We return to public session for item 3. I am pleased to welcome Hugh Hall, the chairman of the Chartered Institute of Public Finance and Accountancy Scotland. I also welcome Dr Jean Shaoul from the school of accounting and finance of the University of Manchester. This is her second attempt at attending a meeting of the Finance Committee—she made an abortive attempt to join us last month.
I am grateful for the opportunity to speak to the committee. As the convener said, I am chairman of CIPFA Scotland, but my day job—my paid job—is director of strategy, performance and regulation at Scottish Homes, one of Scotland's larger non-departmental public bodies. Although the paper that I have submitted focuses on generalities, I will be happy to deal with housing matters as well, should members find that helpful.
Good morning. Thank you for inviting me—I hope that I am able to help you.
Mr Hall, in your paper you welcome the introduction of resource accounting and budgeting but say that the difficulties are in implementation. That fits in with what other witnesses have said. On a number of occasions the committee has discussed how financial reporting that is related to outcomes can be developed, how that reporting can be related to the stage when budgets are put together, and how things can be more accurately measured so that we proceed clearly towards stated policy objectives with financial reporting that reflects that. Do you think that the difficulties in doing that are fundamental or only part of the transition to implementing RAB?
The issues are fundamental. The first is about measuring outcomes in relation to aim; the second is technical. In my paper, I argue for going back to first principles. A non-departmental public body is given a range of responsibilities—Scottish Homes must deliver certain things on behalf of the Executive. We should be able to put together a budget that tells us what sorts of resources we require to achieve those outcomes. We should then construct the technicalities around that—the mechanics should come later. I have some sympathy with what Jean Shaoul is saying about RAB because sometimes you get the feeling that the mechanics of it are driving the agenda. That is why I emphasised going back to first principles—asking what we are trying to do and what resources we need.
The committee has questioned how easy it will be to ensure that those involved in RAB are properly trained and able to carry it out. Mr Hall, in your paper you say that if RAB is to be universally accepted, it must
I think the stakeholders extend beyond the managerial team and include the public in general.
So in the case of Scottish Homes that would extend to a tenant?
Absolutely. A stakeholder is anyone who has an interest in the business. Therefore, information must be meaningful at different levels. Some of the difficulties come in tailoring information to audience. The information that MSPs—or the committee—require for making decisions at the macro level will be different from the information that a tenant wants on what investment is going into the property where they live and what that will mean for rent levels. It is about trying to get the right balance between providing meaningful information to stakeholders and getting bogged down in bureaucracy.
Is there serious stakeholder involvement in RAB at the moment? Are the credibility checks in place?
No—not remotely.
Not even at manager level?
Not even at manager level. It may be disenchantment or disengagement, but whether it is intentional or otherwise, I do not think that people relate the number crunching to what they are trying to achieve. In the various sectors I have been involved in, people are more interested in what they are delivering, in the resources they can get in real time for what they have to achieve. They are not thinking ahead to what something means for the consumption of a particular asset or what will be done about a replacement.
We are finding that in this committee.
I find that when I am in meetings with senior civil servants or senior officials of Scottish Homes, there are two kinds of response to the technicalities. One is cynicism and disengagement; the other is the emperor's new clothes approach—people kid on that they know what RAB is about when in fact their level of knowledge is fairly superficial. That is why I argue for awareness; we must make RAB sexy, something that people will engage with and relate to what they are trying to achieve. That is the trick—whoever can do that wins a watch.
That is a good way to put it. Part of the reason for the inquiry is to get our heads round what has been going on. Finding out precisely what RAB means is not easy. Take the social rented housing sector, in which you are involved, for example. If a project to procure 1,000 houses in a housing association borrows from the private sector, capital charging is implicit in the repayments to pay off the interest on the borrowing and the capital. There is the loan and the charge on it is essentially the interest charged by the bank. That is straightforward and, as you say, it focuses on outcomes and allows us to see what we are getting for the capital charge.
