Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, November 24, 2016

Official Report 599KB pdf

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Major Capital Projects (Progress Update)

Agenda item 4 is an evidence session on the Scottish Government’s major capital projects progress update. I welcome from the Scottish Government Alyson Stafford, director general of finance, Andrew Watson, deputy director for financial strategy, and Christine McLaughlin, director of health finance. We also have Peter Reekie, deputy chief executive and director of investments with the Scottish Futures Trust, and Mike Baxter, director for finance and analytical services with Transport Scotland.

I invite Alyson Stafford and Peter Reekie to make brief opening comments before I open up to questions from members.

Good morning, and thank you very much for inviting me to attend to answer the committee’s questions arising from our latest report on the Scottish Government’s major capital projects, which is on the period to September 2016.

I have a number of colleagues with me. The convener has just introduced them, but I will say a little about how you can expect us to respond to your inquiries. I will look to Christine McLaughlin to help with any questions you might have in relation to health projects. Andrew Watson, who is on my left, and Peter Reekie, who is on my right, will answer questions relating to how reclassification by the Office for National Statistics has affected projects, although they might be able to assist with other areas. In particular, Peter Reekie will be able to say more about education projects and the overall non-profit distributing and hub programme. Mike Baxter, from Transport Scotland, will address issues regarding transport projects.

The committee may be interested to know that the current format of our reports was the product of tripartite consideration to arrive at a consistent tool to track progress. That was agreed between the former Public Audit Committee, the Scottish Government and Audit Scotland. That tool has stood us in good stead in preparing reports since March 2014. We reported before then, but it was good to get something that the committee and Audit Scotland felt was setting out the picture in a way that was helpful to all parties.

The reports give six-monthly updates each year on projects over £20 million. There is also an annual update on the local economic benefits of each project, which comes with the spring report. The six-monthly progress updates show what has changed in the cost and time parameters for each project that has progressed beyond the outline business stage. The updates also include individual hub model projects over £20 million, which are funded at least in part by the Scottish Government, as well as web links to the Scottish Futures Trust website, where information on progress by the hub territories that have been established is published.

To put the issue in context, it is fair to say that responsibility for individual capital projects and programmes remains with the relevant accountable officers—there is no dilution of that whatsoever—and those accountable officers will sit within Scottish Government portfolios and the procuring authorities. That could be Transport Scotland’s chief executive, chief executives of national health service boards or local authority chief executives—you get the point, I am sure. Our task of gathering relevant information and reporting it to Parliament does not interfere with those underlying accountabilities, but it gives a good broad overview of infrastructure investment in Scotland. That said, we are happy to respond to any questions that you may have. If we do not have the answers immediately to hand because they are of a level of detail where we need to go back to the accountable officers, we will of course seek to do that and respond swiftly and in writing.

That is all that I wanted to say by way of introduction, but I will pass over to Peter Reekie, who would like to update the committee on something.

Thank you, Alyson. I just want to declare, at the opening of the discussion, a non-financial interest as the public interest director, as part of the NPD programme, in Aberdeen Roads Ltd, which is the company delivering the Aberdeen western peripheral route and Balmedie to Tipperty project. I just wanted to make that clear to committee members.

Thank you. Mr Baxter, do you have an opening statement as well?

No.

Okay—we will move to questions.

My questions are on the theme of yesterday’s autumn statement, although I realise that some of them may not yet have been answered by the UK Government. First, do you know the profile of the additional £800 million of capital spend that has been promised over the next five years? Will it be front loaded in the first two or three years or is it £160 million per year, and when does it start?

Secondly, I noticed that the chancellor has created a national productivity investment fund of £23 billion and yet the consequentials are only £800 million. In normal times, we would expect that, if the chancellor creates a fund with new money of £23 billion, the consequentials would be more of the order of £2 billion rather than £800 million. Therefore, from your analysis, is most of that £23 billion just reshuffled money? If the consequentials are £800 million, how much of the national fund is new money as opposed to reshuffled money?

The third point arising from the autumn statement yesterday is that the chancellor is promising an increase in spending on infrastructure projects from 0.8 per cent of gross domestic product to over 1 per cent. What is the equivalent or comparator figure for the Scottish Government on infrastructure spend as a percentage of GDP? What impact will the additional £800 million have on that percentage figure for Scotland?

