Agenda item 2 is to continue our inquiry into the Audit Scotland report on the Scottish Government consolidated accounts.
I welcome the Auditor General for Scotland, Stephen Boyle, who joins us in the committee room. I am delighted to see you here, Auditor General. Joining him from Audit Scotland online are Michael Oliphant, who is audit director, and Helen Russell, who is a senior audit manager of audit services. They also joined us for last week’s meeting.
Before I continue with questions on the consolidated accounts, I will ask the Auditor General, given that Audit Scotland and the Accounts Commission produced an overnight report into social care, to elaborate on the principal lessons from it. Of course, the committee will turn to in-depth discussion of the subject at some point in the future. The thing that struck me about the report was the paragraph that said, in relation to a national care service:
“Regardless of what happens with reform, some things cannot wait. A clear plan is needed now to address the significant challenges facing social care in Scotland based on what can be taken forward without legislation, which could provide strong foundations for an NCS.”
Auditor General, do you want to say a few words about the report?
Good morning and many thanks. You are right that we are looking forward very much to briefing the committee—at a convenient date for you—on this morning’s joint publication by the Accounts Commission and me, on sustainability of social care.
The report highlights a number of components of the circumstances of social care, such as the real challenges that face the sector if it is to be sustainable and, principally, if it is to deliver high-quality care. It touches on some funding aspects and, importantly, on the people component—the recipients of care and those who provide care. As I have mentioned, we might not be able to wait to act in respect of some of the challenges that face the sector while Scotland progresses its thinking around a national care service.
We want to contribute to the debate that the country will inevitably have about delivery of social care and how we overcome the challenges, as a country. The Accounts Commission and I have produced the report, having drawn from the breadth of public audit, which covers its responsibilities in local government and mine in central Government. As I mentioned, we look forward to briefing the committee on the paper, at an appropriate point.
Thank you, Auditor General.
We will press on with the committee’s questions about the audit report on the Scottish Government consolidated accounts. People who are joining us remotely should type R in the chat function if they want to contribute. Auditor General, as you know, if you want to delegate an answer or ask your colleagues to come in to develop particular answers, we are keen that you do so.
I turn to the section in the report around the Scottish Government’s strategic approach to investment in private companies, and I invite Sharon Dowey to open the questioning on that.
Good morning, Mr Boyle.
Glasgow Prestwick Airport was purchased by the Scottish Government in 2013 for £1, but paragraph 28 of the Audit Scotland report states that
“loan support provided up to 31 March 2021”
came to a total of
“£43.4 million although this was valued at £11.6 million in Transport Scotland’s accounts ... following an independent valuation.”
Audit Scotland then notes that
“£1.2 million interest charges have accrued during the year resulting in total accrued interest of £6.3 million”
and that
“In keeping with Transport Scotland’s approach in previous years, the interest on these loans has been impaired to nil.”
What is the explanation for the differences in the figures for loan support and interest charges for Prestwick in the Audit Scotland report and Transport Scotland’s accounts?
Good morning, Ms Dowey. I am happy to elaborate on both those points, and I will invite Michael Oliphant to supplement my remarks.
Clearly, there is a long story behind the Prestwick Airport purchase—the Government’s acquisition of it and the loan supports that it has provided to the airport. There is an accounting disclosure component to that. At the end of the financial year, all public sector and private sector bodies have to assess the value of assets. In this case, the valuation of the assets is, in effect, valuation of the loans that the Government has provided to Prestwick Airport. The assessment includes the recoverability of the sum. Therefore, although the total loan value was £43.4 million, the Government’s assessment of recoverability of that loan—what it is actually worth currently—was down to £11.6 million on the balance sheet, at the end of March.
Before I invite Michael Oliphant to say a bit about the interest, there is an important distinction between the valuation and a write-off. The amounts have not been written off. Rather, the figure is an assessment of valuation at that date. As ever with assets, the value could increase by a future date, or it might decrease further. However, it is an assessment that the Government has made of the value; we, as auditors, are required to form a view about the reasonableness of that valuation. We are satisfied from the information and evidence that we have seen that it is a reasonable assessment. I will hand over to Michael Oliphant to say a bit more about that and to add anything that he wants to add about valuation of the associated interest on the loan.
Good morning. I can add only a point for clarification. There is no difference between the valuation in the Scottish Government’s accounts and what is contained in Transport Scotland’s accounts. In the report, we highlighted that the Scottish Government has provided £43.4 million-worth of loans that, following the impairment, are now valued at £11.6 million. That is the value that is now showing in Transport Scotland’s accounts, which is consolidated into the Scottish Government’s accounts. Therefore, both sets of accounts show the same valuation. I hope that that clarifies the point.
Thank you for that. What are the financial implications for the Scottish Government of the continued failure to find a buyer for Glasgow Prestwick Airport?