That is what happens in housing associations—it is all real money and the factor is based on real loans. We expect housing associations to make provision for future liabilities. That is done with a business-like, long-term approach, with a clear view of what that means for rental income.
So local authorities are unaffected by RAB?
Yes.
I get confused. For example, if a market value is based on what can be achieved in rent, that market value is affected by the fact that the social rented sector, which has borrowed from the private sector, includes in its rent a capital repayment at private borrowing rates. That obviously affects the market value of public sector housing too. Essentially, if the market value rather than the cost of replacement is used, the cost of capital is double counted.
No.
If that valuation is used in the public sector, it is affected by the market out there for rents that are affected by private money. I am struggling to understand why, under any circumstances, one would calculate RAB capital costs using anything other than the cost of replacing the capital. Why would one calculate those costs on the basis of income stream? That might not be so relevant to housing, but it is certainly important in the water industry.
Grant Macrae is going to speak to you about water in a moment and he will be able to give you chapter and verse on that. From a housing point of view, my understanding is that there is no double counting. The capital charge is, de facto, the loan charge.
Your point is that no one in housing is affected by RAB because they are already paying loan charges.
That is the case.
Why is that not done generally? It seems perfectly logical.
Scottish Homes and local government have some control over loans. We are talking about real money. I am not sure whether we can draw a parallel between those organisations and other public sector organisations, such as hospitals and schools.
That is useful.
Yes. Our loans at Scottish Homes go back a number of years. Some of them are at higher rates than others.
It may be difficult to relate the two substantially different approaches that you are taking, but in your paper, Dr Shaoul, you said that the question of capital charging and so on
In many outsourcing and leasing agreements—the ones that come to mind are the big information technology projects—the public sector will make annual payments for a number of years. Those payments are supposed to be linked to performance. It is not entirely clear how one can measure performance in any realistic way and, furthermore, tie that to the payment mechanism. In many cases, it turns out that the risk that was thought to have been transferred when contracts went badly wrong has not been transferred. The public sector—or the public at large—pays the cost. For many reasons, it is not possible to terminate the contracts. That in turn means that there is no ultimate sanction of terminating a contract for legal reasons—because the contract was not good enough—or for practical reasons, such as in the case of Lambeth Council, which members may not be familiar with.
We will come back to some of those points. Does any member wish to come back on that last point?
I can understand how you can construct the argument that RAB is designed to produce dependence on outsourcing for capital provision or services. Can you run us through that? Why is RAB designed to push capital provision off the balance sheet?
It is designed to enable that to happen, but that is why it is important to look at capital charging not on its own, but in the context of wider public policy, one policy of which is effectively to say to councils and other public agencies that PFI is the only game in town, deny them access to normal public procurement, and encourage public agencies down the outsourcing route. The significance of resource accounting is that, because there must be a charge for capital, that creates an income stream—or an expenditure stream—that can be diverted to leasing or outsourcing. In that sense, it does not matter.
There is a sum of money within the budget that is to be allocated for capital payments, but that assumes that the cost of procuring the capital assets is cheaper in the private sector than it is in the public sector.
That is the assumption, but the reality is somewhat different. The higher cost of capital, profit margins that must be met and enormously expensive transaction costs, such as fees for lawyers and accountants, make it expensive.
You do not need to sell me on that argument. My point is that your argument that RAB provides an incentive for people to use PFIs implies that the 6 per cent return on the value of assets is higher than would be achieved as a cost of capital for the same assets and returns in the private sector. If the 6 per cent were cheaper, would not you stay in the public sector?
If there is no public provision for capital, RAB encourages people to go down that route.
The money is in the budget and it is allocated as a capital charge. For example, the figure is £1 billion in the Scottish budget. Your argument is that £1 billion is buying roughly 6 per cent of capital assets in the public sector, so there is an incentive for that to be used to go private.
Yes.
We need to be convinced that that is the case—I cannot see how that is the case if 6 per cent is cheaper than what is available in the private sector.