Those are three really important questions. Given the position that you have previously been in, Mr Neil, you will appreciate that a lot of information comes out on the day of the statement and that really important information still trickles out for several days after. We can answer some of your questions in specific terms but, on others, we will need to inform the committee as and when the information is known.

To distinguish between the two types, we can answer today the question on the profile—I will ask Andrew Watson to go through that with you—but we are seeking further information on the national productivity fund. I agree with your initial headline analysis that the figure does not seem in line with the sort of proportions that would normally come to Scotland. The sort of thing that we will check is whether the fund is using guarantee-type mechanisms to help infrastructure investments. So that is still too new news to be able to say much more about how it will impact on us.

We will cover the profile issue first and then I will come back to the GDP question.

We are still waiting for our formal settlement from the Treasury—that tends to follow a bit after each fiscal event—but the provisional breakdown of the consequentials is £125 million in 2017-18, £197 million in 2018-19, £239 million the year after and £257 million the year after that.

So it is very much back loaded.

Yes. That helps with the profile.

I do not have with me the exact percentage of our infrastructure investment in the round as a proportion of GDP. However, we know that construction and infrastructure investment in Scotland make an important contribution to GDP growth in Scotland. In 2015, total construction output contributed the equivalent of two thirds of total GDP growth, which includes the output of the public and private sectors, although the largest proportion in that year came from public sector investment. It is a valid question, because the issue is important for Scotland. We will get back with the answer to the specific question that you have asked.

Good. I look forward to the additional information, because it is important for us to look at that.

I have two or three more questions, which are related more to the report than to yesterday’s statement. The first one is about the significant implications of the Eurostat reclassification, via the ONS, for NPD projects. Again, it might be too early for you to answer this, given that Brexit negotiations are on-going between the Scottish Government and the UK Government but, once Brexit happens, will we be free of Eurostat classifications and reclassifications? Will we have more freedom to do what we want to do with our own money?

I move on to my second point. It would be helpful if you were able to add information in the progress reports on the amount of private sector investment being leveraged by public sector investment. For example, in housing, with the capital grant that is given to housing associations, every £1 that is invested by the Scottish Government generates on average about £2 for new housing developments. The hubs obviously leverage in additional money from external sources. In a lot of the work of the SFT, a lot of private sector investment is leveraged in by public sector investment. We maybe underestimate or even undervalue the impact of public sector investment, because, when we take into account the leverage, there is a very substantial impact on the economy. Where possible, it would be helpful to have that leverage figure in future reports.

My final point is very specific, and it is not a constituency interest; it is a national interest. I am a bit mesmerised by thinking about why only one relatively small or smallish part of the A9 project is in the list of projects. I presume that the target remains to complete the dualling of the A9 between Perth and Inverness by 2025. Therefore, can we get some kind of picture of how and when it will be funded between now and 2025? I assume that that commitment still stands. Similarly, the A96 is not mentioned at all. I know that some of the preparatory design work has started for the A96 dualling between Aberdeen and Inverness. The target date for that is 2030, but it would be helpful to get an update and perhaps a follow-up and more detailed plan from Mike Baxter at a later date. Can we have a general view on where we are with the A9 and the A96, because they are of strategic importance to Scotland and they are a big part of our long-term capital budget?

Obviously, I will save the last one for Mike Baxter, but I am happy to respond to the other two.

You have been familiar with this space previously, Mr Neil, and I noticed that there was a smile on your face at the thought of being released from the grips of Eurostat and all that that brings.

You are smiling, too, I notice.

09:15  

Well, I have had to moderate people’s enthusiasm in this space, and for good reason, because Eurostat, whose translating into our local arrangements—obviously, I am casting the net much more broadly than Scotland when I say “local”—for how things are classified in relation to statistical national accounts, which happens at the UK level, is a product of something that comes from the United Nations. Eurostat translates into European requirements a United Nations international rigour on transparency of reporting of debt and deficits. That is where it all sits. The arrangements replicate an international expectation that any Government’s figures can be held as an internationally recognised way of classifying such activities.

You will be starting to get a sense from what I am saying that the short answer to your question is that we will not be released from such requirements, because the international money markets that rely on such things will expect to see the same sort of rigours for any country that wants to borrow on the international money market stage. Given what we saw in the UK figures yesterday, that will need to continue for a while yet.

