We move to agenda item 3. I welcome our witnesses: Stephen Boyle, Auditor General for Scotland; Dharshi Santhakumaran, senior manager, Audit Scotland; and Cornilius Chikwama, audit director, Audit Scotland.
I invite the Auditor General to make a short opening statement on his renewable energy report.
Good morning. As you mentioned, convener, we published a report on the Scottish Government’s offshore wind investment programme at the beginning of this month.
Three years ago, the Scottish Government announced that it would invest up to £500 million over a five-year period to develop Scotland’s offshore wind supply chain. It aims to speed up building port infrastructure and supply chain facilities and to reduce risk for private investors, so as to unlock billions of pounds of supply chain opportunities associated with the anticipated ScotWind offshore development projects that we reported separately on and which were considered by the committee a few weeks ago.
The Scottish Government has a clear economic rationale for the offshore wind investment programme. The programme has already supported investment in important infrastructure and manufacturing facilities, and it has attracted significant private sector investment alongside public funding.
However, our report found that there were weaknesses in how value for money is assessed and demonstrated in programme investment decisions. Information-sharing issues also significantly weakened collaboration between delivery partners for a period during the programme. Governance, monitoring and risk management arrangements have not yet been fully developed in line with the programme’s scale and complexity.
Progress with the investment programme has been slower than originally anticipated. Although investments have been made across Scotland in strategically important areas, by the end of July, only 28 per cent of the available funding had been committed, and changing market conditions have made programme delivery more challenging.
There are clear risks to the programme that need to be quickly addressed. Ministers need to improve collaboration between programme partners and strengthen how decisions are made about investments, so that they have the biggest impact. They also need to develop a clear plan for the future that will help to reduce uncertainty for delivery partners and investors.
As ever, Cornilius Chikwama, Dharshi Santhakumaran and I will do our utmost to answer the committee’s questions.
Thank you, Auditor General. We will move straight to questions from members, starting with Dawn Black.
Auditor General, you said that things have been slow to get moving. Perhaps that is a bit of an understatement. It could be that the programme will ramp up as we go along.
I want to home in on a few areas. Paragraph 69 of the report notes that there are reasons beyond the programme’s control for why progress may have been slower than expected. There are planning bottlenecks and objections to schemes coming through. There is also the challenge of the Office of Gas and Electricity Markets’ connection charges for ScotWind and other onshore projects. In other parts of the UK, generators are paid to connect to the grid, whereas, in Scotland, we have disproportionately high connection charges. What difference would a change in that make to the progression of the programme?
I will pass over to Cornilius Chikwama in a moment to say a bit more about the specifics of grid connectivity and any other variables.
In preparing and scoping our report, we have been careful to align it with the responsibilities that Audit Scotland and I have—and, by extension, those of the Scottish Parliament. However, it is undeniable that a number of variables will ultimately determine the success of, and the level of ambition for, this project.
You mentioned grid connectivity, planning rules and transmission arrangements. Those are all variables that must be navigated. We recognise those complexities, but they are not new. Those circumstances would have been known and understood throughout the programme. The point that we try to convey in the report is that an understanding needs to be gained of those variables and of how individual projects can be prioritised to best effect so that progress can be accelerated.
Cornilius might want to say a bit more about that, as well as responding to the other parts of your question. Although those factors remain live challenges that must be overcome, other places are, in effect, in a race to develop the infrastructure and port capability that are needed to take advantage of the wider benefits before Scotland does. That risk must be addressed and overcome at pace, so that the impact of the £500 million that has been committed is not lost when it is ultimately spent, or is not realised at such a slow pace that other, neighbouring countries are in a position to benefit instead.
I will pause there and bring in Cornilius Chikwama to cover some of the specifics that you asked about.
We have highlighted the higher costs of Scottish generation and connecting to the grid as potential structural challenges to making progress and perhaps bringing projects online. If that changes, what could happen? That could make Scottish energy generation more attractive and more competitive than energy generation in other parts of the UK, but it is worth recognising that that is only one element of the structural issues that we have identified.
Another key issue to consider is the macroeconomic environment, how it is currently impacting the cost of capital and what that means for developers’ ability to commit to development now and to guarantee that those who are building the supply chain will have work to do. As the Auditor General highlighted, the programme is currently focused on infrastructure around port capabilities in some of the port areas and access roads, but a key element of infrastructure will be how we connect to the grid those sites where the energy will be generated. There is still work to do in that area. If that work is not done, that will act as a structural constraint on realising the potential.