The 6 per cent return—as we know from the PFI hospitals—is in practice lower relative to the level of resources that one would get. In the example of the new Edinburgh hospital, more would be paid in capital elements of the PFI charge for a 20 per cent smaller hospital than would be paid for at the current hospital. I keep coming back to the fact that in reality, you will pay more for less.
I wish to query a couple of the points that Dr Shaoul raised. On page 5, paragraph 4, you say that contrary to public opinion, the figures show that hospitals use their assets better than Marks and Spencer plc, the Forte Hotel Group and BUPA. Why is it the case that the world at large thinks that the health service is not well run, but that those organisations—until recently, in the case of Marks and Sparks—are well run? You said that the figures are different, but can you explain why there is apparently superior management in the national health service?
I said that the asset utilisation figures show the superiority of the public sector; such figures are conventionally taken to show capital efficiency. Why do I think that the public sector is more efficient in its use of assets? I am not sure whether it is efficient. I suggest that it is more economical, but it has, effectively, been capital-starved for at least 25 years.
I am not quite sure whether I understood correctly the first full paragraph at the top of page 6 of your submission. Are you suggesting that the system penalises smaller hospitals? Could you run through that idea?
It appears that the hospitals that have the most difficulty are those that have incomes that are lower relative to their capital base. By and large, smaller hospitals—such as a tertiary cancer hospital—specialise, but they may have a lot of expensive equipment. Hospitals such as those in the south-west or in Cumbria serve geographic areas that have relatively small and dispersed populations. That makes it difficult for those hospitals to break even.
In your view, would resource accounting make those difficulties greater or smaller for the public sector?
The effect of capital charging on hospitals is an example of how resource accounting would work. As Hugh Hall indicated, it is important to recognise the enormous diversity in the public sector, which provides statutory services that are not provided for profit by the private sector—that is why they are public sector services. It does not seem to me that resource accounting is a relevant way in which to record expenditure and I expect that it will have other, perverse implications and effects in other parts of the public sector that I have not examined, or of which I have no knowledge. I cannot predict those effects, but I can imagine them.
We usually get things wrong, so we will also get this wrong: is that your argument?
Those are your words.
Part of the argument that one could have about the performance and use of assets could be based on an initial evaluation of those assets. Perhaps assets in the public sector have been undervalued, rather than being valued at their replacement cost. However, we must replace assets if we are to continue to provide services. In your paper, you state that many assets were given free to the public sector. However, if they were acquired using the resources of the public—in other words, if they were in public ownership—I presume that there was a cost attached to them at some point.
If you want to make resource accounting or accounting for capital work, you would have to put a lot more money into the system. During Hugh Hall's comments, I was struck by the realisation that the discussion was about cash-strapped services.
Even if we left everything where it was without PFI, how would we fund replacement of assets in the public sector, when that is not free of charge?
We would finance it the old way—with grants—and via taxation.
Mr Hall, your submission talked about the bean counters taking over RAB. I am particularly interested in the culture of decision making and how people at different levels in organisations accept RAB. If RAB has a mesmeric effect on somebody who is trying to deliver an outcome, that means that they will not use it as a tool. They will be starved of the information that they need in a form that they can use to make better decisions about whatever they have been asked to do.
That is why I suggest that we get back to first principles. It is basic stuff. There is relevant, meaningful information that people can relate to. We must be careful about behavioural responses. If you create a system such as RAB—which has artificiality about it—people will respond accordingly, but that is no reason for not going down that route. The concepts of accrual accounting and of recognising value, consumption and future costs are all important. We all want to know not simply what we are consuming now, but what we might have to consume in future.
How do you use RAB to deal with technology jumps that are almost unforeseen, but which come upon us very quickly, as can happen in the hospital sector?
That is very difficult, but we must ensure that depreciation policies are fit for their purpose. If you acquire kit that you believe will not have a long life, you must recognise that and build that into your considerations. Such considerations would be written off over a shorter period.
How fundamental a change will RAB represent for the Scottish Executive and the various public sector agencies? How far away are they from producing the information that you have been discussing, which is based on what is required and is focused on outcomes, rather than being based on inputs and so on.
