Finance Committee, 05 Nov 2002

Meeting date: Tuesday, November 5, 2002

Official Report 255KB pdf

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Budget Process 2003-04

Members will recall that, as part of our financial scrutiny arrangements, we agreed to widen the consultation process to receive evidence on the budget proposals from organisations beyond the Executive. We conducted such an exercise at stage 1 of the process this year, and it proved a valuable tool in our consideration of next year's budget, so we decided to repeat the exercise at stage 2. I am delighted to welcome back Iain McMillan, director of CBI Scotland, and Peter Wood, head of public policy at DTZ Pieda Consulting. We had also invited back Grant Baird, but he is unable to be with us today.

I invite both witnesses to make a short opening statement, and then we will proceed with questioning from members.

Thank you for inviting CBI Scotland to be represented today. We take the work of the committee seriously and it is always a pleasure to come and give evidence.

It is worth recalling that the annual budget is closely tied to the annual Scottish three-year spending review, which in turn is driven by the United Kingdom three-year comprehensive spending review. The CBI had quite a lot to say about the comprehensive spending review and about the balance between taxation, income and expenditure. However, I am conscious that that is a matter for another jurisdiction and my comments today will be restricted to those matters that relate to devolved Scotland.

The issue for us is where the money is spent, rather than the income and expenditure equation itself. The extra £4.1 billion over three years, of which the 2003-04 budget forms a part was, in that restricted sense, extremely welcome. As an organisation, CBI was in the main supportive of the outturn of the Scottish spending review, particularly in relation to investment plans for education, lifelong learning, transport and some areas of health improvement, which are important elements in improving the supply side of the economy.

I will not go through the complete list, but efforts are being made now to increase performance among young people in education and there are forward plans on the lifelong learning side for education for work and enterprise. On transport, we very much welcome the recommendations of the consultants who have been considering the multimodal studies in the three main transport corridors—the M74, the A8 and the A80. The Minister for Enterprise, Transport and Lifelong Learning has also committed to starting the process of work on upgrading the A8 and A80 to motorway status.

On health improvement, the point is never lost on the CBI that the health service should be a health service and not just an illness service. The proposals to improve the health of the people of Scotland are important, and should be commended.

I am happy to take questions at the appropriate moment.

Good morning, convener and members of the committee. This is my first visit to the chamber in its current form. The last time I was here, it was to see "Ane Satyre of the Thrie Estaitis"—I am sure that it is not like that at all now.

The committee invited me to give evidence in May, and I was pleased and honoured so to do. At that meeting, I commented on various factors of the budget, including the overall spend and the balance of spend as reflected in the expenditure plans. I commented on specific areas of expenditure. Members will be relieved to hear that I do not intend to repeat the things that I said in May, but I would like to make some observations on the overall spend pattern, as set out in the draft budget, and I will pick up a few points about the measurement of benefit and the targets that have been set. My comments will focus on enterprise, lifelong learning and transport and on health.

I agree with Iain McMillan that there is little point debating the balance between expenditure and revenue. The expenditure plans of the Executive and the Parliament reflect the resources that are made available through the United Kingdom fiscal system. The question is how we best spend the money that is available. From my reading of the draft budget, I understand that it indicates a growth in real expenditure—in terms of today's money—of about £3 billion by 2005. Of that growth, almost half—46 per cent—will be accounted for by increases in health spending; about 30 per cent by increases in the resources available to local government; and 14 per cent will go into enterprise, transport and lifelong learning. Those elements account for the great bulk of the spending increase, with the greatest part being on health spending.

In May, I expressed my reservations about how well the increased expenditure on health might be used and about whether there was a danger that it might feed into cost inflation, and might not buy patient improvement. That question is still hanging. I recognise the difficulties that face planners. The annual real growth in health spending is about 6.5 per cent, although it is arguable that inflation in the health service runs above the retail prices index rate because it is a labour-intensive service and because of the rising cost of drugs. The real growth in resources may be rather less than the raw figure implies. I made a rough back-of-an-envelope calculation which showed that, if differential inflation is allowed for, the true growth in real resources is perhaps 4 per cent a year, rather than 6.5 per cent, although that is still substantial additional expenditure.

The issue is how that extra expenditure will be spent and used. To an extent, it is hard to tell from the draft budget what the money will be spent on, what the balance between staff and equipment will be and where the priorities will lie. I am not saying that the draft budget contains no indications, but those that it does contain are fairly limited. There is still a concern about exactly what health benefits the extra expenditure will produce and what the priorities will be.

I have a couple of observations on the health targets that are set out in the draft budget document. On one level, there are what I would call high-level targets on improvements in the morbidity and mortality rates associated with various types of illness. However, if one looks closely at those targets, one sees that they are largely projections based on recent trends: they show where we will get to if things carry on as they have done in the recent past. I wonder whether those targets are challenging and biting.

The lower-level, more operational targets tend to focus on waiting times—people not having to wait more than a certain length of time. I found it hard to assess from the document the scale of improvement that the changes in waiting time represent. What is the baseline against which the improvement is measured? There are some tantalising hints in the document, but one would have liked to see a more rigorous analysis of the scale of improvement in targets such as waiting times for different conditions.

The fact that the waiting time targets are split between waiting times for a consultation and waiting times for treatment raises questions about how long people are waiting from when they become ill to when they are treated. However, the main issue is that I would have liked to see in the targets a clearer statement of the baseline position from which we are starting across a wider range of indicators and a clearer statement of the scale of improvement that is expected.

