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Chamber and committees

Audit Committee, 27 Feb 2008

Meeting date: Wednesday, February 27, 2008


Contents


Scottish Futures Trust

Agenda item 3 is consideration of a paper from the Auditor General for Scotland on the proposal to establish a Scottish futures trust. I invite the Auditor General to speak to his paper.

Mr Robert Black (Auditor General for Scotland):

Thank you very much, convener. Russell Frith, who is director of audit strategy for Audit Scotland, is with us. He is our technical expert on auditing matters.

The Government is consulting on the possibility of establishing a Scottish futures trust that would drive infrastructure investment at some point in the future. I thought that it would be useful to provide members with an information paper on the proposal, which is very much an outline proposal at the moment. I emphasise that I am well aware that the Finance Committee is in the early stages of its inquiry into the funding of capital investment projects, which is an entirely appropriate matter for it to deal with, but if the Scottish futures trust proposal progresses, issues to do with its governance, accounting and auditing arrangements that could be significant in the longer term will arise. The proposed trust could play an important role in the procurement and delivery of capital projects, so I thought it right and proper that members should be aware of such a developing issue. Once the proposal is more fully developed, it may be necessary for us to come back to the committee with a further paper.

Russell Frith is willing to give a brief outline of what is involved and our general sense of what the high-level governance, accounting and auditing implications are, if the committee would find that helpful.

We would.

Russell Frith (Audit Scotland):

Thank you, convener.

As the Auditor General said, the Government's consultation paper was designed to seek views at an early stage in developing what is seen as an alternative to private finance initiatives or public-private partnerships for channelling public and private capital into infrastructure investment projects in Scotland. The Government has recognised that several challenges are faced in proposing any alternatives to PFIs, some of which could affect current PFI proposals and arrangements.

For example, members may be aware that next year the United Kingdom Government will introduce international financial reporting standards. One likely impact of that change is that a number of PFI projects that are currently off the public sector balance sheet and do not count towards Government borrowing will have to come on to the balance sheet and so will count towards total Government borrowing. That poses a risk to the ability of current PFI projects to increase the amount of available investment in public projects, which will carry across to the Scottish futures trust. One possible way of dealing with that would be to place the trust in the private sector in some way. Of course, that raises governance and accountability issues that will need to be addressed as the proposal is developed.

The structure of the trust is another issue that will need to be addressed. At the moment, there are very outline proposals for how the trust will be structured. One model that may inform further development is that of Welsh Water, which has a public interest board comprising about 50 members of the public.

The other key objective of the trust is to change the finance costs of future capital projects—in particular, to reduce overall finance costs and to eliminate or reduce the returns that some equity participants in existing projects are making. Further risks are associated with that objective and will need to be addressed during the development phase. For example, if equity returns are not available, it is possible that fewer contractors will be willing to compete for such projects. However, only when a firm model has been developed will it be able to be tested.

I have given a brief outline of the proposal and of some of the issues associated with it. I am happy to try to answer the committee's questions, bearing in mind the fact that the trust is at a very early stage of development.

Mr Black:

We will make a short submission to the Finance Committee. It will say that robust governance arrangements must be put in place, especially if we are to have a vehicle that is slightly distanced from Government. We will invite the Finance Committee to bear in mind the need to consult us on the accounting and auditing implications of the proposal further down the road. It is appropriate that the Audit Committee should be aware of that.

Murdo Fraser:

I have a couple of questions about what we have just heard; I am not sure whether Mr Black or Mr Frith should reply. I am interested in where the Scottish futures trust will sit in relation to the public and private sectors. Mr Frith, you suggested that there are clear advantages in placing it in the private sector, although that would have various implications for governance and reporting. Is that a fair summary of your point?

Russell Frith:

Yes.

You mentioned the Glas Cymru model that is used for Welsh Water. Is that a good fit for the Scottish futures trust, given how it is intended to operate?

Russell Frith:

I am not sufficiently involved in the detail of the trust's development to say whether the Glas Cymru model could be carried across precisely. However, it is one public participation model that is up and running in the UK.