You should put such questions to Peter Collings and other people in the Scottish Executive, rather than to me. I am not aware of the Executive's state of preparedness.
We will bear that in mind when the aforementioned Mr Collings comes before us presently.
I am thinking not so much about Peter Collings, but more about some of the people who are not immersed in RAB. That would give members the answers that they are looking for.
I would like to explain how the system is not working in the context of the national health service, and I will give the committee one concrete example.
Are you aware of whether the system that you have just described is used anywhere else in the public sector—outwith the health service?
I cannot speak with authority about other organisations, but from the perspective of public accountability, I find that kind of practice quite bizarre and perverse.
That is an interesting point—we will have to come back to that at some stage.
Surely the acid test of RAB is to consider the outcomes where the system has been applied. In the national health service, RAB was introduced as part of the internal market reforms and that was the forerunner for its introduction to the remaining public services. You are arguing forcibly, Dr Shaoul, that the outcomes have been perverse. We have a scenario in which the introduction of RAB means that some assets are sweated, while other equipment is not being used. NHS trusts have to account in a private sector manner and introduce car parking charges and so on. The level of service to the public is being reduced. Am I in the right vein here? Would you argue that the same kind of perverse outcomes would be likely if the system were introduced to the rest of the public sector?
I think so. The outcomes of the past 10 years are not what the public wanted, expected or hoped for.
What are the prospects of changing the culture in the real world?
We have examples—for example, housing associations and registered social landlords—that show that the principles of RAB can work effectively. The alternative is that we stand still and stick with annuality and the cash-based system. We would therefore be bereft of meaningful and appropriate management information and there would probably be less accountability over the piece. There are many lessons to be learned from the implementation of RAB in the NHS. We should learn from the examples that Jean Shaoul and others have cited, to ensure that we design a system that is fit for its purpose and that takes the best lessons from the organisations that have implemented RAB effectively. The alternative is to slip back into annuality, and to thinking about things in terms of fiscal years, and not in terms of how to operate a business.
Is a capital charge of 6 per cent appropriate?
No.
Why is the capital charge 6 per cent?
The capital charge should reflect the actual charge. The difficulty is that there is artificiality about the capital charge. I say in my paper that in taking decisions at a macro level, for example, if 6 per cent is the level of capital charge, the accountability and responsibility should remain at that level. Decision making should be considered at that level and not pushed down the line. It is unfair to expect people at the front line to account for something that is not necessarily of their making. The organisations—the hospital trusts and so on—have had something artificial imposed upon them.
Mr Hall, I wish to ask you about your previous comments. You talked about cascading. Attractive metaphors should be forbidden in politics, because they are dangerous. Is there any chance of an effective accounting system—RAB or anything else—cascading down so that the people who are managing, for example, a sports centre or housing have a grip on the budget and opportunities to do things better, or is it possible to start from the bottom up rather than the top down and ask, "How do we get this manager to manage more effectively and get the cost set out so that he can improve things?"
It is an iterative process. It goes back to the outcomes that you are trying to achieve, and the infrastructure that best serves that purpose. It may be that there are some activities that should be managed at a national level, some at a local authority level and some at a community level. One must decide what is the best organisational structure, what sort of governance arrangements need to be in place and what sort of resource system has to accompany that. That is the way that I would address it, so to that extent, it is top down, but the drivers that kick in are bottom up. The responsibility for resource consumption, accountability and decision making is cascaded down. You empower organisations to run their businesses.
At the moment, all that seems to cascade down are the bizarre rules imposed by the Treasury. Lots of clever people spend their time working out ways of getting round those rules instead of operating them in a half-decent fashion. Perhaps we should get rid of the top and start at the bottom.
No, we have to create mutual understanding. Sometimes the rules are designed by accountants like myself, or people who are remote from what is happening on the ground. We need to get both sides together and have a meaningful dialogue between the people who are designing the system and those who have to operate within the system.