On expenditure on enterprise and lifelong learning, in May I suggested that the balance of the increase in expenditure between higher education and other elements of the budget might better be changed. I note with some pleasure that there appears to have been a shift, with a greater increase in spending on higher education, which I welcome. Serious matters face higher education funding at the UK level as well as at the Scottish level. We are beginning to see bubbling up into the public arena discussions about top-up fees for example, and higher education funding is an issue to which the Parliament will have to return, when the budget comes under renewed scrutiny.

I know that the committee is concerned with targets, and I want to make an observation about the targets that are set out for economic development, especially those that relate to Scottish Enterprise and Highlands and Islands Enterprise. Again, we have relatively impressive-sounding targets, including increasing research and development and productivity against international comparators such as the Organisation for Economic Co-operation and Development average. When we examine the targets closely, we should ask how testing they are, because they are not quantified. How much improvement is required to say that the targets have been met?

My other concern is with the more operational nuts-and-bolts targets. The question that lingers in my mind is how far the achievement of those operational targets will transform the economy. Are they really challenging, and how do they compare with current performance? I do not want to bore the committee, but I will give one example. One suggested target is that the survival rate for assisted small businesses should be 70 per cent after three years. The current level is about 67 per cent, and the difference between the two figures is within what I would call the statistical margin of error. I wonder whether the targets are challenging. Furthermore, how much evidence is there that achieving the operational targets set for Scottish Enterprise will be enough to change the economy's performance? There are questions about that.

My last comments are about transport. I welcome the commitment to certain key schemes, to which Iain McMillan alluded, and the evidence that progress will be made on the M74, M77, Kincardine bridge and so forth. However, I was taken aback by the traffic targets for 2021, which appear to be to stabilise traffic at 2001 levels. That target is unbelievable. That is all that I have to say.

Thank you. I will kick off by asking you both to return to our previous discussion on the balance between capital and operational expenditure. What is your view of the balance between those two in the budget? Do you think that the Executive has got it right? Are there any issues that you want to highlight?

It really depends on how infrastructure will be paid for. If, on the one hand, a trunk road is paid for by the Scottish Executive and the capital sums are paid outright to the contractor, that is capital expenditure. If, on the other hand, the trunk road is built by a design, build, finance and operate model—whereby the capital expenditure is raised by the consortium that builds and owns the road, which is then, under whatever agreement, paid by the Scottish Executive for the use of the road—the expenditure becomes revenue expenditure that is paid out over time.

In our view, it depends on what will actually be delivered at the end of the day. We are interested in the transport infrastructure that will be made available. Given that there can be debates about how we should provide financing for that infrastructure, the tension between capital expenditure and revenue expenditure can be loose. Our interest is in outcomes.

I agree with Iain McMillan's first point. The financing of elements of capital expenditure through the private finance initiative has meant that I have not quite worked out how the scale of the investment in bricks and mortar and equipment compares with the investment in people. My excuse is that the draft budget has been available for only a few days. We need to reflect on the matter.

I also agree with Iain McMillan that the basic question is about what is being procured or delivered. I find it hard to answer that question because, in certain areas, the budget does not contain the detail to say what the expenditure will produce. There is an obvious concern that money that is channelled into current spending may tend simply to drive up costs rather than to produce extra output.

That question cannot be answered at a broad-brush level. One would need to drill down into the various categories of expenditure. In health, one would need to consider the balance between buildings and equipment and staff. In the local authority education sector, one would need to consider the balance between schools and teachers. The matters require to be considered in those terms rather than in terms of whether the right proportion between capital spending and current spending is X, Y or Z.

The Executive makes great play of infrastructure investment in schools and hospitals and so on, which is a theme to which it constantly returns. Clearly, there are hard decisions to be made. Last time, we discussed whether the Government had the correct balance in the hard decisions that need to be taken on transport projects. Are you concerned about the uncertainty that you talked about? How should such decisions be made and how should they be made clear?

The answer to the question of what is the right balance between investing in buildings and investing in staff and personnel must depend on an analysis of where the constraints lie. In the health service, for example, is my father's hip operation being delayed by the absence of a theatre or by the absence of a consultant who can do the operation? That kind of question can be answered only with such an analysis.

On the roads side, my view is that considerable progress has been made in the rational assessment of road projects. The Scottish transport appraisal guidance and associated analyses are providing us with a rational basis for deciding where road improvements are needed. The CBI may not agree with me, but I think that, on the whole, the balance has been fairly well struck for aspects on the transport side. It seems to me that we have a rigorous and relatively transparent process by which infrastructure spending on transport priorities is analysed.

I agree with everything that Peter Wood has said. To answer the question properly, one would need to examine the various projects in detail and to consider, for each project, what the Executive is trying to achieve and the manpower and skills and buildings and other infrastructure that would be required to achieve that. Once that was done, one would be able to come up with an aggregate figure. However, how each project is arrived at is more important than the high-level balance between revenue and capital expenditure in the round.

I also agree with Peter Wood on the methodologies for prioritising capital expenditure or, indeed, revenue expenditure on DBFO transport projects. That is the case in respect of prioritisation and also capital investment appraisal per se.

I want to elaborate a little further on the transport budget. I refer you to table 8.14 on page 142. Will you comment on the presentation of the table and of "What we will do with the money"? A significant proportion of the additional resources appears to be going into capital charges rather than capital construction. The capital charges and, indeed, the depreciation increase are substantially greater than the amount that is going into capital construction. Will you comment on that?