The final area that I will highlight is the contracts for difference scheme, which is what rewards energy generation at some of these sites. Most of the sites are still five years or more from coming on stream and are yet to secure contracts for difference with the UK Government. We do not know what the contractual offer will be. That is another potential structural barrier that we need to keep a close eye on, because it could impact developments and therefore the supply chain opportunities that we are trying to unlock with the £500 million.
I am very lucky to have Montrose port, which has received some of the funding that has been allocated, in my constituency. According to the report, it has received £6.4 million for electrification of the berths. Many of the supply chain companies that operate at the port, such as Subsea Micropiles, have created significant investment for the renewables chain. The funding is working, but, as you said, it is doing so slowly.
Regarding wider economic benefits, including the creation of jobs, there do not seem to be any specific indicators, targets or milestones to start with. Do we have an indication of what the benefits will be and when the realisation exercise will be completed?
Dharshi Santhakumaran might want to address the issue of progress. To step back from the report, the ambition stems from a very clear ministerial announcement. The intent was to create a £500 million offshore investment fund. That was followed by the provision of a strategic outline business case. In the report, we make the point that, typically, the setting out of a strategic outline business case would be the first thing that would be done. That would be followed by the identification of what funding was necessary to deliver the objectives and what, in programme management terms, the objectives and outcomes would be.
We make what is, I hope, a balanced assessment of that in the report. In spite of the programme not having the linear building blocks for delivery that such a programme would typically have, the Scottish Government has taken some steps and has navigated the complexity with partners, particularly private sector funders. However, key aspects that still need to be addressed include the intended outcomes and benefits and how those will be prioritised. In our recommendations, we say that there is work still to be done, but Dharshi Santhakumaran will say something about the specifics of the measurable impact that you asked about.
11:00
We say in the report that, with regard to the milestones and the outcomes that the Government wants to see from the programme, all of that has been underdeveloped. The Government is now carrying out a benefits realisation exercise. We do not know what stage that exercise is at or when it is due to be completed, but we expect that, as part of it, the Government will look to identify more clearly what it expects to be delivered from the programme and when it expects to see those outcomes. Obviously, outcomes such as job generation and other longer-term impacts will not be seen until we are quite a bit further down the road, but we would like the Government to be clear about when it expects those things to happen and to indicate the extent to which those outcomes will be achieved.
I appreciate that the committee will be well aware of this from its other interests, but the specifics of the fiscal framework between the Scottish Government and the UK Government really matter in this context. The framework relates not only to the wider growth in gross domestic product that might apply here, but to Scotland outstripping other parts of the UK in its activity. The jobs that will be created as a result of this programme will be highly skilled and potentially highly paid, so the importance of the benefits realisation exercise cannot be overstated as a next step in supporting programme delivery, which will involve flexing and taking the opportunity to target particular issues in the “Offshore Wind Focus” document that we refer to in the report.
Thank you.
You make an important point about the fiscal framework and the highly paid, highly skilled jobs that are needed. Indeed, that applies not only to this area of energy policy, but potentially to other areas, such as our nuclear policy and attitudes towards that.
Mr Brown has some questions.
You have said that the benefits realisation exercise is still being developed. In the light of the fact that the value-for-money parameters have not been sufficiently developed, I note the comment in paragraph 26 that delivery partners “questioned” the use of benefit cost ratio. Have delivery partners themselves suggested what outcomes would be a better measure than BCR? If so, what are they advocating?
I will bring in colleagues to give you some detail on that, but I suppose that your question speaks to some of the early arrangements for the delivery of the project. Benefit cost ratio is a pretty well-established approach in project prioritisation and programme management, but we found that the prioritisation criteria that we set out in the report do not include consideration of the other two value-for-money principles. Therefore, the partners, who, as you would probably expect, are experienced in both public and private sector provision, asked, “What wider range of considerations should be looked at?” Indeed, some of the benefits realisation work that we referred to earlier would be relevant here.
However, Cornilius Chikwama might want to say a bit more about some of the views that were expressed during our audit.
