Finance Committee, 30 Jan 2001

Meeting date: Tuesday, January 30, 2001

Official Report 215KB pdf

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Resource Accounting and Budgeting

Good morning, Mr Renwick. Thank you for agreeing to assist our inquiry into resource accounting and budgeting. We have received and read your submission with interest, and we will put questions to you on it. First, I invite you to make an opening statement

(Forensic Accounting Services (Edinburgh) Ltd): I thank the committee for its kind invitation. It is my privilege to attend the meeting today. I shall forgo a formal introduction, but I will pick a few points out of the submission that members have received. All my evidence is in the submission, so there is no need for me to reiterate it.

I was interested to read on the internet the Official Report of some of your previous meetings. I was tickled by a quote from Vernon Sore—my colleague at the Chartered Institute of Public Finance Accounts—who quoted J K Rowling. I am a Christian and so I decided to find a quote from the Bible. The more that I read the quote that I included in my submission—which is taken from the gospel of Luke—the more that I thought that it would provide an apt title for what I would like to share this morning:

"All the costs and none of the ridicule."

I was a finance director in the health service for three years at Falkirk royal infirmary. In that context, I would like to share a few thoughts about capital accounting and describe some of the issues that arose while I worked there. When I moved up to Scotland, I worked for the Scottish Office in the creation of NHS trusts, having spent some time in the north of England with a purchaser organisation—Newcastle and North Tyneside Health Authority—and a provider organisation in North Yorkshire, the Northallerton Health Services NHS Trust. That blend of experience stood me in good stead for my work at the Scottish Office in helping to create NHS trusts in Scotland.

One of the key considerations in that work, with which members will be familiar, was how such a massive amount of estate and capital infrastructure could be put in the hands of self-governing NHS trusts. One of the mechanisms that was chosen to enact that transfer was capital charging. There is a sound rationale for creating capital charges, but a misguided approach to them was taken and they became something of a blunt instrument.

Capital charges were imposed for two reasons: first, to instil a sense of financial discipline into the management of the NHS in Scotland when NHS trusts became self-governing; and secondly—and importantly—to allay any public misconception that the Government was putting significant amounts of state assets into the hands of organisations that were quickly badged as unelected quangos. Capital charges were introduced as a mechanism for instilling discipline and providing a route whereby the Government could get a rate of return on its assets, to show accountability, transparency and good stewardship.

In my opinion, the system went wrong because it was an imposed solution—there was little discussion or negotiation—and because it was too complex. Capital charges created two streams: depreciation, which could be readily understood; and a required rate of return on the capital that was employed. Neither principle was wrong and both were familiar to me in the context of my private sector career with Touche Ross & Co in Newcastle, but their blending together and the creation of a separate allocation of funding to the NHS trusts caused massive confusion. The system became unwieldy.

When he gave evidence to the committee, Peter Collings identified the fact that, when two sets of accounts were created, people did not take capital charges seriously. The practitioners viewed them as funny money and from that view quickly emerged a culture of evasion: people asked, "How do we get around capital charges?" It was not that the original aims of discipline and transparency were not put forward, but people wanted to know how to get around the additional costs. At a time when there was, in the health service, an internal market in which cost equalled price—or price equalled cost, depending on which way one looked at it—an additional 6 per cent had to be found for capital charges, which became something of an albatross.

I am convinced that we need a discipline in accounting for capital in the public services, and not only in the health service. However, capital charges did not work previously. How might they work better in future? We must examine, by negotiation, a method of instilling discipline and creating transparency. One of the problems that is highlighted in my submission is the fact that, during the first couple of years of NHS trusts, most of the accounts had a qualification from the auditors—not in the sense of a formal qualification of accounts—in the form of a wee subparagraph that identified the fact that the assets did not belong to the trusts. The legal service had not caught up with the trusts and it took two or three years to vest the assets in the new legal bodies—the self-governing NHS trusts. There must be a clear process of negotiation.