I am sure that the accountants can answer the question better than I can. All that one can say is that the payments for capital charges reflect the consequences of decisions that have been made about investment—they are in the document because the investment has been made and it is not possible to whisk them away. Nevertheless, questions arise. This is an interesting area. As Iain McMillan said, the way in which projects are financed affects the future pattern of expenditure. Projects that are financed through PFI-type mechanisms imply that expenditure will be made far into the future. That is a feature of the investment, as it were.

With respect, Mr Wood, the costs that relate to PFI and PPP are specified in the table. I assume that the capital charges relate to other matters. Indeed, I assume that a lot of them relate to the resource accounting and budgeting accountancy technique. I am happy to be corrected, but I think that, as the charges do not deliver anything, the bulk of the additional money would appear to be totally a paper exercise to put back in the 6 per cent.

We have not seen any significant improvement in maintenance, which is what the resources are supposed to go to. If you look at the figures for road improvements and winter maintenance, you will see that they are down on previous years. I am not sure why an additional £60 million is accounted to capital charges. What is the figure delivering? It is unlikely to reflect an interest payment on capital borrowing, as that is not how that is done. It must be a feature of resource accounting and budgeting. The money is not being ploughed back into services.

I said that the question of how capital charges are accounted for is best addressed to the Scottish Executive's accountants. The figures have to be represented in any transparent and proper accounting procedure.

I did not say that the figures represent PFI charges. The point that I was making was about the way in which expenditure has to be accounted for in financial terms, which is that they have to be reflected in budgets. Mr Adam is correct to say that the figures concern charges that have been made in relation to resources that have been committed in the past; they do not represent new investment.

In response to the question of whether the charges are wrong, inappropriate or incorrect, I would say that that is not a question that I can answer. As I said, Mr Adam should address the question to a public services or public finances accountant.

I wonder whether I may take you on to another matter. I think that you said that we are talking about how we spend the money and that we are not talking about the balance between expenditure and revenue, but there is one area in which we could do so.

The last time that Mr McMillan came before the committee, he said:

"We would like the uniform business rate poundage parity with England to be restored."—[Official Report, Finance Committee, 21 May 2002; c 2044.]

I notice in the local government section of the document that the income from non-domestic rates is projected to rise over the next three years by 22 per cent. I do not think that that will be due to expansion in the economy, unless something substantial is about to happen that I am not aware of. Will you comment on that? The figure is buried away in the local government section—table 10.02 on page 170 shows that there will be a £340 million increase in NDR over the next three years.

I have no real comment on that question. As I have said, I have had the document for only two days and I have not read that table. I have noted what the Executive has said about its position on business rates, but I have not particularly focused on the matter for this meeting.

The income from non-domestic rates should rise cumulatively through the retail prices index. I agree that the figure is puzzling, but I cannot account for it. That question would need to be directed to either the minister or the Scottish Executive official who compiled the figures. Although there will be a revaluation of property subjects in 2005, that will simply be a redistribution exercise and should not raise any extra revenue. I am afraid that I do not know the assumptions behind the figures, although we very much welcome the one-year freeze on the uniform business rate that will begin next April.

I apologise for missing your introductory remarks, gentlemen, and I am sorry if I ask a question that you have already answered.

Much has been said recently about demographics, support for skills and the requirement to keep skilled people in Scotland. What are your views on that area of the enterprise and lifelong learning budget? It has a very strong focus on supporting modern apprenticeships and on education maintenance allowances for people from lower-income families.

When we discussed the matter in May, I said that I was not sure that the figures at the time gave enough priority to higher and further education. However, looking at the current budget figures, I welcome the evidence that priority is being afforded to skills and learning expenditure. That includes expenditure on higher and further education and on modern apprenticeships.

The education maintenance allowance is a welcome innovation. I recently carried out work on the structure of the 16 to 19-year-old age group in Scotland, how it will develop over the next five or six years, the split involving education, employment and unemployment and so on. We should welcome any measures that encourage young people to stay on in education, given the compelling evidence that young people who do so have much better labour market outcomes. In other words, they get jobs, have fewer periods of unemployment and so on. The greatest labour market problems involve 16-year-olds who come out of education and go nowhere. Indeed, that group is the greatest waste of talent; because it does not receive any further education and training, it has significantly poorer prospects in so many ways. As a result, I welcome the priority that has been given to the matter. Increasing education and training resources and ensuring that they are effective is only appropriate.

I agree with all of Peter Wood's comments. Ms Thomson's point about demographics and so on is absolutely relevant. We are probably about to enter an era in which far fewer people in their 50s will retire on well-funded pensions. Over time, it will become even more difficult for people to retire even at 65 on well-funded pensions. The length of time that people will have to remain in the work force will creep up. That will not happen tomorrow—we will not go over a cliff edge or anything like that—but over time, things will change. On the one hand, there will be a need for income on the part of individuals; on the other hand, increasingly, the economy will need those individuals in the work force. That will all have a significant impact on how we train individuals and retrain them several times during their lifetimes and careers. Lifelong learning and the whole education panoply have always been priorities for public expenditure in Scotland, but the skew is heading more in the lifelong learning direction.

The budget document refers to matters such as extending the modern apprenticeship scheme. That is desirable and we support it. There will be further investment in further education, which ties in with much of that. The review of education for work and enterprise is due to report fairly soon. There are likely to be recommendations in that report that will require public expenditure. We support those measures, and they will have to be built upon over time, for the reasons that I have set out.