I am in touch with colleagues in the Treasury on what will follow. The issue will feature in a future work programme at some point, but we are already well connected with the Treasury and with the ONS so that we can understand what will need to follow on that. Whenever possible—there is a lot of interpretation around these things, as we have described—we will seek to exert influence to get the best possible architecture in place. That is the Eurostat question.

Secondly, in relation to the request for us to show additional information in the report, I would be happy to capture any other requests that the committee as a whole may have, and we will take those away, look to see what we can do and then come back and say what is sensible, in what timeframe, and what information we have available.

The point that you make is extremely important. Following the financial markets crash in 2008-09, our capital budgets were cut by 36 per cent. Some of that has been restored, but we are still not back in those heady pre-crash days of traditional capital spend. We have moved to using a myriad of ways of enabling infrastructure investment to happen here in Scotland. In that sense, we have a mixed economy; we are not just using traditional grants. As you said, there is the national housing trust, which is just one of a range of different models that we have used.

You are right—that gives us the means not just to spend taxpayers’ money in making investment, but to leverage in other forms of investment from places such as the private sector. A declaration of benefits is already made through the SFT benefits statement, which is publicly available, but what you have suggested has really made me think. As I said, we will look at any other suggestions that are made by the committee and will come back to you on all of them in one go.

I do not wish to interrupt, but the £500 million business guarantee scheme is also important, because it, too, is all about investment. I know that it is not technically a capital project, but it is a tool to incentivise and leverage business investment. Just as a matter of interest, when will that guarantee scheme be up and running?

On the Scottish growth scheme that was announced as part of the programme for government at the beginning of September, you will appreciate that the First Minister was clear about the number of steps that needed to be gone through, working with the Treasury and consulting those companies that we want to be most able to access the scheme. The scheme also needs to go through due process with the Parliament’s Finance and Constitution Committee. All of that is still being worked through. I do not have a specific date here, but obviously we can let you know.

That would be helpful.

Good morning. I will pick up on the question about the A9 and the A96. In general terms, the aims are still to dual the A9 by 2025 and the A96 by 2030, and we are planning on that basis.

The progress report mentions the £35 million contract for the Kincraig to Dalraddy section, which is on site, progressing well and due to complete in the summer of 2017. We recently saw a switchover on to the new carriageway for the majority of that section, and work is now under way to upgrade the existing carriageway.

As far as the more general work on the A9 programme is concerned, a considerable amount of planning and development work is being undertaken on the remaining seven sections that need to be developed. We are focusing on a number of areas, the first of which is identifying an appropriate route, taking into account environmental impact, buildability and cost. Statutory and consultation processes will be undertaken on each of those as we progress.

In a wider sense, considerable effort is also being put into discussions on how we procure and how we fund the remaining sections and the options that are available to us. It is a long-term programme, and circumstances can change quite significantly from where we are now to 2025, so we need a cogent strategy to get us from A to B, and that is what we are currently working through.

The options that we are considering—whether to use public capital, revenue finance or a mix of both—are being explored at this point. The other aspect of the development work and planning work that is important here is to understand the impact of such a large programme of works on the market and to engage with the market on market capacity.

The A96 is a longer-term programme, and at the moment we are focused on statutory process, particularly around the Inverness to Nairn section at the western end of the route, but the same planning and route selection processes are being gone through.

As far as the approach that is being taken with the A9 is concerned, I would like to highlight that the headline numbers that are reported on both programmes are in the order of £3 billion. We have recently engaged a challenge group, which is made up of experts from within the industry, to challenge our assumptions about the nature of the dualling project and the junctions strategy, as well as the estimates that we got. We will be able to firm up on those estimates only once route selection has been identified across all seven sections, when we will be able to take the design to a further stage, but that work is in hand.

I would like to continue exploring the ONS issue and the impact on projects. It seems to me that the ONS reclassification is resulting in the Government being forced into more expensive funding for projects. Is that correct?

As regards whether we are being forced into more expensive funding, there is a realisation that, because of the change that has been brought about by the European system of accounts 2010 arrangements, there are certain projects that are having to be recognised as utilising public capacity of infrastructure investment very late in the day.