The implications of its remaining an asset in the public sector will depend on what happens next—whether there is a requirement for future loans or otherwise. The fact that the value of the loans can change has been touched on in previous responses. The valuation of the airport could increase. In essence, with regard to the question of what happens next, the answer is that there is uncertainty.
As we say in the report, events came about after publication of the accounts. The Government’s plans to sell Prestwick did not proceed as planned; we understand that it is still looking to sell the asset to the private sector. We will continue to track and monitor that through our audit work, and we will report further, as necessary. It is a number of years since Audit Scotland reported specifically on Prestwick and produced a separate report—I think that that was back in 2013-14, which I will confirm. As ever, we have the option of doing further public reporting, if I consider that that would be helpful. However, for the time being, the airport remains a public asset, and the associated value of the loans is subject to change, as events unfold, if there is a subsequent private sale.
Is the impairment process that you described a fairly standard practice that is applied widely across such sectors, or is it unique to Prestwick?
That process is absolutely not unique to Prestwick, Mr Coffey. It is a requirement of the accounting standards that apply to the public sector and private sector. All organisations with financial assets must assess their value at the financial year end. Glasgow Prestwick Airport, Transport Scotland and the Government have done what is required of them for valuation of the asset.
So, the process does not highlight a particular issue or problem in relation to Prestwick, but is a standard accounting practice. Is that what you are saying?
Yes—it is a standard accounting practice. In the relevant paragraph, in addition to saying that the Government has rightly followed accounting standards, we highlight that the Government’s valuation of the loans is, in terms of their recoverability, considerably lower than the value of the loans that it issued to the organisation. The Government now values the loans at £11.6 million, compared with the £43.4 million that was originally issued.
Other companies that are covered in the report are Ferguson Marine (Port Glasgow) Holdings Ltd and Burntisland Fabrications Ltd—BiFab. You told the committee previously that you plan to publish a comprehensive audit report into how things are going with Ferguson Marine. Is that on schedule?
Yes. We expect to publish a report that tracks the progress of the ships, that tracks the loans that were issued to Ferguson Marine Engineering Ltd before it became a Government company, that considers some of the steps, processes and risk management and which looks to the future. We intend to publish that report in March.
Are you getting full co-operation from Transport Scotland, the Scottish Government and the people on site? There has been a bit of coming and going of senior personnel at the site, has there not?
Yes. I am pleased to report that we have had full co-operation from the full range of parties to whom we want to speak in our audit work.
Okay. I will switch from the Clyde to the Forth and ask about BiFab, which is also covered in your report. What are the Scottish Government’s total confirmed and potential losses in relation to BiFab?
I will refer to paragraph 35 and 36 of our report.
There is a history with that investment, convener, as there is with some other interventions that the Government has made in private companies. What was initially loan support was changed to an equity stake. I will quote the exact figures. In the 2018-19 accounts, the Government converted £37.4 million of loans into a 32 per cent equity stake in BiFab. The following year, similar to what happened with Prestwick, the current valuation of that stake was assessed. It was written down—not written off—to £0.
In the financial year in question—2020-21—the Government provided a further £4.5 million of loan funding to support BiFab. However, as we note, in December 2020, the Scottish and UK Governments determined that there was no legal route through which to offer BiFab any further support and the company went into administration.
On the total funding that the Government has provided, the £37.4 million plus the £4.5 million gives us a figure of £41.9 million of public investment in BiFab. There is very little prospect that it will be recovered, although we note in the conclusion that the Government continues to work with BiFab’s administrators because it is now a creditor and is looking to recover its losses.
Michael Oliphant will come in to provide additional context or clarity.
I will say something about the total loan support. As the Auditor General mentioned, two loan facilities were provided. The first was a loan facility of £41 million to support key contracts that BiFab had. There was a further loan facility of £10 million for restructuring.
As the Auditor General said, £37.4 million of the first loan facility was drawn down and converted to equity, and that has been fully written down to £0. The second loan facility was extended to £15 million, of which the Government has, over the past couple of years, drawn down £13.5 million, which includes the £4.5 million that the Auditor General mentioned.
09:15The total amount of Government loans to BiFab is £50.9 million and their current value is nil. However, it is important to note the subsequent sale of the business, and that the Scottish Government continues to work with the administrators to maximise recovery of public money. It remains to be seen how much of the £50.9 million it can get back.
I presume that if the business is sold on, it will be possible to recover some of that funding.
That would depend on the nature of the sale, the structure of the subsequent business and whether the business or the assets were acquired. In many cases, when an organisation goes into administration it is not the full pre-existing business that is purchased—it might be components of it or its assets. Typically, the losses of the previous business remain with the business in administration.
Nonetheless, Michael Oliphant is right that—as we touch on in the report—the Government is still working with the administrators to maximise its return in order to offset any losses that were noted.