I wish to pick up on the other side of the enterprise budget. There has for a long time been a debate about the balance between business support investment—which is largely conducted through Scottish Enterprise—and what might be called broader economic regeneration investment. The most obvious example is the use of money to deal with vacant and derelict land. Is that matter adequately reflected in the budget? What is your view of the balance between those two areas and do you see a need—in particular in relation to the latter—to emphasise further the use of available resources to deal with vacant and derelict land, if we are to regenerate parts of Scotland, for example Clydeside?

I would need—to be able to give a full answer—to see in detail what was proposed and find out what Scottish Enterprise and Highlands and Islands Enterprise will be doing with the resources in the round. My answer will therefore need to be based on the principle, rather than on the detail. Any country needs an organisation of some sort to reclaim land and to develop it to ensure that it is fit for purpose and redevelopment. Scottish Enterprise and the local enterprise company network do that. If they did not, some other person or organisation would have to do it. Our members take no issue with the balance that Scottish Enterprise and the enterprise and lifelong learning department have struck on where expenditure is placed.

I am sorry, but I will digress into the distant past. In the mid-1980s, I was involved with a number of people who were, with the then Scottish Development Agency, working on projects that were examining the balance of expenditure on the SDA's activities, and especially its property function. A criticism of the SDA in the 1980s was that relative to what was being spent on direct promotion of economic activity, much of its budget went into physical renewal—removing bings being the prime example. In the late 1980s and early 1990s there was a swing away from physical regeneration towards providing more direct support for business development. I supported that readjustment of priorities.

We are now talking about shifts at the margins. There are important physical renewal issues in certain parts of our cities and urban areas that must still be addressed. However, renewed sites will be taken up and used only if expansion of economic activity makes that possible. It is possible to prettify areas without stimulating economic activity. When spending on that programme area was excessive, we ended up with improved sites that no one was using.

Unless we are concerned simply about aesthetics, decisions about spending should be driven by economic opportunity. I agree with Iain McMillan that there is at the moment no great controversy about the balance between support for physical regeneration and support for business development. We could argue for shifts on a project-by-project basis, but the long-term shift that focused the role of the Scottish Development Agency more on the promotion of economic activity than on physical site redevelopment was correct. The balance might shift slightly from time to time, but I would not argue for a radical change in priorities.

I want to return to the budget process, which is the subject of this morning's meeting. Both of you said clearly that you found the budget document difficult to deal with because it does not contain a clear statement on baseline spending—in other words, it does not contain comparisons. How would you like such comparisons to be made?

Baseline spending is an issue, but I am far more concerned about how expenditure is tied to headline statements about what money will be spent on. The draft budget does not do that particularly well, despite its being a 194-page document.

We support many of the desired and intended outputs to which the document refers. We have every reason to believe that the number crunchers in the Scottish Executive have done a reasonably good job of costing proposals and on phasing them throughout the budget and spending review period. However, the document contains nothing that shows that the relationship between expenditure and outputs has been tested rigorously.

I agree with Iain McMillan. My comments did not relate to the comparison of the spending figures with baseline expenditure, because those data are provided. I was commenting more generally on what the Executive is procuring with its expenditure.

I am aware that the criticism that I am making can be levelled at public expenditure processes in general—it probably often is. When announcements are made, the headline is often, "We are increasing spending by X, Y or Z". Those who work in business know that their group board would not necessarily be impressed if they told it that they were increasing costs by 50 per cent the following year. The board would ask what they intended to do with the money and what the company would get from that.

I know that in business the issue is simpler; it is about revenue versus cost. However, it would be a move forward if in the draft budget and documents of that type we could see more clearly what outputs were expected from spending. There should be more transparent comparisons between where we are and where we expect to reach. My comments about baselines and monitoring measures referred to measures of output and benefit from expenditure. Progress has been made, but it would be beneficial to move towards setting out to the people of Scotland what we will buy with the money that we will spend on their behalf.

You are both saying that specific targets should be set out in the budget—that we should say that we will spend £X million and expect to receive Y in return for that.

That is what we aspire to. I do not for a minute underestimate the difficulty of doing so in an area as complex as health, but it is worth while and necessary to try to make further progress in that regard.

In fairness, a budget document of this nature cannot possibly go into the kind of detail that would allow individuals such as Peter Wood and me to evaluate those matters. For example, the document refers to a number of other Scottish Executive documents across the various ministerial portfolios, and rightly so. Below that, there are other documents that contain information. Below that again, weighty business cases are produced for all sorts of things.

I will give an example. I am a non-executive director of the Scottish Ambulance Service Board, which presented to the Scottish Executive a business case for converting the accident and emergency service to a priority-based dispatch model. We have done that over the past few years and all the detail about how the returns on expenditure will be generated and what benefits will accrue to the patient and the taxpayer are carefully and rigorously set out in a document that is about an inch thick. A substantial aggregation of such business cases would need to be read and understood in order to form a powerful judgment on a budget document such as the one that the committee is considering.

I thank the witnesses for their evidence this morning, and for the evidence in the past which has contributed to our consideration of the Executive's budget document.

Before we move on to item 3, Arthur Midwinter wants to clarify something for members.

The debate about the balance between operational and capital expenditure intrigued me. In table 0.05, entitled "DEL Capital Budget 2002-03", the line for social justice shows that there will be no capital expenditure this year because of the accounting arrangements. I understand from the work that I have been doing on the housing paper for the cross-cutting review that capital expenditure by housing associations appears not to count as capital expenditure by the Government, so it does not show in the accounts, despite its being a significant amount.