I will take Andrew Wilson, and then I will change the set-up slightly. It might be worth while if we bring in Grant Macrae and Leslie Wilson, while allowing Hugh Hall and Jean Shaoul to stay here to answer further questions as issues emerge. If Mr Macrae and Mr Wilson prepare themselves to come forward, as Andrew Wilson deals with his question, we will try to change over seamlessly, although that may be beyond our means.
Just pretend you are on the Des O'Connor show.
It is smoke and mirrors—perhaps all will become clear when we get hold of Government accounts and we are able to see the full figures in their glory. At present, there is artificiality about the system. I agree that we should consider better ways of carrying out the work, if such ways can be found. A useful starting point would be to set off on the road of beginning to consider consumption, investment and so on, which must be considered. We should make that useful start, rather than setting RAB in tablets of stone and modifying our behaviour in accordance with it—there is a risk that that will happen.
Andrew Wilson asked why a system of capital charging leads to PFI/PPP solutions. That occurs, firstly, because a revenue stream that is, as it were, labelled for capital has been created that can be used for leasing, renting or some other source of capital. Secondly, at least at first, leasing or PFI seems attractive as you then get the assets off-balance sheet. That is another whole question that we do not want to go into here and that appears to have changed in the case of hospitals and schools. Thirdly, as with RAB, the Government has largely required hospitals and schools to be financed via PFI/PPP. Because most services in the public sector have been reconstituted as business units with private sector accounting and with accounting for capital via capital charging systems, they are now structured and established in ways that allow them to do that. That could not have been done before the introduction of capital charging—it was a kind of groundwork or framework change. As I said in my paper, effectively the non-cash-generating public services are being reconstituted as nationalised industries.
Thank you. I now welcome Leslie Wilson, director of finance for Historic Scotland, and Grant Macrae, who is a partner in KPMG but is here in a personal capacity.
Historic Scotland is a next-steps agency or an on-vote Executive agency, so we are a subsidiary of the Scottish Executive in that we actively undertake our role but our accounts are consolidated into those of the Scottish Executive. As someone with a background in the private sector, I do not think that RAB as an accruals accounting method should mean difficulties for day-to-day management. After all, managers outside Government are accustomed to managing budgets on a time-frame basis. The average manager's budget is based on the job that he has to do and the resources allocated to allow him to achieve his objectives. He can do that without consideration of the effects of capital charges on a day-to-day basis.
I thank the committee for including me in its consultation. I have been involved with a wide range of public sector bodies for about 25 years, but I believe that you want me to focus on the water industry.
I thank Mr Macrae and Mr Wilson for those opening remarks. In your evidence, Mr Wilson, you outlined the question of non-operational heritage assets and said that you did not consider them appropriate for inclusion in the balance sheet because of the unreliability of the cost of maintaining them and the likelihood of there being no market for them. That clearly applies to Historic Scotland. Are you aware that it applies to other central Government agencies?
The other examples that I can think of are museums and galleries, which have valuable historic pieces. I cannot think of any other Scottish body quite like Historic Scotland, with its monuments, which is what I was referring to.
Is it right that only assets with an income stream should be included on agencies' balance sheets?
We include not just assets that have an income stream, but all assets that we use on a business basis, such as offices. The depots in which the masons and others who manage and look after monuments work are charged in conventional terms to the balance sheet.
I will address Mr Macrae. I am particularly interested in the views on net present value that you expressed. Obviously, calculations of rental streams in the commercial rental market are based on the net present value of the asset and so on. Are you suggesting that, in the public sector, future income streams should be discounted by known requirements for investment? For example, in the water industry, there are huge infrastructure requirements to upgrade water and sewage pipes. We do not know how the cost of that will pan out. We want to get away from annuality. I accept your argument that it is difficult to average out the cost over time. Although that would be okay in a business, it would be difficult for a Government, which has to try to balance its books. Are you talking about a model in which known required investment in the public sector is taken away from the value of the income streams? Is that how one would produce a valuation of the asset on which to charge whatever Government thinks should be charged? What about areas where huge investment may not be required? Are you talking about different levels of charge for different public services?