I turn to another aspect of the report, which is the arrangements between the Scottish Government and GFG Alliance Ltd in relation to the Lochaber aluminium smelter. There is particular reference to the power-purchase agreement, which has been the subject of some interest. Could you explain to us the implication of quadrupling from £37 million to £161 million that provision in the accounts? What does that mean?
A provision in an accounting context is a provision for a call on a guarantee. That is its fullest sense. The Government provided, as part of the transaction, a guarantee for its role in purchase of the power obligations. It is a complex set of circumstances. We have tried in the report to bring some clarity to the nature of the transaction and the arrangements that followed; the Government’s role in the disposal and the role of GFG—in particular, the role of the funder of GFG, which was Greensill Capital, and the financial challenges that it has had, which have been well documented over the course of the past 12 months.
The provision for the call on the guarantee, as you mentioned, convener, has increased and now sits at £161 million. That reflects the likelihood, in the Government’s assessment, of the guarantee being called and, therefore, of the potential Government exposure. In our audit work, our role is to assess the reasonableness or completeness of that provision. It is worth noting—to put it in straightforward terms, as well as we are able—that there is an increasing likelihood that the guarantee will be called upon. The Government has reflected that likelihood in numbers by the provision going up from £37 million to £161 million over the course of the past 12 months.
The minister told Parliament yesterday that
“The note in the consolidated accounts for 2020-21 was merely a technical assessment of a range of credit risk scenarios, which is an accounting standards requirement.”—[Official Report, 26 January 2022; c 21.]
You are describing something that is a bit beyond that, are you not?
I do not think that I am contradicting what was said. We are saying, and the Government has put in its accounts, that it has to make an assessment of that likelihood under international financial reporting standards. The provision is, in effect, the likelihood that the guarantee will be called upon.
That assessment is technical, and it is to do with the Government’s compliance with the “Government Financial Reporting Manual” and its accounting obligations, but the number has changed significantly. Typically, the basis for that will reflect the level of risk or certainty about what the call on the guarantee might be, in the circumstances.
I do not want to put words in your mouth, but are you saying that the risk and uncertainty is being fuelled by the collapse of Greensill Capital, which was the primary funder of GFG Alliance? GFG Alliance itself is the subject of a Serious Fraud Office investigation, because issues have been raised about its governance structure, which one UK minister described as “opaque”. Concerns have been expressed about changes to the accounting periods that the company is using. Auditors have resigned and finance directors have left. Is all that fuelling the assessment of heightened risk to which the Scottish Government is now exposed?
As you are, convener, we are aware of all those factors behind the circumstances of GFG and Greensill Capital. As you would expect, our focus is on the Scottish Government and the nature of the transaction. We note in the report that there is a complex group and funding structure, incorporating acquisitions and Government guarantees. In and around that, we seek to set out in the report some of the history related to potential financial exposure. At paragraph 38, we quote a very significant figure of £586 million, but that is offset by the Government’s fee for provision of the guarantee and a range of security packages. The Government takes security over land and assets on the site.
One cannot get away from the fact that the Government’s assessment of its exposure has changed over 12 months. We know that there are related events, to which you have referred. Looking at all that in the round in our work, we formed an assessment that the Government’s own valuation of its provision and its call on the guarantee is reasonable, and it has cited that as being £161 million this year.
I have one final question on the matter. Is the £586 million figure now an accurate assessment?
The £586 million was the original potential financial exposure; the quantum of that was offset by security packages and so forth. That figure does not represent the Government’s actual exposure—it was a potential maximum, and steps were taken to offset that with security packages, call on assets, fees for the guarantee and so forth. All of that reduced it to an annual exposure, which, as we started our work, was between £14 million and £32 million.
In the round, we are saying that this is still a complex transaction, with challenging circumstances for the funders of the GFG group. The Government’s exposure has increased in the light of a variety of circumstances, and we are seeing that that figure is reflected appropriately in the accounts.
In general, but also with particular reference to this arrangement, is there enough transparency and openness about the financial arrangements that have been entered into? I presume that that is also part of your inquiry into what is going on at Port Glasgow.
In our reports, I and my predecessor have called for greater transparency on Government’s interventions in private companies, including more communications about the risks, the anticipated outcomes and the likely call on public resources for such interventions. As we touch on in our report—I am happy to say more about this—we welcome some of the progress that we are seeing, and the steps that the Government is taking to bring in additional transparency.
That is particularly relevant in the case of Lochaber. It is such a complex transaction, and the likely call on the guarantee, as we have seen through the Government’s own assessment of it, can change quite significantly from one year to the next. From our perspective, that validates the need for transparency and for a suitable framework that allows the Government to manage its risk and be clear on what the intended outcomes are from such investments.