Likewise, the housing revenue accounts of local authorities, which represent more than £100 million of capital expenditure a year, are not recorded in that table. What confuses me is that the single allocation for finance and public services appears to have been included in the table. I would have thought that the housing revenue account expenditure and the single allocation under section 94 of the Local Government (Scotland) Act 1973 are similar. We must try to clarify that, but I think that it is an understatement of the amount of capital expenditure that is actually being delivered. It is an accounting issue. Someone from the outside might say, "You're not spending any money next year on capital. How can that be?"

Housing associations are under the control of the Executive.

Yes, but one of the main accounting thrusts behind the move away from local authorities towards registered social landlords is apparently that RSLs are classed as voluntary, so on the accounts throughout Europe they do not count as expenditure by Government. RSLs get a grant for their housing development programmes from the Executive, which does not show in the accounts as capital expenditure, although it is being used for new build and for improvement of the existing stock.

It is the same as public-private partnerships, in that it goes off balance sheet.

Almost 100 per cent of the housing revenue account is consent to borrow. It is therefore the borrowing, and not the capital expenditure, that shows in the accounts.

Does it not appear in the Communities Scotland budget at all?

It appears in the Communities Scotland budget, but it does not appear as capital in table 0.05 of the budget document, so the figures are an understatement of how much capital is actually involved.

We will eventually reach an ideal in which all the figures in that table are zero. [Laughter.]

We will then not have to spend our time trying to work the figures out.

That is something that we might be able to explore in Skye when the minister comes before us.

Item 3 also relates to next year's budget. I welcome the witnesses who will be appearing before us to discuss the modernising government fund. We will hear evidence from Alan Fraser, head of the 21st century government unit at the Scottish Executive, and Jim Kinney, head of the local government implementation team in the 21st century government unit. I hope that we do not get too bored saying that; it is quite a mouthful to get around.

It is important that the Finance Committee cover areas of the budget that the subject committees do not cover. That gives us an opportunity to examine the modernising government fund. I invite Alan Fraser to make a short opening statement, after which we will ask questions.

The purpose of my unit—the name of which is, as the convener said, a bit of a mouthful—is to focus on better service delivery. The unit is based closely on the Executive's major policy commitment to pursue social justice and to bridge the opportunity gap. We promote citizen-focused projects that provide better services and better access to information for everybody. Although we have the modernising and e-government tags, we are not e-driven. The projects that we support and pursue are often e-enabled, but technology is not seen as the driver; the needs of the citizen as customer are most important. We try to take it into account that not everybody across the social spectrum has access to technology.

The Scottish Executive has had to carve out for itself a place on that agenda. Ministers have signed up to a vision of 21st century government that includes a role in communicating, setting standards, facilitating exchanges between service deliverers—clearly, the Executive does not deliver the majority of services directly—and, through the modernising government fund, incentivising a range of public sector projects. The fund is into its second round.

I will kick off. The modernising government fund is based on support for particular projects. How do you evaluate or monitor those projects and decide which are the most appropriate to develop further? Is a pattern emerging in the choice of projects? If so, what are the identified benefits of the projects that fit that pattern?

In the second round of the modernising government fund, ministers wanted to focus on priority areas. Ministers came to a view on what were the priorities across the patch through, among other things, examination of local authorities' action plans. We had thereafter a dialogue with local government chief executives and other interested parties about how to focus on those priorities. That was how we identified the broad range of key priorities for the second round. When we invited proposals for projects, we asked that a proper financial appraisal and a statement of net present value be produced so that the proposals would be pointed towards savings and service delivery gains.

The final test of the projects is in the delivery. The projects are still running, but we have had positive output. The projects are required to report quarterly and we examine the gist of those reports and put them in the public domain on our website so that other practitioners can benefit. Part of the point of the evaluation is to discover whether we are getting what we hoped for from the projects; another part is to spread the learning benefits throughout the public sector.

One of the projects that features in your targets is the Scottish electronic citizen card. What is that and what will it provide for citizens?

The project builds on the Accord card scheme, which has been piloted in Aberdeen. The Accord card is a smart card that is similar to a bank card, but which instead of a magnetic strip has a chip that can hold fairly detailed information about the owner, if the owner wishes it to.

The cards have been issued to schoolchildren in Aberdeen, who can use them to pay for school meals and to access leisure facilities. The scheme is now being expanded to the wider population to be used for leisure facilities, transport and libraries. The Accord card collapses into one all the current cards that one can end up carrying, so it has considerable capacity to be loaded up with a range of applications. We want to ensure that, as different authorities and bodies develop such cards, we do not end up with 32 flavours of smart card. We therefore promoted a single common standard, partly for reasons of interoperability so that the cards could be used throughout different areas, but also to save money. We wanted to ensure that one trustworthy technology could be identified and used. That is the reason for our intervention. The cards will be a major benefit for people in respect of simplicity of access to services.

The Scottish Executive "Draft Budget 2003-04" states that the target is to develop

"By 2006 … a Scottish electronic citizen card available to all citizens".

I take it that that does not mean that all citizens would have a card or would even be able to get one.

That target means that by 2006 all citizens should be able to get a card.

Is there any target as to what people will be able to get using the card?

The card is the tip of the iceberg. What people will be able to get will depend a lot on the systems behind the card and the extent to which individual bodies or authorities are organised to deliver particular applications. The room for variation is in which applications individual authorities decide are their priorities.