On benefit cost ratio, the main issue has been that it involves reducing the indicator of success to a single measure of benefits and how that compares with costs. That goes back to our earlier point about the lack of clarity on the outcomes that are to be realised.
What we have seen with the other partners is that they are already in the business of making similar investments, albeit outside this programme, so they will use a set of indicators to assess the value of the projects, such as the rate of return on investment, the number of jobs that are being created and the gross value added that will be contributed.
If you take that approach, you start to unpack your benefits in a more detailed way, which brings greater clarity to the outcomes that you are seeking to achieve, rather than simply reducing them to a ratio of benefits to costs without having an understanding of what is sitting within that benefit figure.
Is that causing any tension between partners? If I am picking this up correctly, partly because of the information-sharing issues, each partner will take projects to the investment board almost in isolation. Therefore, if the partners want to use metrics other than BCR, that will make it harder to compare and contrast projects.
You are alluding to the data breach circumstances that we mention in the report. I should clarify for the committee that, as part of the scope of the audit, we did not drill into the nature of the data breach, but it was clear that there was one and that it impacted the functioning of the delivery board and the relationships between partners.
The intent was that a collaborative approach would be taken between the delivery partners and the Scottish Government, and that they would bring their own experience and expertise when considering a range of projects. However, as you rightly say, what transpired during that period was that, instead of a wider collaborative approach, there was, in effect, a default to bilaterals between the individual delivery partners and the Scottish Government. That feels like a period of missed opportunity to apply those wider principles of collaboration and sharing of expertise. As you rightly mentioned—Dharshi Santhakumaran might want to say a bit more about this—a revised information-sharing agreement is now in place.
However, that probably brings us back to the deputy convener’s point. There is not a huge amount of time to play with in the delivery of the programme to get in place the necessary infrastructure and investment. Scotland is in a competitive environment with other countries and jurisdictions, so the fact that the data breach happened and that that created a delay feels like a really unfortunate part of the story of the delivery of the offshore wind investment programme.
Dharshi can say a bit more about some of those circumstances.
I think that it is fair to say that some of the delivery partners’ concerns about the use of BCR occurred before the data breach. As the Auditor General said, that was due, in part, to their having their own due diligence processes and indicators, and there has been a bit of tension around the Scottish Government’s requirements and how those interact or align with the processes of the individual delivery partners.
Following the data breach, there has not been the opportunity for the delivery board to function as it should and to consider the shortlist of projects in the round, because those conversations have been taking place as bilaterals between the Scottish Government and the individual partners. Therefore, expectations for the programme and the progress that is being made on it have not been considered strategically, across the piece.
A new information-sharing agreement was put in place in July, so we hope to see improvements in collaborative working, but those improvements need to happen quickly.
What evidence is there that lessons have been learned from the original data breach, and how do we know whether that has been properly documented? How does that feed into the new information-sharing agreement?
The new information-sharing agreement includes some additional clauses that set out how the organisations involved would address a future information breach. Primarily, it is about giving whichever partner has had its information leaked the right to take action to address the impact of that without having to show evidence that it has lost money as a result, whereas under the previous iteration of the information-sharing agreement, it would have had to prove financial loss before it could take any action. That is the main difference.
We understand that it took the best part of a year and a half for the new agreement to be put into place. I think that there were tensions between partners on the delivery board about what it should look like and where the liability should lie. I do not think that it is possible for us to say yet whether lessons have been learned. There has not been another breach, so we do not know whether the organisations involved would have reacted better or more quickly.
For me, the lessons learned need to apply not only to this ongoing project but to whatever other collaborations might take place in the future. Is that not where the Scottish Government needs to apply those lessons?
That is a fair analysis. I refer the committee to the second of the three blocks of recommendations that we make in the report, which speak to the effectiveness of
“governance, collaborative leadership and oversight”
arrangements through the delivery board that need to be strengthened. We call for:
“formal terms of reference for the Delivery Board, updated governance arrangements to reinstate the originally intended”
collaborative working to support
“investment decision-making for the programme”
and, to go back to some of the fairly standard hallmarks of effective governance,
“risk … management”
arrangements, which need to be in place earlier and more effectively.
Lessons learned absolutely need to apply to the information-sharing agreement, but wider objectives around stronger and more effective governance through the delivery of the programme also need to be addressed.
I have a supplementary question on the data breach. For the record, are you able to tell us what data was leaked, what entity leaked it and, so that lessons can be learned, how that failure occurred?