I will tackle the first part of your question first. The long-term infrastructure renewals programme has been worked out by the water authorities across Scotland. They have a good idea of how much will be spent over the next 20 or 30 years and are allowing for renewals in their cost base for future years. They can calculate cost as the overall on-going costs of running the business plus the estimated charge each year for infrastructure renewals. That will produce their net income. They are allowing for renewals.
What about applying your model of asset valuation to areas in which there are not huge infrastructure costs? For example, teachers carry around knowledge and skills that are not easy to price on a balance sheet. How are they costed into the model?
It is very difficult to do that. There has been much debate over many years about whether a manufacturing company, for example, should put a value on its brands. In a sense, you are asking about the same idea: the value of intellectual property. It is very difficult to value that knowledge, not least because, as it is in someone's head, its value disappears the moment that person leaves the organisation.
Should the education authorities price a model that allows for the purchase of replacement teachers or teachers of new subjects?
That is the ideal. The authorities must address the cost of investment to move away from the traditional means of teaching—be that in schools, further education colleges or universities—towards technology-based forms of learning. That involves a huge up-front cost, but a lower on-going cost. It is right that a value is placed on that investment, which is written off over the estimated life of the asset.
You have mentioned a three-year rolling budget. Will you explain that?
At the moment, the three water authorities have an average rate of return target that must be achieved over about three years. That makes it much easier to cope with the fluctuations of running a commercial business that has ups and downs. Over the term, the authorities have a realistic target to aim for and to be measured against.
Would that comply with Hugh Hall's comments about the problems of annuality and outcomes? Are you in favour of three-year rolling targets for borrowing or financial targets?
That depends on the purpose. In housing, social landlords take an even longer perspective for decisions about investment and borrowing. The decisions that need to be taken and the time scale for doing that varies from business to business. That is why we allow the business, rather than a condition that is imposed from above, to be the major driver.
So there is flexibility that depends on the agency or organisation that is involved.
That is, ideally, what we want; it is achievable.
I have a question for Mr Wilson. It is good to have a practitioner to go through the process. Did Historic Scotland have any assets registered in the "National Asset Register" before this year?
Yes. When the original exercise was conducted four years ago, we made a major contribution to it.
Were all your assets included?
To the best of my knowledge, yes. You may be asking whether non-operational heritage assets were included. I cannot remember precisely what the rules were at the time, but we fulfilled the criteria that were expected of us in making a submission to the register.
That is what puzzled me. I do not know whether it is one of your assets, but does Edinburgh Castle, for example—which is mentioned in your submission—count as an operational asset?
The income-generating parts, such as the shops, the restaurant, the cafeterias and bookshops, count. There is also a large suite of offices on the top floor of Crown Square, which is charged to the balance sheet.
I take it that the asset value of a shop at Edinburgh Castle is that of the shop itself, yet the income stream results only from the existence of the unvalued and difficult-to-value large rock with a castle on it. I do not see how that is sensible.
The district valuer calculates the valuation of the shop by the classic means of throughput turnover.
Exactly.
It is treated as a shop in its own right—as a business aspect to the organisation.
It is not important for the committee's inquiry to dwell on that aspect for too long, but you are saying that things that are difficult to value, such as monuments or castles—those whose replacement value is not obvious—have not been valued, because you have decided that you cannot value them.
We have not spent the money valuing them.
You did for the "National Asset Register".
No. We submitted what was an asset; we did not have to include valuations in that register. At one stage, I carried out an estimate with the district valuer to see what the entire cost of valuing everything would be. We concluded that it would amount to something in excess of £100,000. It would not be a good investment for a small organisation such as Historic Scotland to spend £100,000 without gaining anything in return. I think that you would be criticising me right now had I done that.
Quite. I was not saying that you were wrong. However, you have gone through the process of valuing the operational assets.
All operational assets are valued.
How often will you update that?
There is a five-year rolling programme. It has been running since we first produced our annual accounts in 1993-94.
Is that done on the basis of market value?
It is done by the district valuer according to his rules and the guidance that he receives in his professional capacity. We do not influence what he determines in any way.