My understanding is that the Scottish Government is now looking at the production of such a framework. As you mentioned, there has been a long-standing call for that from Audit Scotland, from you and your predecessor. Do you know when that framework will be published?
I ask Michael Oliphant to update the committee on the progress that the Government has made and on when it intends to make that publicly available.
We are not aware of that framework having been published as yet, but we expect it to be published soon. Our understanding is that it will form part of an extension of the existing guidance, as part of the Scottish public finance manual. We anticipate that it should include more on the Government’s principles, its approach, the policy rationale, the planned outcomes and the relevant types of business—in particular, those that are deemed to be in the national economic interest.
The areas that we have encouraged the Scottish Government to consider include its tolerance of and appetite for risk in investing in such private companies, as well as the financial capacity to do so, the outcomes that it expects to achieve and any form of exit strategy—in other words, an indication of at what point it will step back when it provides loans, guarantees or support to a private company.
The current guidance focuses on the decision-making process and some of the governance arrangements, records management and legislation that need to be adhered to, but we would like a framework to extend that to cover some of the principles of risk tolerance and appetite, and information about the expected outcomes that the Government hopes to achieve. As the Auditor General said, that should provide greater transparency about the Government’s role in financial interventions in private companies.
Thank you—that is very helpful.
Another long-standing request—or demand—of Audit Scotland has been for the accounts of the whole of the public sector to be published. To move from one subject to the other, would the publication of the accounts of the whole of the public sector also allow for better scrutiny of the Scottish Government’s investments in private companies?
You are right, convener. There have been many conversations at meetings of this committee and its predecessors about the need for progress in bringing transparency to the scrutiny of this committee, the Parliament and users of public services through having a single source that sets out Scottish public bodies’ assets, liabilities, revenue and costs. In the report, we note that progress is intended this year.
There is a two-stage process. The Scottish Government intends to prepare a public sector account for the Scottish Administration by the end of next month. We look forward to auditing that. Later this year, it will look to bring into that, on a staged basis, the wider public sector bodies; that will incorporate local government spending. If that is delivered, it will be welcome. It will be an important signal that will aid the transparency of bodies that are not in the Scottish Government consolidated accounts.
As we have touched on in previous conversations, the Government determines the accounting boundary, which is informed by the nature of public bodies, the nature of the Scottish Administration and so forth. That means that a number of important bodies are not included within the boundary; you have mentioned some of those, and they are covered in our paper.
It is important to have a complete picture. That will be delivered by a public sector account for Scotland that is akin, almost, to what is done on a UK basis in the whole-of-Government accounts. Of course, it is important that that is done properly, is subject to audit and is delivered in a relatively timely manner. We know that the Government is working on all those things. As I have said, we look forward to the publication and auditing of that account.
09:30
One outstanding question is what difference that would make to your ability to scrutinise the whole of the public sector in Scotland. I presume that it would open up opportunities for you to get a better sense of what you have previously described as what we own and what we owe.
It would be important certainly for me but also for Audit Scotland in supporting the committee’s scrutiny—and, by extension, that of the Parliament—to have that complete picture.
You mentioned assets and liabilities; Scotland has many billions of pounds of assets—and, by extension, associated liabilities—that are not reflected in the consolidated accounts that the committee is considering this morning, and it feels necessary for the Parliament to have a more rounded sense of the associated assets and liabilities, alongside its revenue and capital considerations, in future budgets. Indeed, Audit Scotland, with the committee’s support, has been pushing that point for many years, because we feel that it is an essential component of what would be a complete suite of financial documents to aid transparency and understanding of Scotland’s public finances.
Let us hope, then, that the timetable that has been set out is met this time.
I invite Craig Hoy to ask some questions.
Good morning. As far as financial management is concerned, it has been broadly recognised that, because of Covid, the Government’s budget was going to be fluid and perhaps more complex. However, I want to look at last year’s underspend of about £518 million, which comes principally from the health and sport and transport, infrastructure and connectivity budgets. In the light of Covid and the associated fluid situation, do you consider the level of underspend that has been reported to be reasonable?
I will ask Helen Russell to supplement my response. Although the quantum of underspend is bigger than in previous years—there are a couple of relevant factors in the portfolio directorates that you mentioned—in percentage terms, the figure is relatively consistent with underspends in previous years, when we take into account the scale of the increase in the Scottish budget as a result of the Covid moneys that have come through.
Certain circumstances arose in the health and transport budgets in particular. With health, for example, Barnett consequentials were received relatively late in the financial year. What is important—this builds on conversations that I have had with the committee in recent weeks—is not just that the money is spent in a timely fashion, but that it is spent well. That was a cause of part of the health underspend in the year. Money is typically carried forward through the Scotland reserve and available to be spent in this financial year.
With regard to the transport portfolio, there were Covid-related factors, such as the uptake of Covid grants and the call on subsidies. As users’ habits and the provision of public transport changed during the Covid pandemic, that changed the budget assumptions that were made earlier in the year.