We should now move prospectively rather than retrospectively. If we are to make the quantum leap from a system that was imposed—for all the right reasons—to a system that is owned by the public services, we must consider the current context. The key issues that we face include the move to resource accounting and budgeting and the prevalence of public-private partnerships and private finance initiative deals. I take the apocalyptic view that we will very soon have an empty balance sheet.

Let us consider what the public and private sectors use balance sheets for. We use them to determine whether an organisation has a strong asset base. We look for evidence of professional management of working capital. We look for ample reserves to cover liabilities. Very soon—given the introduction of public-private initiatives and public-private partnerships—there will be no assets on the public sector balance sheet unless accounting practice changes dramatically. Those assets will be on the balance sheets of special vehicle companies or of consortia that build new schools, hospitals, prisons or infrastructure.

I am 100 per cent committed to resource accounting and budgeting for the reason to which the title of my talk this morning refers; there must be

"All the costs and none of the ridicule."

In my paper, I quote a managing director of Reg Vardy plc, to whom by some tortuous route I am related through marriage. When I suggested that I could happily drive one of his Ferraris for a living and play with his other vehicles, he said, "We don't want any public sector accountants who round to the nearest million". I do not want such ridicule, because I believe firmly that there is much accounting expertise in the national health service and in local authorities, with which I work at the moment. There is a lot of readiness for resource accounting and budgeting—it is the right way to go.

I am concerned that we should apply resource accounting and budgeting appropriately to capital. This is not just about the accruals principle, which is so clearly espoused in generally accepted accounting practice. It is about putting matters into a professional context. I have a vision in which there are fewer bean counters in the public service and more financially literate managers. Those managers will see the empty balance sheet and recognise that there needs to be a change. In my vision of change, we should stop the artificial delineation between revenue and capital. If I asked Bill Gates or Richard Branson what their capital income stream was for the year, they would say that it was the same as the revenue income stream; it is the money that comes through the tills. Only when we stop that delineation can we start to hand the reins of self-control and self-discipline to those financially literate managers. We should allow them to receive a single stream of money and to be responsible for renewing and replacing their infrastructure.

That may sound apocalyptic, but I do not think that it is too far away. A private finance initiative is intrinsically about taking away from capital and making a revenue stream over the long term. The use of PFIs may be in its infancy, but more and more schemes are being introduced. I think that the balance sheet of the future will be empty and can be discarded. In its place, for public accountability purposes, we should move to something that is more akin to a statement of managerial performance, with reference to changes in working capital and to debtors, creditors and stock. The income and expenditure account will show clearly the costs of any PFI or PPP infrastructure.

I also foresee a move to real three-year budgeting. In the public services at the moment, we talk a lot about three-year budgeting. However, if at midnight on 31 March we have not broken even or delivered on the targets that have been set for us, there is little latitude for excuses. We cannot say that something was a loss-leader for which we will have fully compensated for—and then some—in two years. We need full three-year budgeting, in which there is latitude for financially literate managers to take decisions that involve entrepreneurial risk.

I trust that the paper's comments that I have not discussed are clear.

Thank you for that interesting expansion of some of the points that you made in your paper.

I will ask you a question that you may answer from your experience in the national health service. Last week Mike Hathorn, of the Institute of Chartered Accountants of Scotland, talked about the resistance of managers to moving to resource accounting and budgeting from what they regarded as the tried and tested system. Were you aware of that resistance when you worked in the NHS? Is that management mindset still prevalent in the NHS?

There was built-in resistance to resource accounting and budgeting when I worked in the NHS. I attribute that to the fact that the creation of self-governing trusts was causing massive change. Folk were very comfortable with jamjar accounting: the prevalent attitude was that there was one jamjar containing cash for this year and another containing cash for next year. It was an alien concept to think that cash plus commitments equalled total costs. Given all the changes that were taking place in the organisations, there was a resistance to going the extra mile.

That resistance has evaporated. There are many capable managers in the health service, who would espouse management accounting in its fullest sense by introducing commitment accounting. Most accounts that are prepared in the health service are prepared on an accruals basis. Most reporting to the Scottish Executive is done on an accruals basis. There is no longer the resistance that there once was.