In your view, would the model work for the Scottish futures trust, given the policy direction that has been set for the trust?

Russell Frith:

I do not know enough about the detail of it to be able to answer the question.

Is there some irony in the fact that the Welsh Water model is deemed to be good enough for schools and hospitals but not good enough for the water industry in Scotland?

Russell Frith:

I do not think that the Government has yet formed the view that the Welsh Water model will form the model for the futures trust.

Murdo Fraser:

I appreciate that. It was an entirely unfair question to ask someone who is not a politician. However, you will be aware that we have had some lively debate during the past week about the Scottish water industry and it is interesting that, although the Welsh Water model does not appear be on the agenda at the moment, it might be suitable for the futures trust; that was the point that I was trying to make. Thank you for answering my questions.

Will the adoption of the new international regulations have an impact on existing PFI schemes, notwithstanding the impact that it might have on the futures trust?

Russell Frith:

The Financial Reporting Advisory Board, which advises the Treasury on the precise accounting policies to be adopted, meets tomorrow to consider PFI accounting under international standards. If the proposal in the Treasury paper is adopted, the answer is yes, the way in which existing projects are accounted for will change and they will come on to the balance sheet.

Will that impact on all the Scottish projects as well?

Russell Frith:

Yes, it will.

Claire Baker:

I have a couple of questions on timescales. The proposals are still at the outline stage and there is still a development process to go through. There are issues around the funding that is available for infrastructure projects, particularly schools. Can any indication be given of when we could expect the Scottish futures trust to start releasing money for such projects?

Mr Black:

We are not really in a position to answer that. It is a Government issue.

That is really a question for politicians.

Perhaps I could ask a linked question to which Audit Scotland might be able to respond. As a comparison, how long did it take for PFI to become a workable model? That might give me an idea of the timescale.

Russell Frith:

It is quite a long time ago. Negotiation of the early projects probably took two to three years, but the model changed as people learned from the experience of the first few projects.

That is helpful.

George Foulkes:

Paragraph 9.2 of the consultation paper states:

"SFT will be run on non-profit distributing principles and would obtain its funding through bonds and other appropriate commercial financial instruments at rates which would be cheaper than those involved in PFI procurements."

I am interested in getting cheaper rates. What are the bonds and "commercial financial instruments"? How can I identify them?

Russell Frith:

Bonds are slightly more complex, in that for them to work effectively means relying on tax changes that are in the gift of Westminster. The underlying idea is that if we package together a number of individual projects and put a single, larger package of financing out to the market, we ought to be able to obtain some economies of scale in the interest rate obtained and, perhaps particularly, in the fees involved in negotiating the deals.

They could be packaged together for a PFI project, could they not? We could achieve economies of scale by having all PFI projects financed by a single institution.

Russell Frith:

That might be possible. I am not aware that it has been tried so far.

It just seems to me to be like making wine out of water if we are able to get cheaper financial rates just because something is called the Scottish futures trust. If it can be done, why has no one else thought of it?

Mr Black:

If I may say so, convener, I acknowledge that that is a reasonable question to put to us, but it is very close to policy, and therefore an appropriate issue for the Finance Committee to pursue, as I am sure it will.

The Convener:

I suspect that that is something that the Finance Committee will consider. The point that you made earlier was that the proposal will have significant implications for auditing practice and procedures. We will need to consider how we engage properly with the process at that point, while the Finance Committee looks at the broader policy implications.

Would it be proper for the Auditor General to consider what the costs of administering a Scottish futures trust might be?

Mr Black:

If the Scottish futures trust were to come to fruition, once it was in operation, the governance arrangements could be subject to audit, depending on the policy framework in which the trust was sitting.

Before the committee moves on, I should clarify a point that I made earlier, in case I misled the committee slightly. It has been pointed out to me that I should say that our submission will be going to the Scottish Government not to the Finance Committee, as part of the consultation process that is under way.

Thanks for that clarification. We await with interest the eventual outcome.