It is primarily for the delivery partners to provide that detail or be clear about what they can share directly with the committee in public. We have only a partial picture of some of the circumstances, so I am reluctant to give you a false impression without the full detail.
I hope that the report makes clear, and that I have confirmed in my evidence, that we have not audited the specifics of the data breach, but rather have audited its implications. I do not think that we use these words in the report, but it effectively led to a lack of trust and clarity between partners that went against the intent that the governance arrangements would be collaborative. Different partners were meant to bring their experience and expertise to support investment decisions, but they instead held time-consuming bilateral discussions rather than collective discussions about the specifics.
Mr Brown’s point and your question are really important. As Dharshi Santhakumaran mentioned, the updated arrangement has been in place only since July. The robustness of that arrangement, the agreement and what follows are most important. However, with regard to the detail that you are looking for, it might be for the Scottish Government and its partners to take a view on what they can set out for the committee.
11:15
To close out this area of questioning, and to get things clear in my mind, I would have thought that the whole point of the process was to achieve greater collaboration between the partners. In order for that to happen, it is necessary to be able to share commercially sensitive information, but in a protected way. Is that not the aim? Did the data breach occur because the information-sharing protocols were not sufficient, or was it simply the case that the information was still deemed to be too commercially sensitive? I would have thought that we would want the partners to work as one and to share commercially sensitive information, so that we can get to a point at which the best investment decisions are made on the various strands of information that are available.
You are absolutely right. That was the intent when the delivery board arrangements and the information-sharing agreement were set up, but that did not happen—or rather, there was a breach and a resultant breakdown in trust that remained unresolved for 18 months, which led to a lack of the intended collaboration among experts. It was very unfortunate for the delivery of the programme that it did not harness and benefit from that expertise in the way that was intended, which gave rise to additional resources and costs, as we touch on in the report.
The scale of the delivery of the project was hugely significant for some of the organisations involved—that was certainly the case, as we say, for Highlands and Islands Enterprise—relative to their other capital investment activities. There are undoubtedly issues to be resolved and worked through, but the new arrangement has been in place for a relatively short space of time. It will be for the Scottish Government and partners to set out in more detail—should the committee decide to take evidence on this—how they are overcoming the difficulties and reinstating collaboration and trust between the different parties.
I want to return to the outcomes or returns on investment. You touched on the fact that many of the delivery partners would often use the metric of the number of jobs created.
In case study 1, you highlight the Sumitomo factory, where 330 jobs are being created. That involved a combined public sector investment of £23 million, which levered in a huge amount of private sector investment. On the face of it, that seems like a great return, which boosts the BCR, but the public sector contribution works out at £70,000 per job. Is that a useful measure? Is there a general guideline metric on what you would expect job creation to cost the public purse, if that makes sense?
Cornilius Chikwama might have that detail to hand, but I will say a few words first.
I agree with your assessment that the Sumitomo investment in the port of Nigg represents a very successful project from the point of view of the scale of private sector investment—of which there has been £326.5 million—to public sector investment. We cannot overstate the importance to the leveraging or crowding in—whatever language we use—of private sector investment by the delivery partners around the anchor of public sector investment. Typically, the ratio of private sector investment to public sector investment is expected to be about 3:1, but, for the Sumitomo project, the ratio for the first tranche of development is 14:1 and, for the follow-on investment across both projects on the same site, we are talking about a ratio of 11:1. The scale of private sector investment to public sector investment has been hugely significant and beneficial.
I will bring in Cornilius to talk about the success measures that you have asked about.
The cost to the public sector of realising each job could be one of the indicators, but we as Audit Scotland would not really say that there was a specific threshold that would determine whether a particular number was right or wrong.
It probably goes back to what we should be looking at in assessing the value for money of these types of projects. The cost per job might be one element. We could ask, “What is it costing us to achieve the outcomes?” However, we also want to look at measures of efficiency and ask, “How efficiently are we delivering the programme?” This is where some of our findings around pace of delivery might be highlighting issues around efficiency in delivering the programme. We also want to be looking at outcomes—what does this mean for the people or the communities where these projects are being undertaken?