What you say about jamjar accounting leads me to my second point, which is on three-year budgeting and to which you referred in your opening statement. You said that three-year budgeting was not yet a reality. I cannot reconcile that with the statement that jamjar accounting is largely gone and managers have moved on. Surely it is because of jamjar accounting that three-year budgeting has not taken off fully.

I think that three-year budgeting has not taken off because it has been imposed rather than being owned. Currently, most of my work is with local authorities, in which three-year budgeting is prevalent. I have no contemporary experience of three-year budgeting in the health service. It is clear that local authorities are sticking to the break-even, 31-March deadline, dead-hand-of-the-Treasury approach. Although I do not think that there is resistance to resource accounting and budgeting, I think that my former colleagues in the NHS are taking one step at a time. They are making resource accounting and budgeting real and will then move to three-year budgeting.

How can resistance to putting three-year budgeting into effect—despite the facility for such budgeting existing—be fully broken down?

An omnipresent problem in the health service was that our ability to carry sums over the financial year-end was restricted. Therefore, if we wanted to create a new specialised service, such as a new clinic or outpatient service, we had to ensure that it broke even within 12 months. That restriction stopped us creating new services. By the time we obtained referrals and communicated with general practitioners, we would be unable to break even before the year-end. The tolerances for carry-forward and carry-back need to be increased. There needs to be scope for the movement of money across the financial year-ends for pre-defined and agreed projects.

You referred to that as allowing managers to make decisions and look further ahead.

Yes.

You described the artificiality in the NHS. Surely that applies to other parts of the public sector when resource accounting and budgeting is introduced. How might the problems that the NHS encountered be overcome? Are there useful lessons to be learned from its experience?

Yes. There are unique circumstances in the health service. There are three key targets for NHS trusts: a break-even, which is a fairly standard yardstick; an external finance limit, which identifies the amount of external borrowing; and a 6 per cent rate of return—it quickly became clear that that meant six point zero zero per cent, or else.

I will give an example from my experience to show the artificiality of the regime. My trust invested significantly in some capital equipment, which at midnight on 31 March was in the middle of the Irish sea in a storm. By not putting that through my books and not accounting for the expenditure, my 6 per cent rate of return became 6.8 per cent. I received black marks and anti-brownie points from the trust board on that day.

We could move to a set of fundamental baseline activity or performance measures. The Audit Scotland approach to performance management and planning could usefully be rolled out across the whole public sector. Under that approach, we ask fundamental questions about best value. The financial criteria that are applied are relevant in the context of best value and performance management and planning. Are we doing things right? How will we continuously improve? How do we account for our performance? It is important to put trust in the managers and to give them latitude to manage without tying their hands.

I will pick up on a couple of points. Mike Hathorn and another witness raised this issue previously. As RAB is introduced in the public sector and organisations move from jamjar accounting—you referred to financially literate managers, which I take to mean non-accountants—

I mean non-bean counters. I think that my tribe does itself a disservice. I am a chartered accountant and a member of the Chartered Institute of Public Finance and Accountancy and I know Mike Hathorn well. Rather than employing people who merely see the beans and count the numbers, we need people who live the job. I entered the health service because the rest of my family were nurses and therapists. I loved the job—it was my vocation and many people work in the NHS for the same reason. It is not possible to put a bean counter into the health service and expect financially literate management.

How do we make the process straightforward? What preparation is required to develop a generation of financially literate professionals in the public sector?

When I was in the Scottish Office, we gained a less than brilliant reputation by simply tartanising what came up from the south. We changed the cover and one or two references to statute. We need to take a clear Scottish stance and we need to explain it exceptionally well. That stance should be grounded in generally accepted UK accounting practice, about which Mike Hathorn will have spoken to the committee. We are not creating an extra tier of bureaucracy; we are allowing the managers who run the finances of the public services to apply their professional codes. It must be made clear that we are not inventing a new scheme, but are applying generally accepted accounting principles and practices.

It would not hurt at all, although it would extend the time scale, to offer to introduce pilot schemes in some organisations. Case studies could be shared in forums such as the Convention of Scottish Local Authorities, the Healthcare Financial Management Association, the Chartered Institute of Public Finance and Accountancy, and the Institute of Chartered Accountants of Scotland. Dissemination of good practice would be helpful before there was a blanket imposition.