The classification change is signalling that in order for those projects, the original design of which was intended to get better value for money for the taxpayer, to still be giving us additionality and to be classified as private, which was the original plan, the Government would have to give up all the value-for-money aspects that it wanted to secure. If we were to do a before-and-after comparison, we would find that there would be less value for money in terms of what we were looking for.

If you would like more specific information, I can ask Peter Reekie to say a bit more about how the scheme design has changed to make that the case.

I think that you said yes in relation to projects costing more.

In that regard, what is the impact on the budget for the current projects in terms of additional cost and on the future capital budget?

There is a distinction between what would happen with the cost of those individual projects and what the change means within the programme of activity as a whole. I make it clear that there is not a material change in the flows of funds that we committed to in those projects; it is a question of how we manage the whole programme.

In response to Mr Neil, I said that we have a mixed economy when it comes to how infrastructure investment takes place in Scotland. In response to the cuts in traditional capital funding, the NPD programme was designed to bring something additional so that Scotland did not feel the full pain of those cuts. It was an alternative that was brought in, but given that those projects are now classified as public, we have had to accommodate them within the capital programme. The period of time in which we are having to do that is time limited, because once the programme’s construction phase has completed, that will be the point at which that encroachment into our capital programme will cease. There is a time limit on those areas.

As the committee knows from the scrutiny of the consolidated accounts only two weeks ago, we have found a way to mitigate the worst impacts on the rest of the programme. As we said when we were reviewing the 2015-16 accounts, the accommodation that we had to make for the different classification meant that we did not have to defer other projects at the time because we were able to utilise the release of contingency from the Forth replacement crossing. We were able to reprofile—without any loss of investment at all in the Scottish Water infrastructure—the loans that came from the Scottish Government, because Scottish Water had cash to utilise instead. A change in policy had already been made with regard to the prison estate, which meant that the money that was being set aside for a women’s prison was no longer needed, and there were certain other areas in which the demand that we expected to come through did not materialise.

Therefore, I think that it is fair to say that the Government has taken a pragmatic, managed approach to the issue without causing any damage to other programmes of activity. I hope that that goes some way to answering your question.

Looking at the profile of the projects that are being put in place with the hubcos and the design, build, finance and maintain projects, the structure of the ownership looks incredibly complex. For example, 20 per cent of the special purpose vehicle will be owned by a private sector charity. How will that work?

As you say, the model for such projects is complex, which is why we have experts who help us with that. They sit within the Scottish Futures Trust, so I will ask Peter Reekie to respond to your question about the make-up of the mechanism that you asked about.

I would say that there are many companies that have a diverse shareholding—that is quite a normal situation in a company. In the hub arrangement that we have moved to, the private sector partners who were procured at the outset of the programme hold 60 per cent of the shares in all the hub companies, and that has remained static as we have had to evolve the model. That private sector corporate shareholding remains the same and the board of the company reflects that shareholding, so the majority of members of the board of directors that controls the day-to-day activities are from that private partner.

We in the public sector retain an interest in and a directorship of those companies so that we can bring the transparency that comes through the evolved models of partnership that we have, which involve much closer representation on the board. SFT and the public sector procuring authorities hold that shareholding.

The Hub Community Foundation, which is a privately classified charity, is in place. It does not have an active role in the governance and the operation of the day-to-day company but is there to make sure that the benefits of shareholding—the eventual profits—are deployed for the public good, because the statutory remit of a charity is to do public good, as we all know. Whenever profits flow from that, the charity and the public good will benefit from those funds over time.

We have introduced the charity. As we have said in the past, that was a direct result of the change in the Eurostat rules, which required us to have a privately classified entity holding those shares. By making that a charitable entity, we are making sure that, while those funds are privately classified for statistical purposes, they will in the end go to the public good. I can appreciate that that introduces a bit of complexity—there is a new shareholder there and a new party to consider—but it was very much the best way of changing the structure to remain compliant with the evolving rules and at the same time making sure that the public benefit and the public good that are delivered over time remain as they were intended to be.

09:30  

Can you just clarify that, with the charity, the benefits that are acquired locally go back to the local area? They do not go into a national pot and go off to some other area.

As has always been the case, some of the public sector shareholding is held by the Scottish Futures Trust. It holds that money centrally and reinvests it, or uses it for funding our own infrastructure investment work. The change is that the 20 per cent that was owned by the territory participants collectively—all the participants in the area—is now directed to the charity over the long term. It will be the job of the charity’s trustees to decide over time how to deploy those funds, and they will be very mindful of both the overall geographic spread of projects and where the most good can be delivered for those returns.