Is it intended that the card will cover central Government services? Are you thinking about the card being used in the first instance only for purchasing local services?

The potential is very wide, but in the first instance the card will be a means of gaining access to local services. That access could be extended to health services, for example, although that is another complex area that is not part of the immediate plans.

The first Scottish universal application that we expect is as a youth card. We are building on the back of the established Young Scot card for young people, which acts as a means of identification, a proof-of-age card and it gives access to discounts, information and services. All 32 authorities want to develop the card for that purpose in the first instance.

If a person has a youth card, will the same card continue to be of use to them once they have passed into adulthood?

That is the potential; that is what we want to see.

That would be almost an identity card for adults. You talked about proof of identity in regard to the Young Scot card.

I mentioned proof of age.

The one point that we—and everybody else who is involved—would make is that the card is not intended as an identity card. The card would be voluntary; it would be available to people who want to carry it, but people would not be compelled to have one. It is voluntary for young people to obtain and carry a Young Scot card. Some young people want to have a card that they can use as a proof-of-age card.

If the card is being used to deliver council services and, for example, in the school canteen, the benefits come if the only way that you can get Coke out of a machine or whatever is to use the card. Although the cards are voluntary, they will soon become essential.

That is right. The most economical outcome will be everybody choosing to use the cards. We, and those who are promoting them, hope that the advantages of the cards would be such that most people would choose to use them. It is not part of the plan to say to people that if they do not use a card they will be denied services—that is not the proposal.

I want to develop that point a little. Alan Fraser said rightly that the card is based on the Aberdeen Accord card. How far down the road are you in assessing its viability? As I understand it, the cards have been used to a limited extent so far in schools, but their use not been expanded beyond that. Is the time scale for their introduction throughout Scotland realistic? I must admit that I find your argument that such cards will not be back-door identity cards to be totally unconvincing because it would be so simple to say, for example, that school meals will be provided only if pupils use cards, which would make their use compulsory.

There were two points in that question. One is about the use of cards. There has been a limited pilot in Aberdeen including a number of applications for the card, and the intention is to extend that further in Aberdeen. As Brian Adam will know, that forms part of the overhaul of the way in which public services are delivered in the city.

Brian Adam's second point was that he is unconvinced that the cards will not be identity cards. There is no question but that if someone carries a card such as a banker's card, bus pass or anything else, it has their identity on it. If it does not carry the individual's identity, it could belong to someone else and be open to misuse. However, we are not talking about cards whose possession will be a requirement and which people will be compelled to produce on demand.

That will become a requirement if school meals are provided only on production of such a card. The difference between the cards in this project and bank cards is that there is a host of banks, but we are not suggesting that we will provide a range of alternative local government services from which people can choose. We are saying that a range of local government services will be provided by using the card, but there appears to be no guarantee that those services will continue to be provided if people do not use the cards. If there are no guarantees that services will continue to be provided reasonably and equally accessibly, will the card be anything other than a compulsory identity card? That will be especially important if you want to introduce the cards on a cross-border basis throughout Scotland so that their use is transferable between authorities.

That might be the ultimate objective. However, if Brian Adam is looking for reassurance, ministers have made it clear that the agenda is about access to services, which must reflect the fact that different people might have difficulties with particular means of access. People who have reading difficulties or disabilities might find some of the channels of access harder to navigate.

One cannot get a library book without a library card. I presume that library cards will be subsumed into the smart card.

We are probably beginning to labour the theme.

The convener may have used the right word, but there is, nevertheless, an important point of principle. Will choice be restricted as a consequence of rolling the system out? Will we get value for money? Has a proper assessment been made of any of the schemes that are currently in place? Is it realistic to expect the scheme to be rolled out Scotland-wide in the next four years?

At present, the schemes are in an early phase of development, so there will be an evaluation. I presume that, as well as operational issues, some of the philosophical issues will be dealt with in that context. We must bear in mind what we are trying to scrutinise today.

This is the only place where the card will be scrutinised. This is the committee that will deal with the policy issues, as well as the financial issues. Is not that correct?

I suppose that that is right, but the issue concerns roll-out. Does Elaine Thomson want to speak?

Oh, thank you. Sorry, I have lost my thread of thought.

Do you want to rethink and let David Davidson speak first?

No, I wanted to ask about 21st century government. Does not part of that involve doing things in new ways and facilitating new technology with a view to substantial cost savings? For instance, in the past 10 to 20 years, the private sector has achieved substantial cost savings by conducting some transactions electronically, such as paying suppliers through the bankers' automated clearing system. How do the projects that the modernising government fund is resourcing intend to achieve such savings?

All the projects that we back are subject to financial appraisal and we expect a positive net present value. We expect them to make gains not necessarily through savings, but through service delivery improvements. Some benefit must be projected. The aim is not purely to achieve cost savings, but Elaine Thomson is right to say that, ultimately, significant cost savings are possible in many cases. As I said, one way in which we are pursuing savings is by encouraging authorities throughout Scotland to pool their resources to develop their applications, rather than to risk pursuing them separately at considerable cost. We are pursuing savings in a couple of areas.

I will backtrack ever so slightly. We talked a bit about Aberdeen's Accord card. To make the best use of information when rolling out such a service throughout Scotland with a view to the creation of a Scottish electronic card, will you base that service on the pioneering work that has been done in Aberdeen city, rather than reinvent the wheel?

The project has been fast-tracked but has yet to be signed off formally. Aberdeen City Council will be a lead authority because, as Elaine Thomson suggests, we are trying to capitalise on the experience and the technical know-how that authorities have accumulated.