The NHS is already using RAB. In effect, is that a large-scale pilot? Perhaps, we should examine what the experience of using it has been in the NHS.

There are two strands to that. Clearly, RAB is being used in the NHS; particularly by trusts, but less so by health boards. There needs to be uniformity among those organisations and experience must be shared.

If we are taking the changes one step forward and adjusting capital aspects in recognition of the emergence of PFIs and PPPs, although we could examine existing good practice, there would be merit in field-testing changes in the larger units that have developed PFI schemes, such as Edinburgh royal infirmary or Hairmyres hospital. There have been PFI schemes at Hairmyres for building work and for a large information technology installation. Examining how the Scottish Executive and a couple of teams that have introduced PFI schemes account for them in an RAB framework would be helpful.

That would be helpful. You said that extension of RAB in the public sector might be helped if people were given ownership of the system, so that there is a bottom-up rather than a top-down process. Will you expand on that? How might such an approach be facilitated?

In the public services, we are not good at reconciling top-down and bottom-up views. Previous witnesses have identified the ability to track useful information. The information and statistics division in the health service has a role in finding some comparable bedrock data so that there can be a comparison of apples and apples. Furthermore, we have to get the practitioners to create the foundation on which to place the principles of UK generally accepted accounting practice, or GAAP. We can then reconcile those two aspects in a series of exercises halfway through a financial year. In that way, we do not have to suffer the trauma of trying to do everything at the end of a financial year when the auditors are breathing down our necks. If we get things out of the way in September, we can use October, November and December to dry-run a move into RAB. Furthermore, if we share experiences, we can ensure that people are more prepared for the start of the next financial year.

Previous witnesses have said that they need new information technology to implement RAB. What is your experience of implementing RAB? That point has caused organisations in the private and public sectors a lot of grief; however, it can be worse in the public sector, which is more open and therefore even more exposed.

I agree with your very last point; life in the goldfish bowl of the public sector is really quite something. Before I came along to the committee, I asked Irvine Lapsley whether any subjects were taboo, and he said, "Certainly not." I am therefore going to make my heretical statement: any trust or body in the health service that claims to require a new IT system for RAB is missing the point completely. As RAB is enshrined in good accounting practice, there should be no need for any such system; and anyone who has bought an IT system in the past two years that cannot cope with accruals and resource accounting needs to ask serious questions about their procurement policy.

I understood that quite a few organisations have such systems.

It is claimed that they have such systems.

I am unrepentant on that point.

As I have some background in the health service, I found some of the comments in your paper interesting and teasing. On the second page of the paper, you refer to

"estimates of useful economic life".

I know that, in the health service, people decide on different bits of equipment on a fit-for-purpose time scale, which will vary throughout the system. You then mention

"charges on non-revenue generating assets"

How should we handle those two aspects?

During my career in the health service, I experienced a lot of management by decibel and an ill-preparedness to replace infrastructure. For example, it is okay to assess the useful economic life of ultrasound equipment, but if there is no financial discipline to provide for a replacement, the life of that piece of equipment will be extended and extended until the clinician has to wave the shroud and the equipment is replaced because of necessity instead of prudence. That particular situation is exceptionally worrying.

You also asked about non-revenue generating parts of the infrastructure, which returns us to a previous point about the ability of accounting systems to cope with the totality of resource accounting and budgeting, particularly in a capital sense. We need to identify the costs of the supporting infrastructure; for example, no one can run a health service without the hospital, even though the car parks do not seem to generate much revenue.

When I was in the health service, I was concerned by a propensity for an evasion culture of getting round capital charges, which I felt was one of the symptoms of why capital charges did not work. We must have a more holistic view of capital. Although the ultrasound machine is important, the car park is also important as people need to get to the hospital in the first place. For example, we should remember the recent deluge of complaints when West Lothian Healthcare NHS Trust tried to start charging for parking outside the hospital in Livingston.