So the benefits would not necessarily go back into the local community in which there had been investment in the project.

In terms of equity holding, there has never been a direct link between the profits of the equity investment, if and when they come over time, and the very local aspect. We know that the hub companies, as they deliver the projects, have separate community benefit obligations that are applied more directly to local communities in terms of jobs, the supply chain and the training and apprenticeship opportunities that they can give, but the long-term return on that public investment, if you like, has always been more diversified and spread across the country.

In a slightly different vein, do we get any support or investment from the European Union for our capital projects? When you travel around Europe or even Ireland, you see big signs that say “Funded by the European infrastructure fund” or whatever. Do we get that benefit from the EU?

With a lot of the projects that use different innovative models, you find that there could be a whole mix of different funding contributors. A hospital project that has been using a mix of public and private financing streams can end up with nine or 10 different funding elements and, within that, funding often comes from the European Investment Bank, which is the European Union’s vehicle for that sort of funding. There are examples of road projects where that has been the case, too. The European Investment Bank will continue to invest while we are members of the EU.

Do you have a figure for how much on average we receive?

There will be a mix in terms of where investment sits in different areas. It would probably be better to write to the committee about that, so that we can capture that across the piece. Does Peter Reekie have that information?

In the NPD programme as a whole, there has been more than £650 million-worth of EIB investment. The EIB has been a contributor of good value-for-money financing to our major projects—the roads projects and the larger hospital projects. Of the around £1.8 billion of finance that has been raised to date, just over 30 per cent probably—around £650 million in all, as I said—has come from the European Investment Bank.

I will stick with the AWPR. Has the ONS decision to reclassify it led to any delay in the likely completion time?

There has been no impact from the ONS decision with regard to the AWPR. The timing of the decision has not impacted on the delivery of that project.

Has the decision had an impact on other capital projects? One would have thought that there would be an attendant impact and that you would need to go back to other projects that are being delivered and look at them again.

There has been no impact on roads or transport projects. I will hand back to Alyson Stafford to answer the more general point.

There has been no delay in terms of the NPD-based projects. There was a pause on the hub programme until it was really clear where things were going. We can say a little bit more about that pause if you would like.

There were 13 projects across the hub programme where there was some delay in the commencement of construction, as we had to rearrange the structure in the hub to retain the private classification. All those projects managed to reach financial close in the first quarter of this financial year, and the cost of the delay in inflationary terms was met and came well within programme contingencies.

That is where I was going: what is the cost, and has it been accounted for? Thank you very much for that response.

There is only one other thing that I wanted to explore. We have been told that the Scottish Government estimates that each additional £100 million of public sector capital spending supports approximately 800 full-time-equivalent Scottish jobs. I found that very interesting. How robust is that estimate?

The estimate is calculated by economic and statistical colleagues in the Scottish Government. They will have applied a robust methodology to come to that figure. I do not have the detailed workings—as I said, other colleagues do that work—but I know that the estimate has its origins with the people who have that skill set within the Government.

I appreciate that you may not know the answer to my next question. Do you know whether that research breaks the estimate down—it is a very general figure—by sector, so that we can say that value really is delivered at this level, or—

As you predicted, I do not have that level of detail.

In which case, we can move on.

Okay. Monica Lennon is next.

Thank you, convener. Good morning.

I will pick up on and ask you to talk me through borrowing powers. I note from our briefing that the Government has the option of using its borrowing powers to finance capital investment, but that that did not happen in this financial year. Can you tell me why?

Borrowing powers were set out for the first time in the Scotland Act 2012, and they will be enhanced under the Scotland Act 2016, which will enable us to make stronger and greater use of them.

In this financial year—2016-17—the Government’s infrastructure investment plans work on the basis of our being able to use the full borrowing facility. However, we have not used that yet, for a very good reason: we will wait to know exactly how much money we need to borrow. Although we have planned to use it all, obviously no one wants to take on debt and have to start servicing that debt until they know absolutely what they need. There is always a degree of variability in delivering a capital programme—people are waiting for planning permission, identifying sites and so on—and it will be much closer to the end of the year before we borrow the balance that is required to fund our programme. You are right in one sense—we have not actually borrowed yet—but we are planning to borrow, and the final figure will be right and proper, taut and realistic, and in accordance with actual need at the point when we need to process it.