To answer your question directly, Mr Hoy, I would say that although the overall quantum of the underspend is larger, the overall percentage has not necessarily changed from what we have seen in previous years.
It is less than 1 per cent of a change.
Next year’s budget is being debated in Parliament at the moment, but the Government has flexibility in where it can direct the underspend. Have you looked sufficiently at the budget to know whether the money will be moved to other portfolios, or are we confident that it will stay broadly under the health and transport headings?
I am mindful of my responsibilities because, ultimately, it a policy choice for Government and Parliament to determine where best to apply the Scotland reserve or any underspend that has gone into the Scotland reserve in previous years. We will, of course, audit the reported results of that spending in the annual accounts.
This might be a more abstract and philosophical question, but, as you look forward, what level of underspend would give you cause for concern?
There is always a balance to be struck with regard to the extent to which the budget is spent in its entirety, and we need to be mindful of the fact that the Government is not able to overspend. At a Scottish Administration level, it has to remain within the approved budget. As part of our work, we are required to make an assessment of that, informed by the audit opinion that we give. Given the size of the Scottish budget—which, in the year in question, was more than £50 billion—we would encourage the Government to spend that money well. The fact is that a degree of underspend is to be expected in any financial year.
You can probably sense that I am reluctant to name a figure for an acceptable level of underspend. The fact that the Government now has mechanisms in place through the Scotland reserve to allow it to apply underspend and to carry forward components of that into future years gives it more flexibility. That means that, rather than public sector bodies making rash spending decisions at the year end—which a stereotypical assessment of public sector spending might suggest would happen—there are mechanisms that allow them to defer spending, if that is the right thing to do.
The overspends are relatively modest. Do you have any comment to make on the overspend in the economy, fair work and culture portfolio—which was £53 million—and the overspend in the education and skills portfolio? Have you had the opportunity to drill down into the reasons for those overspends?
I will ask Helen Russell whether she wants to provide any details on those particular portfolios. The only thing that I would draw to the committee’s attention is that, in its narrative that accompanies the accounts, the Government set out particular reasons for some of the overspends in portfolios. We can see that, in totality, there is an underspend.
Do you have anything to add, Helen?
Good morning. There is a range of overspends and underspends across the expenditure areas. I do not have anything specific to add at this point.
I think that Willie Coffey has some questions about the performance report sections of the consolidated accounts.
Thank you, convener.
Before we come to that, Auditor General, I noticed that, last week, we did not touch on the European structural funds and their replacement. Did you make any comment on the replacement funds and where, within that, the audit process for Scotland sits? We are unclear about that so far, but can you update us on your perspective on what your role will be, if you will have one, and whether there will be a role for the Parliament and this committee?
Regrettably, Mr Coffey, I am unable to provide the clarity that you and I are looking for.
I will step back for a second: it is within the gift of the UK Government to determine what the successor arrangements will be. That also relates to any audit and assurance component and how that flows through to my role. My statutory powers are clear, but, because it relates to the audit of European funding, that has been a more discretionary component of Audit Scotland’s work. We have spoken previously about the fact that we discharge some of that through our audit of the agricultural funding. It is also reported through our audit of the Scottish Government on the European structural funds, albeit that the audit of the European structural funds is undertaken by both the European Commission and the Scottish Government’s internal auditors.
Therefore, we are not yet sighted on the associated audit arrangements for what will come. As I have mentioned in previous discussions, we remain in contact with the other UK audit agencies, notably the National Audit Office, but we do not yet know whether that will mean that there will be a specific direct role for me or Audit Scotland in auditing the successor funds. However, you can rest assured that we will stay in touch with the committee and that we are seeking clarity on what comes next.
Thank you for that. On the issue of performance reporting, the consolidated accounts is a huge document full of numbers. It is the annual statement of accounts that tells how the Government has spent the money that it has had at its disposal. However, in your report, Auditor General, you make some comments about performance reporting. You say that the first 50 pages of the accounts are devoted to performance reporting but you also say that it is difficult to disentangle that and see clearly the performance of various policy areas or spending lines.
How might we improve that? It comes up often at the Public Audit Committee that we want to see how well the money has been spent and the outcomes that that spend has achieved.
We recognise the need for public money to be closely related to outcomes—what has been achieved from that spending. There have been some improvements this year in the performance report, which is welcome. The Government has added some narrative on the impact of Covid. As you would reasonably expect, it has set out how that has affected some of the different directorates.
We note that there are many disclosures—associated links to other documents—that show how the consolidated accounts have been spent and the associated performance. Although there is progress, it is still challenging for the reader to piece all that together and see what has been delivered from the £50 billion that has been spent. Although we welcome the progress, more could be done to make it an easier journey for the reader of the consolidated accounts to form a rounded perspective on how the Government has performed and what it has delivered from public spending. As we note in the report and have mentioned in our discussions, the Government equally recognises that.