We must create systems that account for the full infrastructure, not just the clinical sharp end, and take a more holistic view of the asset base. That brings us back to one of the themes of my paper: responsibility and financial management being vested in the organisation rather than an imposed system dictating the useful life of a particular piece of kit or how a hospital treats its car parks.

But that is the responsibility of the individual manager of the asset, no matter who that is within the organisation. For example, in a factory that produces machine tools, someone would have made a bid within the departmental budget for the replacement of assets, which is fine. In business, people might borrow money; as you said, there is an external financing limit and the needs of the bank will need to be met.

I get the impression that you are really suggesting that we should simply consider a leasing arrangement for assets—be they PFI projects or assets owned by a trust, a health board or whatever—which is then built into a revenue structure. Presumably that means that responsibility for the total capital assets of the health service will be left in the hands of the minister. Was that part of the thinking behind setting up the trusts?

You have far more eloquently described the first part of my paper's thesis than I have—and forgive me for that.

The answer is yes. I foresee that, in future, the public services—particularly the health service—will be able to vest control of operational assets under a single revenue stream, with the totality of the infrastructure vested in the minister.

You mentioned management by decibel and said that everything should be done through negotiation. Does that mean that some trusts will be better at negotiation than others, or are we talking about a national system of negotiation?

My comment about management by decibel referred to within a trust rather than the totality of the NHS in Scotland. I was actually alluding to the concept of opportunity costing within a trust.

I will move on to your comments on Peter Collings's evidence. I get the impression that you feel that managers should be more accountable within their particular organisation instead of globally. How would separating the three strands of assets, capital charges and depreciation make managers more accountable within the budgetary process? They are looking for outcomes; you are talking about widgets and money.

It should be said more often that the most important people in the health service are not the accountants or the managers, but the clinicians, who use the assets. In the context of your question, I have found that one of the more striking features of many different NHS bodies is that the budgets of clinical managers do not show depreciation or asset charges. Consequently, there is no onus on them to sweat the assets.

For example, when we invested £500,000 in a computed axial tomography scanner, the supplier said that we would get maximum use of the equipment by scanning animals. The clinicians were horrified by the suggestion, as they did not feel the need to sweat the assets. If we are to move to that good use of assets—in which context the Accounts Commission's recommendations on full-house theatre utilisation are helpful—we must put these financial criteria into the hands of the budget holders who use the resources.

Are you suggesting that there should be equipment renewal programmes instead of depreciation?

People could see things much more clearly. My tribe is very good at using language that no one understands. The statement of standard accounting practice 12 definition of depreciation uses silly phrases such as effluxion of time, but including a measure of wearing out into a clinician's budget makes an awful lot of sense.

If that is the case, how can the Government continue to seek a fixed 6 per cent return?

I would argue that we do not. I respectfully suggest that Joe Public does not understand the financial discipline behind creating a break-even in NHS trusts—nor do they understand yardsticks such as the number of trusts in deficit or in artificial deficit. Instead, Joe Public more clearly understands the yardstick of a renewed and contemporary infrastructure that is fit for purpose and that breaks even, year on year, to ensure that there is no drain on own resources each time there is a new injection of funds into the service.

As an amateur, I find it difficult to grapple with the idea of a return on public assets that do not make money. Someone who runs a BUPA hospital needs to find income; an NHS hospital does not have that problem. I have found your comments very helpful. What do you think is the philosophy behind charging for hospitals built 100 years ago that are still going strong?

That is a very difficult situation. There must be a very clear evaluation of functional suitability, which is the terminology associated with capital charges. As David Davidson said, functional stability means assets that are actually fit for the purpose. We must find a system in which the totality of assets is recognised as generating the patient care that is the most critical aspect of the health service. The way the whole infrastructure is accounted for is very important, and any move to resource accounting and budgeting will open a window of opportunity for moving away from a piecemeal to a more holistic approach. Such an approach is intrinsic to my apocalyptic vision of an empty balance sheet and the creation of financially literate managers who are truly accountable.

The new Edinburgh royal infirmary has been built through PFI; on the other hand, the Western general was funded by ordinary public borrowing. How would your system provide the proverbial level playing field so that we can get good management?