Do you expect to fully utilise that borrowing facility?

Currently, our plan is to use it, but we will fine tune the exact number that we will borrow based on the financial picture at that point, which will be very close to the end of the financial year. The level of the facility that we can use is just over £300 million, and we are planning to use it, but we will know the exact amount much nearer the end of the financial year.

Okay. Is there a risk that you will not be able to identify projects in time to utilise the borrowing facility?

The projects are already identified, and the plan is already set out for the year. We know the capital programme, and borrowing is just one source of funds. We have our traditional capital and, as we have already rehearsed, we have a whole range of other innovative financing techniques to support the underlying financing arrangements for our capital programme. We are certainly planning to use borrowing as one of the tools to finance the whole programme. As I said, it is not that we then have to wait to identify projects; it is just a matter of assessing what the actual amount of expenditure will be. We will then need to match that with traditional capital, other leverage of investments and finally borrowing. You will not be surprised to hear that we will leave the borrowing as the last place that we go to, because that has an associated additional cost. That is part of our methodology around that.

Okay. I will move on.

Can you explain why there was an underspend? Our briefing says that the Government announced that it would boost capital spending by £100 million in this financial year, and that that spending would be funded by the carry forward of an underspend. Can you say a bit more about that?

Certainly. The underspend that was generated in the last financial year, which we talked about when we discussed the annual accounts two weeks ago, came from a range of different areas. The Government can never overspend its budget—it has to live within its budget—and with a multi-billion pound budget, a level of underspend always comes out. The underspend came from a mix of different places. From memory, about £40 million came from capital areas, and there was a mix across the different types of funding that the Government has.

The underspend was not lost to Scotland. Under the budget exchange arrangements that Scotland and the UK Treasury have, we were able to bring that money forward and reutilise £100 million for the capital acceleration package that was announced in August 2016. Basically, we are just making good use of money that was brought forward from the previous year and targeting it at a whole raft of projects, some of which are capital and new things, with roughly half going into maintenance activity.

Thank you. I was interested in the point that Liam Kerr raised about the link between the £100 million and what it can deliver in terms of jobs—I think that the figure was around 800 jobs. When I read in the papers about a £100 million underspend that could have facilitated and supported 800 jobs, I wonder whether that delay in fully utilising available budgets is a source of frustration for you and your colleagues.

Do not get me wrong—I am absolutely passionate about our infrastructure investment, which underpins so much that is important in the economy in Scotland. There is always a very fine balance to be struck. We absolutely have to deliver a balanced plan for a budget, but we also have to actually achieve balance at the end of a financial year. Therefore, there will always be a modest level of underspend. I know that £100 million is an awfully large number with which to associate the word “modest”, but, relative to our overall aggregate budget, our underspend was within 0.5 per cent, which is a really fine margin. There is therefore a judgment to be made about how much money is utilised right to the finish line. I am not just talking about 31 March, because our accounts have to stay open for any further liabilities that have to be recognised in the year—they stay open right up until they are signed, usually in September. There is a judgment about risk in relation to how much of the money is spent right up to the letter, and how much we then have to fulfil the non-negotiable obligation to live within the budget.

09:45  

The good thing is that that £100 million was not lost to Scotland. It is there for this current financial year, and as early as 10 August it was being deployed on things that were very responsive to the circumstances that the Government and the country found themselves in, helping to create a further economic stimulus.

In deploying that £100 million, ministers exercised judgment in getting assurance about timing—when the impact of economic activity would be felt—and the extent to which the money would go to help employment. Ministers also looked at retaining the supply chain in the Scottish economy and considered the extent to which the money would leverage in additional economic activity in Scotland. The Government was also sensitive to the things that you would expect any government to be sensitive to in terms of geographic distribution and, importantly, the impact that the money would have on business confidence, which is very hard to measure.

I want to explore one more point, which I think you mentioned. You talked about other delays such as site constraints, identification of sites and planning delays. When I speak to industry stakeholders at events and meetings, quite often infrastructure is cited as a major barrier to making development happen. If we take housebuilding, there is a tension between house builders front loading and paying for roads and drainage upfront.