Earlier, I wanted to talk about what Mr Fraser said about applications elsewhere. The principle that I took to be behind your evidence is that you are looking for improved service delivery—I presume that that means improved efficiency—and that part of that will come through improved access.

Mr Fraser also referred to access to information, which is a two-way exercise. If Brian Adam were a 17-year-old who used an electronic card as identification to enter a library, that would give the service provider information about who was accessing the service. What about the other way round? Is there anything in it for the user, apart from the fact that people who have a card will receive a selective discount, which will be paid for by others who do not receive one?

From Mr Fraser's arguments, I am not sure how the savings will be produced. It is logical to presume that the information on a uniform citizens' card across Scotland will, when presented to anybody, identify clearly where its holder lives and to which authority they have, or have not, paid their council tax. How will you obtain the service efficiencies for which you are looking, given the bureaucracy involved in transferring funding? For example, if someone takes a prescription from an Aberdeen doctor down to Birmingham and has their medicine dispensed there, Grampian NHS Board ends up sending money down to pay for that prescription and undertaking a balancing-off exercise. Is that what you have in mind?

I am not sure whether I followed your example of pharmacists and dispensing. I do not know about that.

I was just describing the process in which funding follows the individual from the source authority.

The initial motivation behind the Aberdeen scheme was to allow citizens who paid higher council taxes in the city to benefit from the subsidies that were given to local services. The scheme has moved a long way from that stage, when I was involved in it, and has grown into something that is totally different.

If discounts are offered, the individual card user will benefit personally. Mr Davidson's point is that the benefit appears to be all on the side of the scheme's administrator and that individuals will have little or no personal benefit, other than through possible general savings across the board. That is a long way away from having privileged access to local services for making a local contribution.

I hope that I did not throw in a red herring by talking about discounts. The discounts that are involved in the Young Scot card are from a range of private sector providers who are interested in offering incentives to young people to come to their places of business and do business there. That is outwith the public sector rationale for a citizens' card, which is more about enabling the streamlining of the back-office processes. Instead of an individual authority dealing with and maintaining information on individuals across a set of transactions, we could begin to bring the information together in a single place. That would create potential savings in the administrative, back-office costs of doing business.

What is your audit process for checking out the savings? How do you set that process in train in the projects that come to you?

At the moment, we rely on quarterly reports from the individual projects. In turn, the internal processes of each of the authorities that are involved—the beneficiaries—are also audited.

Each project is required to submit to the Executive a quarterly report, which we put on our website. Those reports contain information on how the project is progressing and actual expenditure against planned expenditure. At the end of the year, each project is required to put in place an independent certification process through the internal or external audit process to certify that the money was spent on the purposes for which it was intended—the project—and to give us a balancing statement of the fund at the end of the financial year. There is scrutiny of how the project is managed and of expenditure on the project.

What sanctions do you apply if the projects have not achieved what you want them to achieve?

If there are any problems with the financial statement, the ultimate sanction is that we have the right to ask for the money back.

I note from our briefing paper that the origins of everything that you have told us about the modernising government fund are in a United Kingdom-wide fund. What discussions have you had with departments in Westminster about what you are trying to do? How have you co-ordinated your work with them? It strikes me that the Benefits Agency should be involved because information about social security benefits—disability living allowance, for example—could be usefully connected with and put on to such cards.

I will answer that question in a second, but first I will backtrack to the feedback on the card that we get from local authorities. We respond to demand from local authorities to support particular projects. A fair number of local authorities want not only to develop the Accord card, which is based on the Aberdeen model, but to pilot other work on the use of the card, such as the dialogue youth card that Alan Fraser mentioned, which has been used in Angus, Edinburgh, Argyll and Bute and Glasgow. A fair amount of development work has also been done on the citizens' card in Dundee. All local authorities realise that there is a benefit in having a card scheme. They also realise that there is a benefit in collaborating to avoid having 32 flavours of card.

When we review the projects, we get feedback on the card. One benefit that is put to us is that the card represents the concept of a citizen's account with the authorities. One of the difficulties in managing local authority services is that authorities hold multiple records for individuals. That makes it difficult for the customer to transact with the council and sometimes makes it difficult for the council to transact with the customer, because access to information about the service is not readily available to the customer. The card is not the driver. As Alan Fraser said, the back-office gathering of information on the citizen is the driver.

To return to Mr Stone's question, we consulted the office of the e-envoy in London on standards for the card and the infrastructure required to support it. We are aware of developments in local authorities down south. For example, in Cornwall, a consortium of seven authorities is working on a citizens' card. We want to ensure that any developments in Scotland are compatible not only with UK Government departments, but with the local authorities in England and Wales.

If I may, I will complete Jim Kinney's answer to Mr Stone's question about our work with Westminster departments. As we develop standards, we have one eye on the need to ensure that those standards are common. We also need to ensure that, as a matter of policy, whether or not one decides to join up services, at least technology is not an obstacle. That is another strong driver in trying to facilitate the development of the information that is carried on the cards, however people decide to use them. If we have common standards, we will not have a mosaic of incompatible cards.

I am sorry if I put the wrong emphasis in my question. I totally understood what Jim Kinney said about the scheme not being card driven, but being back-of-house driven, so to speak. You are telling me that the Whitehall department that is responsible for benefits is in communication with you and is keeping an eye on what might or might not happen in future.