From our perspective, we would probably challenge the Government to be thinking about a wider suite of indicators to underpin the assessment of value for money. This is where one of our key findings in the report is coming from. There is an absence of metrics or benchmarks to measure value for money. As the Auditor General says, we have these high-level measures around how much private sector capital we want to leverage from £1 of public sector investment, but those measures are not telling us about what it actually means for the communities. We are just looking at money rather than the real impact on people’s lives.
Thank you.
It is about understanding that there is a big difference between the Sumitomo project, in terms of that 14:1 ratio, and the other projects. It is really important to understand the specific differences between the Sumitomo project and the other projects, because there is clearly a big difference in that private to public investment ratio.
You are absolutely right. It is about the success and the scale of the Sumitomo investment. We give some of the detail in case study 1 of the report. I do not want to be imbalanced and say, “Were it not for the Sumitomo investment,” but just extending that line of thought, if that investment were not there, it would look like a very different set of results.
It is clear how significant the Sumitomo port of Nigg development is for the progress of the programme in its entirety. It is also the case, as you are referring to, convener, that without the relatively high private sector investment through Sumitomo—there is a bit more detail on that in exhibit 7—we would not be in quite the same space of private sector investment looking so healthy across other projects. The committee may wish to explore that further. I am very happy to say more about it.
Looking back, one of the original principles was that the programme would primarily be not so much grant led by public sector investment but more about loans or equities. Clearly, the benefit from those two latter types is that they are repaid and recycled for future investment. With a grant, on the other hand, the contribution is then locked into those developments.
The point is, I hope, clear in the report. It is about the somewhat skewing impact of the Sumitomo investment on the scale of the progress, the leveraging of private finance and the nature of the relative type of public sector investment that has taken place so far.
Yes. If you exclude the Sumitomo project, there is £705 of private capital for every £1,000 of public money, so there is a significant difference without it, as you point out.
I do not have much to say on this. My views on offshore wind are fairly well known, but, for the avoidance of doubt, I think that it is, at best, pointless; at worst, it is hugely damaging to the economy. In every case, it produces very expensive and unreliable electricity, so I am not a big supporter of offshore wind.
Apart from that, it is a good thing.
Apart from that, it is fine—aye.
The first sentence in the key messages says:
“The Scottish Government has set out a clear economic case to spend … £500 million”,
but, in your opening remarks, you said that the Government set out a clear rationale. Those two are not quite the same. I think that I understand the rationale, which is that the £500 million of public money being spent—largely in the North Sea—will produce supply chain benefits and consequentials in education and training, in that it will upskill the workforce. I can understand that, but I do not understand the economic case for doing it. Does the economic case exist as a single document somewhere that I could read?
I will pass to Cornilius shortly, because this is very much his area of expertise.
As we say in the report, Mr Kirkwood, the chain of events was perhaps not quite in the traditional programme implementation timeline that you might typically expect. In October 2023, the Scottish Government announced £500 million of investment, which led to a strategic outline business case instead of a full business case, which, as we say in the report and as you might be familiar with, would be more typical sequencing.
We go on to say in the report that there were sufficient compensating actions in the round that set out the rationale for that—including the alignment with ScotWind and the crowding in of finance—but that has not fully mitigated some of the judgments that we arrive at across the totality of the report, which Cornilius can expand on as he wishes. There is a need for better prioritisation and clearer value-for-money intention. A benefits realisation exercise is happening latterly. There are matters to be addressed that set out the rationale—that is probably my use of language—but not necessarily the totality of the suite of measures, indicators and timelines that would be more traditional in the delivery of a complex programme of this scale.
On process, the Government produced what it termed the “programme-level strategic outline business case”, which is where it made the arguments for why it is worth while making an investment in this area. We have looked at the business case, if I can just use that as shorthand, and it looks at the market failures that the Government is trying to address with the £500 million, which are things that, without Government intervention, would not happen.
I think that the Government realised that there are certain activities and projects that are needed—public infrastructure, in particular—and that would not happen if the public sector did not make an investment. It identified that there are areas in which things could happen but perhaps not at the right scale to maximise the available potential. The final thing that it highlighted is that there are things that could happen but perhaps not fast enough. That speaks to the point that the Auditor General made earlier: to realise the potential, we have to move quickly, because we are in competition with other countries. That is the assessment of market failures and where the Government saw opportunity to add value.