I invite Michael Oliphant to comment because, from his close audit of the work, he will have a perspective on that, too.
Certainly, more information has been produced in the accounts this year, Mr Coffey. It is a big document—I think that there are just shy of 180 pages—and the performance report is a key part of that. In particular, the performance analysis section, which is the best part of 30 pages, outlines not only some of the planned deliverables and contributions to primary and secondary outcomes but, this year, additional information about the impact of Covid, which is important.
However, the volume of information in the document does not make it accessible to the reader. Greater links are needed to the financial statements that follow the performance report. In particular, further work is required to tie some of the amounts in the individual portfolios that we have mentioned to the intended contributions towards the outcomes.
The Scottish Government is aware of that and, in the past couple of years, has worked to improve it. It is fair to say that it is not easy but there is more that the Government can do and it recognises that. Further refinement of the type of information that was produced for this year’s accounts is required.
It is important to say that the performance report has to meet certain requirements of the financial reporting manual. We are content that it does that. However, it needs to be extended and improved upon further to make it more accessible to the reader, because although it is a set of financial statements, it is more than just the numbers, as you will be aware. There is a story to be told around the numbers about what the Government has achieved over the financial year.
There is certainly room for improvement.
Are the consolidated accounts the place for that or do we need something different on performance in specific policy areas? Should it be woven into the consolidated accounts or should we ask the Government to consider a separate performance report or document, which we have never had? Is that where we are going? Does the Government recognise that there is an issue?
It is not one or the other but both. I agree with Michael Oliphant’s point that there is an obligation on any public body that follows the financial reporting manual—any set of accounts, really—that the organisation’s performance be described in a balanced way that includes the pluses and minuses and that it be clear what has been spent and what has been delivered. Although we recognise that there has been progress on that front, there is a way to go to bring clarity.
09:45I do not underestimate the challenges. The Government is a large and complex organisation. As Michael Oliphant has mentioned, the accounts stretch to 180-odd pages. Much of that content has to do with compliance and is prescribed, but organisations have more licence in their performance report to be creative and to find ways of telling the story of the financial year that describes their performance, connects to the spending and gives a rounded and balanced picture.
On your other point, many organisations do both things: they accompany the annual report and accounts with a good performance report, alongside, maybe, an annual report of some description. Similarly, organisations have much licence to do that in the way that best suits them.
The Government has, rightly, made much of the national performance framework and the national outcomes as a way to best describe progress on that front, too. That matters, but what also matters is that there is a connection between spending and performance. We are keen to see progress on both fronts.
Are you saying that that is recognised by the Government, or do we have to persuade the Government that it might want to adopt such an approach?
We know that the Government is thinking hard about its performance framework, the national outcomes and how it can best describe those and make them into an accessible document. Where it becomes harder is on having more qualitative measures and outcomes, and on the various means of moving beyond outputs against budget to ask what is actually being delivered—what the outcome was. Rightly, that will have to draw from a range of sources, to tell the story of Scotland’s national performance.
Colin Beattie has a series of questions on governance.
Governance has always been a big issue in connection with the component parts of the Scottish Government. I am concerned about three statements in your report. First, in paragraph 70, you state that
“There remains scope for greater clarity on the impact of planned actions on reducing risk levels”,
and so on. Secondly, in paragraph 74, you talk about limiting
“the use of interim appointments to ensure greater stability and certainty within its leadership group”,
and you seem to be encouraging the Scottish Government to improve its arrangements, in order to ensure that they are fit for purpose. Thirdly, in paragraph 75, you say:
“The Scottish Government’s arrangements for sponsoring public bodies remains an area of concern.”
The committee has looked at sponsorship on a number of occasions, and there have been question marks.
You have talked about improvements to risk management processes within the Scottish Government. Will you give more detail on the measures that are being provided, and whether they are considered to be adequate? Is it just a matter of quality? Are they in place but maybe not as sharp as they should be, or is there a serious gap?
In a moment, I will ask Michael Oliphant to describe the risk management arrangements and the progress that is being made, because, when it comes to risk management, we are talking about progress.
As the committee will know and expect, we interact closely with the Government’s governance arrangements when it comes to the attendance of executives and non-executives at the Scottish Government’s audit and assurance committee, and to some of what are known as the director general assurance committees that the portfolios lead. There is a very significant structure of both governance and associated risk management within the Scottish Government.
Some of that has evolved, over recent years, from a different base, in terms of the adequacy of arrangements. If I remember rightly, it was three years ago that we were really quite critical of some of the components of governance within the Scottish Government. We commented adversely on the Government’s audit committee and on the level of challenge that it made in fulfilling its purpose of supporting the permanent secretary in its advisory capacity.