As the chairman of CIPFA, is Hugh Hall able to say whether district valuers carry out that function across the public sector?
It certainly was not the case in the health service.
We are talking primarily about district valuers, although other experts are used depending on the circumstances. The housing sector uses commercial firms rather than the district valuer.
There is no restriction on who the valuer might be. It is sensible and convenient to use the district valuer, who will have long experience of the public sector.
The approach is obvious when you have a rental income stream from houses and an income stream from a shop. However, I am bemused as to how you value a hospital on that basis. Do you use a replacement value?
The district valuer is required to value the buildings on the basis of their replacement value.
So you use replacement value for hospitals, but income streams for houses and income from the tariff for water.
I can clarify the position in Scotland in respect of the NHS. The last time that the health portfolio was valued, it was done by an independent firm, which reported to the management executive and the individual health boards and trusts. That was based on the value of individual properties. In the water industry, the basis of valuation is value in use. That is reached by discounting the net present value of the income streams.
Not all buildings are income generating. Offices, for example, are valued as the equivalent of commercial premises. We are paying for the equivalent of an office suite in the centre of Edinburgh.
Are you saying that, where there is an income stream, you value on the basis of a discounted income stream and that, where there is no income stream, you value on the basis of replacement.
Yes.
I have a specific question, which I will follow by a more general one. Mr Wilson's paper uses the phrase,
Capital charging has two phases. The first phase begins on 1 April 2001 and runs for two years. The charges go through an account called the annually managed expenditure—AME—account, which, as somebody said earlier, means that the Treasury will underwrite the capital charging costs for two years. That is outwith the measured funding of the department or agency, which goes through a separate account; the departmental expenditure limit—DEL—account. For two years, the charges will go through the AME account and will be picked up by central Government. After two years, the resources that are given to the agency to manage its business will account in full for capital charging and that money will go through the DEL account.
I think that I understand a little bit of that.
Utopia is hard to predict. I think that the change from the value-in-use approach to a value-in-assets approach will encourage people to decide whether an investment is worthwhile and whether the impact of that will be borne by today's consumers, rather than by tomorrow's. Forcing that sort of decision through will be important. I am concerned about how that blends with having to achieve a steady-stream rate of return, because I do not think that the two fit together. If one puts too many obstacles in the decision-making tree, something is going to give. If one is trying to run a trading business, it is unrealistic to assume that the market conditions will not produce a volatile rate of return at some stages over a number of years. A flat rate of return is not commercial and, if the Government is going to own a commercial trading arm, it will have to monitor the performance of that against the rest of the businesses that compete in that form.
No accounting system will be perfect. The one that we have has been hundreds of years in its development. The biggest changes have happened during the past 20 or 30 years with the arrival of the Accounting Standards Board. The trick in understanding accounts is not to read them at the large level, but to understand their significance at specific levels. Unfortunately, people who are busy with many day-to-day activities do not have the time to understand the finer nuances—I am grateful for that, of course, because that is why we have accountants.
We should walk before we run. The prospect of valuing heritage assets and intellectual property such as brands and so on should be put to one side. You mentioned pensions; our accounts can tell you what Scottish Homes' pension liabilities are. We pay those commitments annually, using the management costs that are made available to us by the Scottish Executive. As long as we have that information in the accounts, somebody who picks up those accounts will be able to identify a long-term liability. We can then start to make decisions about whether to continue to meet those liabilities through an annual payment process or whether—if some additional funding happens to be available—to purchase an annuity and pass that over to somebody else to take on the future commitments. The base information must be there for us to make sensible judgments.
One of my few concerns about the detailed rules and regulations in relation to RAB is how complicated they might be. The form of reporting may not be easily understood unless people are properly trained in it. I believe in simple, straightforward accounting reporting. Anybody's annual report and accounts should be laid out so that a non-accountant can understand what the figures mean. The explanations that go with them should be designed with that in mind.