The challenge with the business case is that, at the time when the funding decision was being made, there was no certainty on which of the individual projects would be funded, because those would be demand led. As investors came forward with individual projects, there was a detailed assessment of the projects to determine those that represented good use of public money and those that did not. That is a legitimate approach, given the nature of the investments that were being made.
My only other point is that, at the time, the Government looked at similar projects that had been funded elsewhere in the Scottish, and potentially UK, public sector. Its view was that, for every pound it spent, it would expect projects of this type to generate an additional £2. However, that assessment was made at the programme level, before the Government started looking at individual projects, which came on stream after the decision to invest £500 million had been made.
11:30
You used a very interesting phrase: “market failures”. Would I be wrong to define that as a situation in which people with sound business sense do not see an opportunity to make money, and the Government has to step in to provide profit for private enterprise?
That might be the case. However, there are a number of reasons why that might happen, and I will give some examples from the report. In some cases, value can be generated, but that value cannot be commercialised or captured in a commercial sense. We highlight examples of ports that are not operating on a commercial basis, so there might be a commercial return to be realised, but that is not what motivates their investment decisions. In that case, because the commercial benefit cannot be realised, the public sector might have to step in and provide investment to enable certain things to happen.
There can be co-ordination failures, too, when it comes to some of those investments where individual investors or bodies are working independently. That might affect either the timing of projects or, in some cases, whether they happen at all, because the required co-ordination does not take place. You can view the fund as providing an incentive or a focus for that co-ordination to happen, in order to unlock the potential that was identified in the supply chain.
I will briefly add to that. I suppose that it is not really for us to take a view on the merits of the Government’s choice to make an investment. I am sure that there will be many different arguments about how public money can be used, but what we seek to set out in the report—I agree with Cornilius’s point—is that the intent was to provide an anchor, enabling public funding to leverage private sector contributions. It could be argued that, without that public sector investment, a commercial entity would be taking on all the risk and all the up-front costs, which might lead to a business decision not to proceed.
As we have already touched on, the Scottish Government’s planned investment is intended to accrue wider value in the form of well-paid, highly skilled jobs, sustainable communities, and so on. You are very familiar with that context, Mr Kirkwood. Our judgment is not on the merits of the investment, but on the progress and pace of the programme and, ultimately, whether it is on track.
It is important to highlight to the committee that we have not made a fundamental judgment about value for money at this stage because of the pace of the project. However, value for money needs to be integrated more clearly into the investment decisions and the prioritisation that the Government and its partners are making.
You do not make a judgment about the merit of the investment, but the method of investment is under scrutiny. To follow on from Mr Kirkwood’s point about the significant public investment that is going in, I note that the ratio of public to private investment in the Sumitomo project is quite significant. We have seen a trend from loans to grants. Does that mean that repayable loans and equity stakes are becoming increasingly important for the Scottish Government to consider or implement as methods of public investment?
I agree. That speaks exactly to one of our recommendations about the need for clearer future project prioritisation and its connection to value for money, the types of projects that are being supported and their location. I refer to exhibit 8. You might infer from that, perhaps from the Sumitomo project and others, that certain types of activity are more attractive to private sector investment.
We recognise that the Government will base its decisions not just on immediate return—there are wider considerations with regard to particular parts of the economy in different parts of Scotland—but the recommendation is, at its heart, about what you have just asked about: how prioritisation is being carried out with regard to private sector investment, highly skilled jobs, sustainability and the recycling of investment, if that is the intent behind public sector contributions to different projects.
A business case would set out the investments necessary to achieve an objective and the profits expected from the project. What profits are expected from this project? Are we talking about just financial profits, or are we talking about changing emissions, too, which is what the climate change project is based on? What is the purpose? Is it just a disguised jobs creation and infrastructure improvement programme?
We can say more about the detail of the strategic outline business case, but if you are asking about the delivery of specific climate reduction targets, my recollection is that that is not part of the specifics. This is more about making an economic contribution to deliver supply chain benefits, which we talked about a few weeks ago, through harnessing the initial, and anticipated, significant returns from the ScotWind leasing round. For Scotland to benefit from projected ScotWind returns over many years, it must have the necessary infrastructure in place. It is one of the key enabling contributions to wider supply chain benefits and job creation, rather than its being directly aligned with contributions to climate or COemissions reductions.
Again, I will turn to colleagues and see whether they want to add anything.
