Audit Committee, 07 Dec 2004

Meeting date: Tuesday, December 7, 2004

Official Report 171KB pdf

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“The 2003/04 Audit of the National Galleries of Scotland”

Agenda item 2 concerns a section 22 report by the Auditor General on the National Galleries of Scotland. I invite the Auditor General to address the committee.

It is important to draw the Parliament's attention to a situation that has arisen in relation to the finances of the National Galleries of Scotland. In both 2002-03 and 2003-04, the galleries used a significant proportion of the money that was allocated to their purchase grant to assist with running costs. I will expand on that.

As members know, the NGS is a non-departmental public body that is sponsored by the Scottish Executive Education Department. During 2003-04, the department provided the galleries with grant in aid of some £8.6 million to assist with running costs. The department also provided a purchase grant of about £1.2 million for the purpose of purchasing works of art for its collections. The galleries generated a further £7.9 million, mainly from donations and lottery funding, for the refurbishment of the Royal Scottish Academy building and the expansion of facilities at the National Gallery of Scotland on the Mound in Edinburgh—which is commonly known as the Playfair project.

If we go back to 2002-03, we find that the galleries reported a surplus of income over expenditure of just over £100,000, but that was achieved by transferring some £400,000 from the purchase grant that was provided in that year to keep the running costs going. For 2003-04, the NGS reported a surplus of £370,000, but that was again achieved through the transfer of funds from the purchase grant to cover running costs. In 2003-04, which is the most recent financial year for which there are accounts, the sum transferred was about £1.1 million out of a total purchase grant of £1.2 million. If the purchase grant had not been used in that way, the galleries would have recorded a deficit of more than £780,000. In its 2003-04 accounts, the NGS indicates that, for the first time in its history, nearly all the grant in aid provided for the acquisition of new objects had to be used to fund running costs.

A major exhibition of Monet paintings was held during the summer of 2003, which generated increased income from sponsorship, admissions and publications, but expenses associated with the exhibition, along with the increased costs of opening the refurbished RSA building, accounted for a significant proportion of the increased running costs.

The Executive is currently providing additional funding over and above its annual grant in aid of some £3 million. The provision of that money, which is being spread over three years, is only a short-term measure that will expire in 2005-06. The Executive's latest spending proposals—which are for 2005 to 2008—show that the annual grant in aid that the galleries can expect to receive to cover running costs will increase in each of the next four years to £11.5 million, in round terms, by 2007-08. That represents a 33 per cent increase from the 2003-04 levels. In 2006-07, ministers will also provide some £7.7 million to assist with the acquisition of the Scottish National Gallery of Modern Art, which is designed to release the galleries from rental payments of £550,000 a year.

The galleries have updated their financial projections to take account of the Executive's spending proposals. The projections show a continuing reliance on the purchase grant to fund running costs in the three-year period to 2006-07. Without the use of the purchase grant, the galleries would expect to have an accumulated deficit of about £1.4 million by 2007.

In my opinion, there is a need for the department and the galleries to consider how best to manage the gap between income and expenditure over the period. Given the importance of the issue to the future of the galleries, it needs early attention. I shall of course expect the appointed auditor to monitor the developments in the galleries' financial position and to report to me as necessary over the next year or so.

Thank you. We now have the opportunity to question the Auditor General on the section 22 report. Under agenda item 7 we can discuss how we might wish to proceed.

The NGS has been awarded considerable sums of money to purchase works of art for the nation, but that money has been transferred to fill the funding gap. How are the galleries able to do that? What terms of the purchase grant allow them to transfer that money to be used for a purpose for which it was not awarded?

I am not sure whether we have the details of the terms on which that transaction took place. The committee has to appreciate that the report is not a full report as it relates simply to the accounts. I imagine that the galleries would reach an agreement with the department that they could transfer funds from what is in effect a capital purpose to on-going revenue.

Have the galleries indicated whether what is now recorded as a surplus, but which is in fact their purchasing grant, is going back into purchasing, or is it swilling around somewhere in the accounts as a surplus sum?

We are likely to see a continuing pattern of annual purchase grant being used to fund running costs through to 2007-08, by which time it is possible, according to the audit report, that the purchase grant will be reduced to nil. Over the same period, the funding of running costs will increase by about 33 per cent.

The report states that the NGS intends to carry out a best-value review. Do you know whether that has started or been completed and when it is likely to be available?

