of some of the public funds that are spent on our behalf by our neighbouring Parliament down south. We have no visibility in that regard.
Those are reserved matters.
Yes, those are reserved matters. Spectacular failures are the preserve of Westminster, but successes are the preserve of the Scottish Government.
Some members of the committee are a bit puzzled about where you are going with this, Mr Coffey. We are the Public Audit Committee of the Scottish Parliament. However, you may carry on.
You said that whatever Mary Scanlon said was her business, so I expect the same courtesy.
I was asking questions. You are not asking questions.
Colleagues—
I do not remember Mrs Scanlon being interrupted as often as this.
I am not sure whether there was a question there, but would you like to comment, Auditor General?
I would like to clarify something that came up in the early part of Mr Coffey’s remarks. We are clear in the report that Transport Scotland expects the projects to be delivered on budget and, in the case of four of them, on time. We think that it is managing the risks well, but we also say clearly that it is not possible to eliminate all of the risks, because of the size and complexity of the projects, which are still live. We are saying in broad terms that the governance of the projects is good, but I need to place on record the fact that there remain risks to their delivery, simply because they are large projects that are still in process.
I would not expect anything other than that.
I thank our colleagues from Audit Scotland for attending. We will suspend for five minutes for a comfort break.