I can follow up on that. The Auditor General is right—it is not really for us to make the case for the investment. Instead, what we are sharing is what we have seen in the business case.
The starting point was the ScotWind leasing round, in which developers were invited to submit supply chain statements, as I think they are called. In those statements, they identified that about £28 billion-worth of supply chain activity could be realised in Scotland as a result of developments on the 20 sites that were subject to the ScotWind leasing round.
At the time that the business case was made, it was estimated that there was a pipeline of projects worth between £6 billion and £8 billion that could be delivered at a certain point in time. The judgment that was made was, perhaps, to unlock that £6 billion to £8 billion, with the Government investing about £500 million. Those are really the mathematics—if I can use that term—in terms of the value, where that value was coming from and how it related to the £500 million. It is set out in the outline business case.
I think that that is about it from me, convener.
I call Miles Briggs.
Good morning, and thanks for joining us today.
Having read the report, and having heard some of the answers to our questions this morning, I would say that seeing whether all this is on track feels a bit like taking a stab in the dark. I have to say that I was taken aback by some of the points that you make in the report. For example, paragraph 76 says:
“At this stage in programme delivery, there is limited evidence available to assess the extent to which these outcomes are being achieved.”
I have to say that it is not clear from your conclusion what the impact on the investment will be. When it comes to ministers providing that clarity, what do you expect to come from that? After all, there has been a lot of movement with regard to whether the supply chain funding will actually be realised, and that is quite concerning at this stage, if we are not talking about the public money that is being put forward.
We would agree that there are a number of moving parts to this investment—that is exactly the point that you are making—and that even small changes or additional investments can skew the relative ratios or the progress towards the £500 million target.
As well as highlighting the need for clarity on benefits realisation, jobs metrics and the recycling of investment returns, I would signpost the committee to the final tranche of recommendations in our report. As we look towards the end of the signalled timescale, with the current programme ending in March 2029, much will depend on the progress on delivering the £500 million, and we have already talked this morning about the need for more pace in that regard. Moreover, once the review of the outline business case has been completed, the question will be: is there any clarity on progress?
Most fundamental of all, perhaps, is the need to provide clarity to stakeholders, partners and the Parliament on the progress that is being made. Is the programme delivering the intended outcomes? We recommend that within the next 12 months—that is, before the end of next October—further detailed clarity be given on the success, and progress towards the completion, of this investment.
Thanks for that.
I do not know whether you can answer my next question, but it is on the issue of the benefit cost ratio—the two-for-one, as it were—that has already been touched on. Given that we are talking about a lot of private investment that would be happening anyway, and given your caveat in the report that the benefits in a BCR are represented in monetary terms, so benefits are “purely financial” and might not include, say,
“job creation or combating climate change”,
that ratio seems very low, given the public money that is being put forward. In what respect would the Government outline a different benefit arising from the significant amounts of public money being used?
It is an important question, although it is one for Government rather than for us, and it relates to measures of success. The benefit cost ratio is one of the measures, as are the crowding in of additional investment, job creation and sustainability. Thinking of other ratios, particularly with regard to the leveraging of private finance, I note that a ratio of 3:1 is referenced in the material as an appropriate indicator, but we make it clear in our report that there has to be better prioritisation and more focus on achieving value for money, not just in the here and now but all the way through to the completion of the project in the round. There needs to be a fuller assessment of the benefit cost ratio and whether it is sitting right at the heart of an individual project progressing as intended. There is certainly a range of factors to be considered now.
In paragraph 6, which is specifically on risks, you conclude:
“Given the current stage of investment and long-term nature of these expected outcomes, it is not yet possible to conclude whether the investments will deliver value for money. Instead, our assessment focuses on the risks to achieving value for money as a result of how money is invested, managed and delivered.”
Given the money that has already gone into, for example, port investments, are those things also being seen as public assets? How is the Government quantifying that? What I am interested in looking at is, when public money is being spent on assets for private companies, how those assets can be utilised by other companies, what the wider benefit to the economy might be and how all of that is being audited.
In truth, it varies. When the public sector gives a grant to a private organisation, it will be subject to a range of conditions. More often than not, though, if the money is being paid to a private sector provider, the asset in question will not be in the public sector—it will be owned by the private sector provider.