A best-value review has been undertaken, which the auditor reported. We do not have the details of what it covered or what its implications will be for the future running of the galleries. The auditor's report identified a number of areas of concern, such as the need for the galleries to develop an action plan to address the deficit, a need for them to review expenditure priorities and a need for the management team to improve its effectiveness, because corporate working could be improved. We have not been involved actively in that and have not had sight of the consultants' report.

So you do not know whether action has been taken to address what the review identified.

Not at this stage.

The report also refers to the Monet exhibition. It says that there was increased income, but also increased costs. Do you have a breakdown of the outcome of that exhibition?

I do not think that we have that information to hand. You would be best advised to obtain it from the galleries.

Thank you.

Even with a 33 per cent increase in grant funding for running costs, the galleries do not seem to be planning to be able to balance the budget. Can you explain why? A 33 per cent increase is huge by anyone's terms.

The 33 per cent increase in grant relates to a portion of the running costs. The grant in aid forms about half of the galleries' total income. There are other sources of income, such as exhibition admission fees and general sponsorship, but they are not expected to increase at the same rate, so the overall increase in income will be somewhat less than 33 per cent. However, the increase that will come from public funds during the next four years is 33 per cent.

We are advised that the galleries expect their core running costs—staff salaries, building maintenance, utilities and so on—to increase by about 10 per cent in the period to 2007-08. There will be additional running costs for the newly refurbished Royal Scottish Academy building and the extension of facilities at the National Gallery of Scotland at the Mound—the so-called Playfair project. We understand that the Executive is seeking increases in service provision in the areas of access, education and information and communications technology. There are pressures in the budget but at this stage we have not analysed them in any detail.

How many purchases have the National Galleries of Scotland had to forgo to balance the books? The purchase fund clearly exists to purchase works. How many purchases have they been forced to—

I suggest that you would have to put that question to the National Galleries of Scotland.

It seems that, as part of its budgeting process, the NGS relies on its ability to transfer funds from the purchase grant. Do you have a sense that that is part of its forward budgeting process? In other words, does it plan to transfer the purchase grant to the budget for running costs rather than to use it for purchases? If so, I wonder what the Executive's response is.

Unfortunately, I cannot read into the minds of the galleries' senior management when they put the budget together, but there is quite clearly—

Could you draw some conclusions?

There is clearly a requirement to rely on the purchase grant year on year and it is clear that that will continue right through to 2007-08. At the same time, there is an increase of 33 per cent in the budget for running costs.

The reported budget surpluses were, in fact, transfers between one budget heading and another. How was that reported to the board and the Scottish Executive Education Department?

I am sorry. We do not have that level of detail available.

I presume that that was accepted by the board and the department. Did the department know that that was how the galleries were operating?

Yes. The transfers take place with the Executive's knowledge and agreement.

So it was a matter of policy.

It was a matter of agreement.

I presume that it was accepted by the department. If I have got this right, there were no new purchases, there was an underlying and growing deficit and there were an extra cost for running the newly refurbished buildings. The NGS could see that coming after one year and by 2007-08 it will be running to stand still—it will have an actual deficit. You say

"There is … a need for the SEED and NGS to consider how best to manage the gap between its income and expenditure over this period."

Do you not mean "solve" or "eliminate" rather than "manage"?

It is fair to say, and we have to recognise, that there is an increasing cost base because of the new activities the NGS is expected to take on—and that is recognised by the Executive.

I should expand on the point about whether any purchases are taking place and place it on the record that the galleries continue to acquire works of art with the money they have. If the committee is interested, I can give details of the paintings that were purchased in 2003-04. I have a list of them. We must recognise, however, that those acquisitions were financed largely from trust and bequest funds and that some items are bequeathed to the galleries. The acquisition policy is founded on non-public sources of funding because the public funds are being diverted to cover running costs.

You mentioned new activities, but they seem to be extremely limited, given what has been happening to them. What is happening looks like deliberate policy and there is no sign of any change in that policy. Were deliberate management decisions taken or did they not see the situation coming?

I am afraid that those questions would have to be put to the management of the National Galleries of Scotland.

I look forward to doing that.

Was any work done, as part of the auditor's report, to find out where the increases in running costs are taking place?