Our main communication is with the office of the e-envoy which effectively convenes all the interested departments. We have close contacts with, and are members of, different groups and working parties.

I will take you to the third of the fund's three targets, which is to

"Ensure services are available through broadband technology in the pathfinder areas of South of Scotland and Highlands and Islands by 2004."

When you say

"the pathfinder areas of the South of Scotland",

you are not talking about the whole south of Scotland, but certain patches of land in that area. Is that correct?

No. Our reference to

"the pathfinder areas for the South of Scotland"

is to Dumfries and Galloway and the Borders.

What do you mean when you say that you will

"Ensure services are available through broadband technology"

in Dumfries and Galloway "by 2004"?

Let me take a step back. The purpose of the pathfinders is to test the proposition that aggregating the public sector demand for broadband might be a more effective way of levering in private-sector interest in servicing those areas. The objective is to have a contract and service delivery in place across the pathfinder areas by 2004.

The point that I am trying to get at, which crops up throughout the budget document, is about measures of success. How will I know if the target has been met?

If we have a contract in place, the target will have been met. The difficulty is that, to an extent, we are testing the market—or testing the water. We need to find out what can be done to achieve a reasonable depth and intensity of service. There will be a process of negotiation with, we hope, a number of potential providers to establish that.

It sounds as if you are saying that you will have met your target if, sometime in 2004, an unspecified broadband service is available somewhere in the south of Scotland.

Well, yes. I suspect that Mr Morgan is going to lead me into saying that we will meet our target if the level of service is reasonable. I appreciate the difficulty, but we cannot say precisely what level of service will be available. Nevertheless, we are putting together a set of requirements from the partners in the project, which include local government services, such as education, and the health service.

You will appreciate where we are coming from: the whole point of having targets is that they must be measurable. I assume that, at the least, targets must also be slightly challenging. It sounds as if the challenge in this instance was met the day after the budget document was printed.

I appreciate your point entirely. If the process to put a highly specified target into the document were straightforward, that is what we would do. The difficulty that we face is that this area of expenditure is testing a proposition, so to speak. Until we run through that test, we will not know precisely what service we will get or what it might cost. The difficulty with being highly prescriptive is that, among other things, that would compromise our negotiating position with providers. If we clearly stated the level that we wanted or the price that we were prepared to pay, potential suppliers in the area would have us over a barrel in any negotiations.

Elaine Thomson has a specific question on broadband.

My question is on exactly the same issue that Alasdair Morgan was pursuing. Are you the main drivers for rolling out broadband across Scotland? Do you provide the impetus from the Government or the Scottish Executive for that initiative?

My unit is responsible purely for the pathfinder project, which involves testing the proposition and promoting the roll-out of broadband in the two areas that I mentioned. Activity is continuing in other areas through private providers. A further element in the work of the enterprise and lifelong learning department is that of using a number of measures to promote business take-up of broadband. However, that is outwith my responsibility and my minister's responsibility.

So it is not within your unit's remit to ensure that X per cent of the Scottish population has access to broadband by a certain date.

No.

Is the enterprise and lifelong learning department responsible for that?

Yes. That department leads on the broadband strategy. As I recall, no target for broadband has been expressed in those terms. However, I will check that and put it right if my recollection is wrong.

My final question is about the pathfinder areas. As I understand it, the objective of the strategy was to aggregate public sector demand and to negotiate with private suppliers to find out how they might be able to roll out broadband in specific areas. Is the strategy making good progress?

Yes, it is on track. The issue is complex, as it involves bringing together large partnerships and going through their precise requirements both across the wider public sector and in local government. However, we expect to meet the set target on time.

I want to move on to a more technical question. Is the modernising government fund based purely on consequentials that come to Scotland from similar UK programmes? To what extent have consequentials from the capital modernisation fund and the invest to save budget been dedicated to the modernising government fund?

Although we have the benefit of the consequentials from both sources, we are not driven by them. Within the budgetary process, it is up to ministers to decide on allocations across the range of programmes. As the modernising government fund is a relatively small programme, ministers are not necessarily driven by—nor do they keep an eye on—what comes from the consequentials.

What percentage of the modernising government fund is made up of consequentials from those two sources?

From memory, it is probably less than 100 per cent of the consequentials. However, I doubt that our modernising government fund is precisely analogous to the funding sources. As a result, it is rather difficult to make comparisons.

I should repeat that the modernising government fund is very small in comparison with the total Executive budget, from which large sums of money go all the time into what one would probably call modernisation projects. The modernising government fund is by no means the sole source of such money.

Unsuccessful bidders will expend energy, cash and staff time on their bids. How will you keep them on-side if they have already been unsuccessful? What incentive is there to spend even more on another bid?

We tried to fast-track those who seemed to be most closely aligned to what we were after. We gave them an early indication that they were likely to be successful so that they did not need to go through a lot of unnecessary bureaucracy.

On unsuccessful bidders, we expect every authority to be successful, because this time we managed to build up a series of partnerships, some of which cover all authorities. Although authorities might have been participants in an unsuccessful bid in one area, they will probably turn out to be beneficiaries in another.

However, there is a general benefit above and beyond that. We have also prescribed that, where pieces of processes or systems are being developed, there should be no unique ownership of that intellectual property. Where we have funded authorities to undertake that development, they should be prepared to share information with other local authorities and bodies in the wider public sector.

Is that a contractual obligation?

Yes.

I thank Alan Fraser and Jim Kinney for their evidence, which we will examine for our report on the budget process.

Meeting suspended.

On resuming—