Almost everybody who has talked to the committee about RAB has mentioned the need for a change in attitudes and culture in relation to the imposition of RAB, and what kind of training would be adequate for that. Mr Hall referred to that this morning. I notice in the paper that Mr Wilson gave to us that, although his staff have spent considerable time training, they will require further training. As an organisation that is going through the process, how important has training been for Historic Scotland? What message about the importance of training and attitudinal change do you have for other organisations that must still go through the transition?
It is very important indeed. There are two levels to that. I and the other experienced, qualified accountants that work with me on the subject have had to receive training to get our minds round what RAB is about. Generally, to get the general principles across, staff training has been focused on those who manage budgets and who are responsible for funding. People who have been working on a cash accounting system that has an attractive simplicity to it need to have it explained to them what accruals accounting means. That is essential for acceptance of RAB. When we put in any system in any situation, the credibility of that system needs to have time and effort devoted to it, so that people buy into it and begin to understand it and take full advantage of it.
I have a fairly simple question. In your expert opinion, has the Government understood the complications and the initial impacts on, rather than the outcomes for, the various bodies that it manages?
I am not sure what "the Government" means in that sense. I would like to think that it is true that the practitioners understand the finer nuances. There is a need for a wider understanding of some of the implications, such as the cash resources conflict, because I am not sure that that is fully understood. However, those who designed RAB were aware of what was coming.
I think that the people who designed RAB have a good idea of what is involved. A huge education process is required to ensure that the civil servants at Victoria Quay and elsewhere understand the significance of the change. They are not all trained accountants. In fact, there are relatively few accountants. A lot depends on the briefing by, for example, the Civil Service College to all civil servants. That is so that they understand the implications, what happens when RAB is working well and the warning signs when it is not working well, and how to deal with things when they go wrong. Forewarned is forearmed.
Do Hugh Hall and Dr Shaoul have anything to add?
I can add only the anecdote that when I have tried to speak to the RAB unit about particular questions, I have been told, "That is a technical question. You will have to ask somebody else." I concur, in that I am not sure how well trained in and cognisant of the issues civil servants are.
There is clarity in the principles of what we seek to achieve in the longer time frame. Practical implementation has been under-provided for, from where I am sitting. We all have a lot to do to address those issues, if we are to reap the benefits of RAB. My institute has a contribution to make; we also have a contribution to make as practitioners, but we have to do more about the practicalities of implementation. It is an evolutionary process, rather than a big bang, but there is a propensity for people to underestimate how fundamental the change is.
Are you suggesting that there is a need for slippage in the implementation time scale?
I do not know whether slippage must be built in. We should go at a speed with which the stakeholders are comfortable; if that means slippage, that means slippage. We have operated for decades and centuries without RAB. We should not be in a huge rush to implement it. I would prefer that we implemented it well over a longer term, than that we implemented it badly over a shorter time scale. If, in the committee's evidence gathering, you identify that there is much work to be done in terms of practical implementation, we should adjust the time scale accordingly.
I would like to ask Dr Shaoul a final question. You say in the rather apocalyptic conclusion to your paper, with regard to the analysis that you have done on the NHS, that it
I do not feel competent to suggest practical ways in which the impacts of RAB can be minimised, other than to alert people to the fact that there have been very sweeping consequences for the NHS, which have been perceived widely as problematic. I do not feel competent to make concrete suggestions.
I invite any of our witnesses to add final comments before we bring this part of the meeting to a conclusion.
We ignore Jean Shaoul's apocalyptic view at our peril, but as I said, we should not let it stand in the way of progress. We need to learn lessons from the implementation of RAB in other areas, but it is more important to keep our eye on the ball and on what we are trying to achieve. Let us learn all the lessons that we can from the NHS, the private sector, and a variety of sources. Let us feed that into the machine so that we get a more meaningful accounting system in due course.
This has been a very useful, long and detailed session. I thank the witnesses for their written evidence, and for being here in person to assist our inquiry.
We agreed that item 5 would be taken in private, so the official reporters can take a rest after this lengthy session.
Meeting continued in private until 12:51.