That is a very good question. The Western general is a very interesting case in point. The initial scheme to renovate the central core of the Western general was a PFI scheme that was deemed inappropriate because it was too integral to the whole campus.

The asset base on an NHS balance sheet will not evaporate overnight; it will depend on the passage of time as the assets come towards the end of their useful life. That said, the totality of the value of the assets—be they publicly funded assets that have been there for a long time or public-private partnership or Exchequer-funded additions to existing campuses—can still be assessed and calculated. Furthermore, the managers will be able to use that asset to generate wealth in its widest sense—which means to deliver optimum health care and health gain while still breaking even—and consider how it will meet the definition of total wealth or health gain for the population.

If, instead of going down the social scale to become a politician, I had stayed in teaching and risen to the dizzy heights of head teacher of the Royal High School in Edinburgh, what would be my working capital statement?

Working capital is the part of the balance sheet that shows the live issues of the business, be it a school, hospital or local authority. The live issues are the debtors, or the amount of money people owe us; the creditors, or the amount we owe to folk; the stock balances, if there are any; the cash in bank; and short-term debts, if there are any overdrafts or so on. That forms the reality of the daily management agenda of a management team and a head teacher should demand members of the management team to show good stewardship.

For example, current liabilities, or the moneys that are owed, should be covered by current assets. The quality of an organisation's management is demonstrated in the way it can find the funds—or the assets that can be converted into liquid funds—to pay for any short-term call on those liabilities.

I cannot disagree with much of your presentation, but why will the public sector's balance sheet not show any capital after how many years, and why is that logically a good thing?

I have not mentioned the word desirability this morning. The situation will come about because the paucity of capital available to the public sector will drive us to the point where there will be fewer and fewer Exchequer-funded schemes. The skill base that has been developed in PFI and PPPs is advancing so well that it will become the common model, which means that the size of the capital asset base on the balance sheet for a public sector organisation will necessarily shrink over time.

That is interesting. Although the overall level of capital investment goes down on the balance sheet, it still far outweighs private sector funding, even in the Government's pretty expansive plans. How does that stack with your theories?

I have no problem with that. In 1996, at the public expenditure settlement presentation, the finance director of the NHS, Simon Featherstone, clearly identified that the level of capital investment is growing. The rationale behind that is that although the public Exchequer-funded element is diminishing, the use of PFI is being advocated and the likes of the level playing field support—the revenue support to go alongside developing PFI schemes—is coming forward, which is a very sensible and appropriate means of supporting that investment. Notwithstanding comments about diminishing assets on balance sheets, the infrastructure of the public services can only benefit from the increase in PFIs and PPPs.

Any investment would do that. The question that arises—particularly given your comments about the managing director of Reg Vardy—relates to the supporting revenue streams. No one disagrees that revenue streams are important but, following Mr Gorrie's comments, the parallels break down when the revenue stream cannot be influenced. A private business would seek to increase sales to pay for investment. We do not have that opportunity. How does the commercial logic run through?

That is an interesting point. The committee agenda says that I am a management consultant; I am currently working on a huge waste management integrated PFI scheme. The critical part of that analysis is deriving a public sector comparator, because you do not get on the train unless you can afford the fare. If, when we consider the current and prospective revenue streams, the affordability model per the public sector comparator is not correct—in so far as it is not a cheaper option to go to the private sector partner—the scheme will not go ahead.

A greater awareness of the totality of cost through the piece is demanded, at the outset—before one buys the assets or takes up a PPP or PFI. That demands much greater financial discipline at the outset of an investment scheme. The models of PFI and PPPs demand close scrutiny across the piece, throughout the term of the contract. Treasury guidance on risk and risk transfer is very helpful in that context.

Your health service experience underpins much of what you have said today—notwithstanding your other experience. The committee has received written evidence from Dr Jean Shaoul, from the Manchester University school of accounting and finance, who will give oral evidence in a couple of weeks' time. If you read the evidence that Mike Hathorn gave last week, you will have heard his comments on Dr Shaoul's submission. Dr Shaoul made the fundamental point that as capital charges must be met, staff costs are often squeezed to meet the 6 per cent demanded. She painted that in a very negative light. Mike Hathorn took some issue with that, but did not really dispel the notion. How do you view that aspect of resource accounting and budgeting in respect of capital charges?