In the terms of reference for the Infrastructure Investment Board, it looks as though there is a fair bit of discretion in how you can take an overview across Government and other areas. To what extent are you looking at a range of different projects, and what barriers are faced at a more local level? I recognise that you are looking at major capital projects, but quite often the delays that you have mentioned happen more at a local level and perhaps they will not be picked up in the reports or the infrastructure investment plans. To what extent is Government joined up in looking at this in a cost-cutting way?

We use a number of tools to try and make the process as streamlined and integrated as possible. Some of those things are very much at the hand of Government—for example, the national planning frameworks and things that give a sense of prioritisation and how the planning regime works in Scotland. It is also about how, where there can be both efficiencies and something that makes more sense for local communities, we can get that connectedness between different activities that are happening at the same time. In the Highlands and Islands, quite a bit of the work is about mobilising construction teams to work there and getting the right availability of people at the right time to work together, particularly when there are geographical challenges, too. Those are some of the things that we take into consideration.

Peter Reekie will respond on some of the things that feel more local. I appreciate that those are the things that you hear about from the constituency perspective.

Can I just add to that? Perhaps Peter could pick up on this point, too. I think we recognise that there is a shortage of skills in the construction world—is that on your radar, too?

I will start with part 1. I have exactly the same discussions as you do with people in industry—in the infrastructure industries, if you like, and in the construction and particularly house building industries. Part of the answer is that it is really tricky. First, for any one development that a developer wants to move ahead with very quickly, there will always be other developers who want to move their development ahead really quickly, too. Secondly, there is a range of infrastructures, from the private sector—the electricity and telephone connections—through to Scottish Water, transport and, for larger developments, schooling and health. Drawing all those together was a very strong recommendation in the planning review, and a lot of work is going on in the infrastructure leadership within the planning system to try to better co-ordinate the different infrastructure investments that are needed at a very local level to support individual developments.

However, it will always be the case that particular developers want to see the particular focus on their development. The planning system and any infrastructure investment need to look at the situation overall and at what is the best use of public funds, particularly in that investment, to deliver inclusive economic growth for the country as a whole.

I do not think that every developer will ever get the infrastructure to enable their development exactly when they want it. However, the planning review and the framework around that will lead to improvements in the co-ordination of the different infrastructure agencies to lead to a more infrastructure-led planning system.

Mike Baxter has some examples as well.

I have two points to make. One, we have to recognise that it is not just about the new infrastructure; it is also about our existing transport networks. Recently, we have done work on the economic growth sectors, such as whisky and food and drink; we have looked at the reliance on our transport networks and started to target where we need to invest in order to improve productivity or reliability.

Secondly, a significant amount of investment is going in on our transport networks and there are some iconic projects. Those projects allow us to promote construction engineering as an industry for young people to go into. The A9 academy work that has been undertaken has been a major success; work has also been done around the Forth replacement crossing, in the education and contact centre and with local schools and communities.

We are looking at opportunities not just for community engagement more broadly, but for targeting and engaging with young people about the opportunities that exist. That is a long-term aspiration, but while we have the opportunity to undertake such major projects, it is important that we use them.

Good morning and thank you for coming along.

My question touches on two points that Monica Lennon raised, one of which is about the underspend. We have saved money on the Forth replacement crossing, and that is a really good news story. Other projects, for whatever reason—often it is outwith our control—go over. With a hubco model, when the project comes to financial close, the cost is the cost. If a project goes over timescale, does it also go over budget and, if it does, who pays for that? Are penalties then put on the construction company? If it is not a hubco model—if it is purely funded by Scottish Government—how do we fund that continuing overspend and how do we fix that?

There was a lot in there. Peter Reekie will start on the hubcos. Mike Baxter will respond on what happens in some of the contractual arrangements in the traditional areas.

There are a lot of different ways of contracting for construction activity and therefore a lot of different ways in which the risks of delay are allocated between the private sector construction company that is delivering the project and the public sector procurer of the project.

In general, if the projects that come through the hub programme take longer to build than the construction company promised, the additional costs fall straight to the construction contractor who promised to do that work within a set period of time. As you know, we pay for the buildings as we use them rather than as we build them and we start paying for them only when we actually get to use them.