We are talking about progress. The role of the Scottish Government is one of key leadership to all public bodies in Scotland in risk management and governance—it should be an exemplar. In order to do that, there are additional steps to take in relation to how the Scottish Government translates its risk management arrangements and what it intends to do, so that it is possible for non-executive and executive members of committees to say, “Did you do what you intended to do to manage that risk?”
Michael Oliphant will want to say more about the specifics of risk management, then I will come back to your other questions.
Over the course of the past year, there have been improvements in aspects of risk management, particularly in relation to the escalation of risk throughout the organisation, the ownership of each risk in the Scottish Government and some of the important components of risk management, away from the actions and the numbers. That improvement has been about the culture that exists in the organisation. It is important that it is not only senior civil servants who are risk aware. There have been improvements in the culture of risk management and identification at all levels of the Government through training and so on.
We would like to the Scottish Government do more on its planned actions against risk to reduce its exposure and to be clear on how those planned actions will deliver a lower risk score. Sometimes, the target date and target score that it intends to achieve can seem overambitious in relation to the time that it will take to deliver. Greater reflection is required on the length of time that it will take to reduce the risk, and a bit more clarity is needed on the actions that it is taking to demonstrate how it will address the risks that are there.
The Government has improved in relation to cross-cutting risks. You mentioned one about sponsorship, which the Scottish Government has been well aware of. That is not a risk that sits in any one portfolio; it cuts across Government. There are a number of risks like that—for example, risks in relation to the response to Covid and those around Brexit need to be seen through one lens rather than the lenses of several portfolios. There is a decent amount of work going on to identify those cross-cutting risks.
I will cover Mr Beattie’s other points. There are changes in leadership within the Scottish Government—for example, a new permanent secretary started at the beginning of this month. In the report, we also note the changes at director-general level and the use of interim appointments. Some of those interim appointments were a consequence of the process of change and others were due an inability to appoint someone at the end of the recruitment process. We also draw attention to some of the changes that will happen in the non-executive cohort of the Scottish Government.
In effect, we say that having a lot of change happening at the same time can be challenging for an organisation. We are not saying that it is destabilising, but the process needs to be managed, because there is a loss of stability and corporate memory that goes alongside that. For the Government to manage that change, it needs to support induction processes, as we know that it is thinking about.
The Government is going through an unusual volume of changes in its leadership—higher than has been the case for a number of years—and we will monitor that closely.
Do you think that the present governance arrangements—I use that term in its broadest sense—are fit for purpose?
Yes; nothing that we have seen suggests that there are fundamental deficiencies in those arrangements. The current arrangements in relation to the overarching role of the Scottish Government audit and assurance committee, which is supported by the director general assurance groupings, probably stretch back six years. Michael Oliphant mentioned the escalation arrangements. Alongside all of that are the roles of the executive team, the corporate board and various subject governance groups. For example, in its scrutiny of major capital projects, the committee heard about the role of the infrastructure investment board and economy groupings. Although it is a complex set of arrangements, we see no deficiency or anything that suggests that it is not fit for purpose.
However, there is no cause for complacency. We expect that the adequacy of the governance arrangements will be tested and reviewed. There is a fundamental component that relates back to the consolidated accounts: as the principal accountable officer, the permanent secretary is required annually to make an assessment of the adequacy of the governance arrangements. Our work takes us there too, and we similarly have to form a view about the fullness of the disclosures and what has been said. We were content with what was said in the governance statement.
Michael Oliphant specifically mentioned target dates. As he raised that matter, I presume that, in a significant number of cases, they are unrealistic. Have you had a discussion with the Scottish Government about that? Is there any prospect of more realism? It will always be thrown up as an anomaly. If someone does not meet their target date, that is bad and it is a black mark against them.
Michael Oliphant can give details of the discussions that he has had.
You are right. There is always a temptation for public bodies—or any organisation, really—to set an earlier target date than is realistic so that they can seemingly address the issue and so that the risk de-escalates, the action is done and they can move on to the next thing. It is harder to set a longer date and to be realistic about how long the work will actually take and the work that is necessary to address the risk. We are keen that that should not be a pattern, so that the Public Audit Committee and the experts round the table at the Government’s audit committee can be satisfied that appropriate steps have been taken.
Does that happen at the moment?
Michael Oliphant will speak about the extent of that. As I said, there is a temptation to set target dates that are not realistic or to plan action that does not give enough detail so that it is not sufficiently clear. I will allow Michael to answer on the specifics of the Government’s work.
I attend each of the director general assurance meetings. There is one for each of the main Scottish Government portfolios. The realism of target dates is an issue that not only I have raised throughout the year but non-executive directors have raised as part of their scrutiny and challenge role.