In that context I would lean more towards Dr Shaoul's view than that of Mike Hathorn. There is a tendency in the accounting profession to start with an answer and then work out the question. If the answer is, "Here is the affordability," the question will be, "I have got to fit capital charges into the equation, so what can be squished?" That is a very dangerous preoccupation—going down to a price, rather than up to a quality. Having said that, a public limited company would not make decisions on affordability and then say that it wanted to attract better staff and so go beyond the affordability envelope. As I mentioned to Andrew Wilson on the public sector comparator, at the moment there is a greater need to derive a baseline. We must ask what the staff are currently costing us.

We have notions of best value, performance management and planning, a fundamental element of which is continuous improvement, but we cannot demonstrate continuous improvement unless we know where we are starting. If we do not know the costs of our staff, we cannot make appropriate costings to economise on staff at the expense of capital charges and we cannot get a good handle on what the capital charges should be. The inability to take that decision prevents us from considering that capital charges over the life of the asset divided by the activity that that asset can do might cause us to look more closely at the activity. That goes back to the point about sweating the assets—making them work harder. It may be that one does not have to dilute the staff-skill mix, because one can increase activity.

Finally—forgive me for rambling—we should recognise that the centre can help, rather than simply impose. Several years ago, a trust in Edinburgh—I will not name it, but I am sure that members will be familiar with it—had two magnetic resonance imaging scanners in one hospital. One was being used and the other was redundant because the trust could not afford the capital charges to run it. That is shameful. If there were some central assistance to spread the activity across centres of excellence—instead of everyone wanting the latest toy—we would be able to afford both the capital charges and the quality staff.

How would that work? The existence of the machine would incur a capital charge irrespective of whether it was in use.

Yes. The point was related to the convener's comment made about economising on staff. As the trust incurred fixed cost capital charges on the machine, it could not afford to run it and so did not attach any staff to it.

I see.

It was terribly sad.

I want to return to a comment you made in response to Mr Gorrie's question about working capital statements. As far as I am aware, working capital statements have never been particularly sexy in the UK. Many moons ago, when I was at business school, there was a great push to use working capital statements to examine commercial organisations. Most of the textbooks that championed that aspect of asset management were American. Has there been a change in UK culture towards that approach? Is it only the companies that respond to the US Treasury and the tax model that use working capital statements? That is a more simplistic view of the totality—to borrow your term—of how to manage the assets.

My recent experience in the private sector is rather limited; I have spent the past three years primarily in local authorities, health boards and NHS trusts. I see an awakening to a requirement, particularly in the context of political representation, to present financial statements that are straightforward. As I said to Mr Gorrie, the headmaster, as head of the ship, needs to understand the statements. By the time I prepare a balance sheet and feed it to my board of directors—that is if I am working in a trust; if I am working in a school it would go to the headmaster and to the chief executive management team if I am working for a council—for approval, it is three or four months out of date. It is historical information and of little use. As members will know, a balance sheet is simply a snapshot at a given point in time—usually 31 March. Why is that living? Why can we not have a statement of what has happened to the working capital in a 12-month period, just as we have a statement of what has happened to the income and expenditure over 12 months?

That raises an important issue. If we move towards working capital statements, we need an agreed method of evaluation of the assets. Are you proposing that there should be a formula into which different assets could be fitted on the basis of writing them off over, for example, 50 years—for a building—or 20 years?

Potentially. To some degree the comments that I made to Mr Wilson come to bear on that point. If we are taking the PFI or PPP route, the contract has a predefined term anyway and therefore the imposition of economic lives is not an issue. That is the term of the contract and the risk transfer element is clear. Beyond that, there is a need for commonality. It would be better to carry out a pilot study than to impose predefined lives for X, Y and Z on day one.

Thank you for your submission and the clear responses that you have given to the committee's questions.

Thank you, convener. It has been a pleasure.