However, additional costs and time might arise because the public sector procurer changes its requirements or evolves them during the construction phase. If that is the case, part of that body’s thinking on whether it wants to make those changes and whether they represent value for money will be its assessment of how much the changes will cost and whether they really need to be made, given the extra time that will be required to deliver them. In some cases, the body will make the assessment that that is worth doing.

Overall, in the hub, we very much deliver projects on time and on budget because of the strength of the incentive on the construction contractor to deliver on time. The cost of making changes and the rigorous development process that goes into the hub early development phase mean that, by the time that we sign the contract, the public sector procurer is pretty clear on exactly what it needs and is therefore very unlikely to require changes to be made during the construction phase. Occasionally there will be instances in which either the construction contractor overruns and has to take that into its own costs or the public sector procurer decides to make some changes and has to take on that cost. Overall, the programmes run pretty much to time and budget—certainly within 2 per cent overall.

We are running a little bit short of time on this item. Please keep the questions and answers a bit more concise.

Certainly. The previous discussion was around the use of different funding techniques and borrowing, and tight financial control becomes more and more important at an operational level in order to give an overall picture nationally.

I would distinguish between the projects for which we have direct control—a lot of the roads projects, for example, on which we are responsible for direct capital funding or, indeed, for which we enter into design, build, finance, operate type structures—and the rail projects, for which the funding arrangements, through Network Rail, are different and there is an overall cap on the borrowing level over a five-year control period. The levers that we have to control those projects are different in each of those circumstances.

Given the independent EY report that was issued earlier in the autumn and published at the end of October, we are working through a series of actions to try and tighten up the control. For some transport projects there will be a direct financial consequence, and for others there will be an indirect and longer-term consequence depending on how much Network Rail has to borrow to fund projects.

I have three questions that follow on from Liam Kerr’s question about the AWPR. My first question relates to the ONS statement and reclassification. As you know, the AWPR project is being done in partnership with Transport Scotland, Aberdeenshire Council and Aberdeen City Council; both councils have a commitment with the Scottish Government around the £75 million cap or the 9.5 per cent, whichever is lower. What impact would the ONS statement have on those contributions potentially? What is the risk around that?

The NPD element of that project is separate from the councils’ contribution, so there is no direct financial impact.

I am sure that the heads of finance will be relieved to hear it. That is good.

Touching on what Liam Kerr mentioned, you said that there was no impact in timeline costs from the ONS decision. However, we had storm Frank last year, we have had a safety shutdown recently and just in October staff on the site were laid off. Where are we now with the timeline and costs?

We are where we expected to be on costs, and winter 2017 is still achievable for the overall programme. I think the slower rate of development in 2015 was offset by additional works in 2016 to catch up. I think that there are 10 million cubic metres of earthworks to be moved on the AWPR project, so it is no small undertaking.

This year a city region deal was signed off for Aberdeen. Above that, the Scottish Government committed £254 million for capital projects. The annexe to the paper says that there should be information on capital projects with a value of more than £20 million. As part of that city deal announcement, £24 million was meant to be allocated for the Laurencekirk flyover, with the cabinet secretary saying that he wanted to see that delivered as soon as possible for the north-east, and £200 million to increase capacity between Aberdeen and Montrose. I cannot see those projects mentioned in the annexe. Can you help me with that?

The budget that is allocated in the current year for Laurencekirk is £1.5 million. It will be 2019 before we go through statutory processes, so the reporting is simply a timing issue. I would expect that to be reported going forward.

10:00  

When will the project start on the ground?

The minister was asked that question when he appeared at the Rural Economy and Connectivity Committee and clearly there are statutory processes to go through, so I defer to the earlier answer. However, we will progress it as best we can.

Thank you.

Four primary school projects are listed on page 26; three are completed and one is still described as “Planned” and “In Preparation”—that is the Dundee joint campus. On page 56, there is a project under the heading

“South of the city, Dundee City Council”

for which construction has now commenced. Is that the same project?

I would prefer to get back to you with a precise answer rather than looking through the documents in front of me and making a comparison, if that is all right.

That would be great.

On the V&A at Dundee, under the heading “Progress at August 2016” the report says:

“aiming for completion and opening to public in 2018.”

Is that still the expected opening date?

Yes. The council is the procuring authority for that project, but I understand that that is what it aims to deliver.

Thank you very much for your evidence.

10:01 Meeting suspended.  

10:03 On resuming—