We have only limited information on that. As I may have indicated earlier, the National Galleries of Scotland is expecting the core running costs—for staff, building maintenance and the like—to increase by about 10 per cent. It also expects additional running costs for the new gallery and the Playfair project. As I mentioned, the Executive is seeking increases in the services provided by the galleries in relation to access, education and ICT support. We do not have a breakdown of the detailed costs. The committee would have to acquire that from the National Galleries of Scotland management.

Was sufficient funding built into the projections for the financial year to cover the refurbishment of the Royal Scottish Academy building?

The Playfair project, which is now finished, was completed in time and on budget. The total cost was about £31 million, which was met by moneys from the Scottish Executive and sponsorship and donations initiated by the National Galleries of Scotland and the Heritage Lottery Fund. We have no evidence that the construction costs have contributed to the financial problems of the National Galleries of Scotland, although there may be short-term cash-flow issues that contribute to its difficulties. We do not have detailed information relating to that. However, as the Playfair project involves an extension to the facilities, it is likely to have consequences for the running costs. For example, we would reasonably expect there to be increases in the warden costs as a result of the requirement to oversee a bigger exhibition area. In all probability, there will also be increased heating and lighting costs. However, the general picture is that the project seems to have been completed according to plan and within budget.

Do you believe that the projections for the running costs were sufficiently robust and that they did not contribute to the use of grant in aid and purchase grant?

I am sorry, but we have no more detail than I have already given to the committee.

To me, the use of the funds as described in the report seems to be similar to the use of non-recurring funds in the national health service to deal with difficulties that are faced year on year. Do you share that view?

It is certainly a fact that, to the best of our knowledge, the National Galleries of Scotland has not had performance targets set by the Scottish Executive against which it can be measured year on year.

That is interesting.

In other funded arts organisations, such as Scottish Opera and Scottish Ballet, that receive funding from the Scottish Arts Council, it is common for a member of the SAC to attend board meetings. The National Galleries of Scotland is not funded in that way—it is funded directly by the Executive. Do you know whether a member or representative of the Scottish Executive Education Department regularly attends board meetings?

I am sorry, but I do not have that information. Perhaps my team can help.

I confess that I am not certain. I believe that a representative of the Executive attends board meetings as an observer, but I will check that and correct myself if I am wrong.

It would be useful for us to have that information. An interesting situation has been described, especially when one is aware—as I am—that at least half a floor of the Scottish National Portrait Gallery, which is part of the National Galleries of Scotland, is permanently closed. It is not the case that the galleries are working to full capacity.

To what extent have the galleries' auditors drawn to the board's attention—or the management's attention—the likely developments if the practice of using the purchase fund continues into the future? Is that something that the galleries' auditors have noted any concerns about?

The auditors whom I appoint to the galleries have drawn attention to that issue. It was on the basis of their report that I determined that I should make a section 22(3) report on the accounts.

I have a brief question. The year 2003-04 has been exceptional in the fact that, by and large, the whole purchase grant was transferred into running costs. Do any exceptional circumstances lie below that, which explain it?

I am not sure that I can give an answer to that beyond repeating what I said earlier about the development programme that the galleries have been running over the past few years and the difference that that makes to the cost base of their activities.

It is important to know whether that is a one-off or whether it is the trend line in the galleries' predictions, which are not terribly robust. I suspect that we will need to ask the galleries.

It is fair to say that there are different impacts on the accounts depending on which exhibitions are held in which year and how successful they are.

I understand that. I am trying to tease that out.

That information is not available to us at the moment. We might add that to the list when we come to agenda item 7.

You mentioned the best-value report. When is that expected to appear?

It has been concluded and it is reported in the auditors' annual report. If it helps the committee, I can give you an indication of the key findings.

That would be useful.

According to the auditors' report, a number of areas of concern were identified and plans have been developed to mitigate those—mitigate is the word that is used. The significant areas that were identified were the development of an action plan to address the potential financial deficit; the need to seek to improve the overall effectiveness of the management team, in terms of corporate working; improvement of the planning, development and review of the performance of the exhibitions; review of arrangements for partnership working; review of the prioritisation of spending and actions to maximise access to collections; development of an effective succession plan by the middle of 2004; development of a mechanism for constructive staff commentary on the operations of the galleries; assessment of whether the galleries comply with best practice in the modernising government agenda; and, finally, consideration of the galleries' compliance with the Scottish Executive's stated art policy priorities. Those areas have been addressed by the best-value review.

Thank you. That has been a most instructive agenda item. We will discuss in private, under item 7, our reaction and how we wish to proceed.