To be fair, we are seeing improvements. The Government recognised that it needs to improve on the realism of target dates. It is not necessarily easy to do. I absolutely agree with the Auditor General’s assessment that, sometimes, the problem is just overambition. The Government wants to reduce risk scores and plan actions that will address that. Our role in groups such as the assurance meetings is to pass comment and challenge from an external point of view where we think that a target date looks overambitious. It is partly about the timeliness of documentation.
The matter is part of a continuing discussion and we want to see further improvements on it over the next year.
We talked about sponsorship bodies. They cut across the whole Scottish Government. What are the specific concerns about sponsorship? Individual matters have come to the committee, but you see the full picture across the board. What is the fundamental problem with the sponsorship of public bodies?
Michael Oliphant mentioned that the Government notes the risks of sponsorship, so there is a response to that. I will touch on some of the response that we have seen and welcome without overplaying the idea that it somehow removes the challenge that still remains.
We welcome the governance hub that the public bodies unit has established. It is, in effect, an overall source of induction, training and reference to allow the non-executive members of the boards of public bodies to discharge their responsibilities as part of the governance arrangements. We also welcome the additional training that there has been. Some of it was interrupted by Covid, which was reasonable, but has now restarted.
In addition, we mention in the report—as we have touched on in previous discussions with the committee—that the Government commissioned a consultant to review its overall arrangements. It received that review, with associated recommendations, towards the end of last year. We are awaiting sight of what steps the Government plans to take.
10:00As I note in the report—and as I have said in verbal evidence to the committee in recent weeks—I am keen to see that progress and what steps the Government plans to take, which will inform what I plan to do next in relation to audit work on the sponsorship of public bodies in Scotland. The committee will forgive me for repeating a point that I have made on a number of occasions, but sponsorship generally works well in public bodies.
I prepare reports—as I have done this year and in previous years—to highlight examples of where that has not been the case. I will continue to do that as necessary where sponsorship is not working as intended. The desired effect of that—or what I hope—is that that contributes to the Government’s overall arrangements and improves whatever is happening in a public body, and also that that learning is spread out so that we do not see some of the examples of where sponsorship has not worked and, instead, there is an overall growth in the quality of sponsorship arrangements across public bodies.
The thinking is in the right place, and the recognition of the risk and the on-going need for improvement is part of the Government’s arrangements. As I said, I will take a view on sponsorship as soon as I see the Government’s planned next steps.
You have answered my next question—I was going to ask when that review would come forward and what you would do when it did—so thank you for that. Obviously, this committee will take a close interest in that. Of course, we only see the bad side—we only see the section 22 reports and so on, and we do not see the good cases, where it is working well. Nevertheless, there has been sufficient evidence that sponsorship in some cases has not been as effective as it should be. Obviously, we have a concern about that, and I am sure that the committee will come back to that in the future.
I have a question that comes back to the risk management process. Do you consider that, overall, the risk management process is adequate?
That is a big question.
I was kind of hoping that you would say yes.
I am perhaps reluctant to give you that unqualified assurance. What is on my mind are the perhaps more remote but very significant risks, as we have seen through the course of the pandemic.
Before the Covid pandemic, the Government’s thinking—and that of all public bodies, to be reasonable—was that a pandemic event would be a flu-like pandemic. Although it featured on its risk register, it therefore did not necessarily have prominence. It was not a near risk, in those terms. That is the level of thinking and risk analysis that the Government and other public bodies need to be doing. I would like to come back to the committee in future discussions on risk management about how those risks are being managed—risks that will have a very significant impact but whose likelihood might be distant or which might not happen for many years. For me, it is therefore a qualified assurance at this stage, which we will continue to monitor and report to you on.
Would it be correct to say that day-to-day risk management is adequate, and that you are talking about more remote possibilities? You quoted the question of a pandemic, which is clearly not something that anybody hoped would ever happen and the preparations for which are obviously very different. Would that be a fair analysis?
That is a fair conclusion. Notwithstanding the points that we make in the report and Michael Oliphant’s observations about the timeliness and adequacy of steps, in the round, the Government’s risk management arrangements have improved, and it has plans to do more. As we have talked about, we are thinking about our audit work in relation to those really remote but very significant risks. We know that the Government does deep dives and takes topics that it explores with its audit committee, which is all good practice. However, as we have all seen, there are also those remote risks, and there has been learning for all of us—auditors as well—about how a public body might respond to them. I would like to give that more consideration.
That is something that this committee might want to keep an eye on.
Thank you very much indeed. I would concur with Colin Beattie on that final point.
That is the end of the questions that we have on the consolidated accounts. Thank you, Auditor General, for once again giving us the benefit of your wisdom and analysis. I also thank Michael Oliphant and Helen Russell, who joined us online.
We have a changeover of witnesses now, so I will suspend the meeting until that takes place.
10:05 Meeting suspended.