As for the auditing and scrutiny of that sort of thing, there will, typically, be a funding agreement between the public sector and the private entity and, provided that the grant conditions are met, it might end at that point, or there might be a follow-through exercise thereafter.
The wider point is that, with a grant, the money is gone—it will be with the private sector. Loans and equity stakes are, of course, a bit different, because a funding agreement with loans still affords the public sector rights, and it is similar with equity. Some of that will be recorded in public sector accounting. To go back to the original intent, loans and equity stakes afford more rights and longer-term interest, and the recycling of that investment, once the equity stake concludes or the loans are repaid, is a stronger use of public money into the longer term.
11:45
Where does the balance between those agreements present a risk in relation to achieving value for money? Some of the agreements that you outline in the report between different companies seem not to follow a pattern of reducing that risk; they seem to be more about trying to get companies to invest.
That is why we recommended a clearer process of project prioritisation, so that the question of what one type of investment in one location can allow relative to another is more clearly understood and applied. Value for money will not be quite so direct that it can only follow that particular approach—indeed, Government and ministers can take a view that value can be achieved through a range of different metrics, so some of those agreements might just have to be led with grants instead of loans or equity stakes, because grants produce wider benefits. Of course, that is for ministers to determine. However, getting through that process will be helped by clearer prioritisation arrangements than we have seen thus far.
Paragraph 55 is quite interesting. You state:
“While value for money is considered during project prioritisation, there is no consistent, documented follow-up. More recent changes have introduced additional value for money monitoring”,
which is positive to hear. However, you go on to say that it is only
“for some projects, indicating that the approach is continuing to evolve.”
It is little wonder, therefore, that you conclude that
“board members have reported a lack of shared understanding of progress and impact”.
That additional value-for-money monitoring is only for some projects and not all, so, obviously, that approach would need to be expanded. However, the paragraph suggests a bit of a piecemeal, reactive approach.
There has clearly been iteration in the course of delivery of the programme. I cannot help but feel that there was a pretty important period of time when it was not functioning as well as it ought to with regard to governance and prioritisation, for the reasons that we have discussed.
As we set out in paragraphs 56 to 59, however, there is evidence that learning is happening. You can see that some of the issues that we set out in the report are being addressed. It is healthy and welcome that gateway reviews are taking place, and the amber judgment that is referenced is not unusual. However, to go back to the point on which we have touched several times, pace is needed around that work because of the wider competitive environment that Scotland finds itself in.
You have talked about the need for pace, about progress being slow and also about the lack of a plan for the offshore wind programme after 2029. Was the Government able, during the audit, to provide an idea of when a post-2029 strategy will be produced?
No, we have not heard anything definitive about when it will announce what might or might not happen with the programme and whether it will continue in some form after March 2029. Clearly, because the pace has been slower than expected, because of the change in the market conditions and because a lot of those projects are large, multiyear ones, it is really important, given the changes in the circumstances, that it considers what it wants to do as we get into the latter stages.
There is—
My apologies, convener. It is exactly that. As the committee will be familiar with, large, complex capital projects do not always conform to a particular milestone or end date. That is some of the risk in relation to the role of the public sector. The stability of and clarity around duration are matters for public sector confidence and scrutiny. Equally, as we have heard from Government during our audit with it, predictability on private sector investments gives certainty. That is why we recommend in the report that there be clarity on what will happen after 2029, because, although we are three years away from that point, the complexity and duration of some of those projects suggest that it will be an important step to take in the relatively near future.
So, there is no post-2029 plan or definitive idea from the Government on whether the programme will continue. Is there a plan to determine whether there will be a plan? Has the Government indicated how it will go about looking at that issue? Will it consult with industry partners on continuing the programme?
Cornilius might want to say a word about that, too, but I would say that it is now very much now for Government to set out its intentions to Parliament along with its other priorities. It might be for us to defer to the Government to share its planned next steps with the committee in response to one of the report’s recommendations.
We enquired on that point, and what Government indicated to us—which we have noted in paragraphs 96 and 97—is that it is reviewing its outline business case to reflect those changing market conditions and the progress that it has made. It has not indicated to us when a decision will be made, but it looks as though consideration is going on through the process of refreshing the outline business case.
Thank you for that. Members do not seem to have any further questions, so I thank all our witnesses for their evidence and I move the meeting into private session.
11:52
Meeting continued in private until 12:17.