 Welcome to the 11th meeting of the Economy, Energy and Fair Work Committee for 2019. May I ask everyone present to turn electrical devices to silent so that they don't interfere with proceedings? We've received apologies from committee member Gordon MacDonald. Item 1 is a decision by the committee to take items 4 and 5 in private. Are we agreed? Yes. Thank you very much. We turn now to our inquiry on construction of Scotland's economy, item 2 on the agenda. We have with us today a number of witnesses, all of whom I would welcome, and also to advise that there's no need to press any buttons on your sound desk. That's all operated from the sound desk, so if you want to come into the discussions and blindicate by raising your hand. First of all, we have Graham Dodds, director of operations for Jacobs, then David Stewart, who is policy lead for the Scottish Federation of Housing Associations, Mark Dixon, director of capital investment, Scottish Water, Peter Rickey, who is chief executive of Scottish Futures Trust, and Soren Jensen, who is a senior policy and research adviser of CUST, which is the infrastructure transparency initiative, so I welcome to all five of you this morning. I'll hand over to the deputy convener, John Mason, to start with some questions. Thanks very much, convener. The first area that I wanted to touch on was the whole question of the project pipeline and what guidance, as I understand it, the Government is giving a kind of overview of the amount of money and the number of projects that they're expecting in the coming years. I'm interested in your views as to how useful that is, or are there gaps in there? Would you like it to go further ahead? Would you like more detail? Would you like other sectors to be in there that aren't currently in there? I don't know if anyone's got some strong thoughts wants to start on that. Mr Stewart is looking interested. I'd be happy to start. I should perhaps start by saying I'm not an expert on infrastructure, so I'd be proposing to talk more about planning programmes for housing, but obviously infrastructure has a role, but as far as affordable housing goes, obviously there's a 50,000 target for affordable homes, which is extremely welcome. There's been grant planning targets for local authorities set out for three years, so as far as clients and contractors being able to plan for work over the period of the current Parliament, we're in a good situation and that's extremely welcome. It's not always a situation that we've been in previously. Housing is not included in the project pipeline that the Government produces because the housing is in details decided by other bodies. Yes, I believe that's the case. Right, but we've still obviously got a pretty clear target on housing. Yes. Yes. Thank you so much. Any way, Mr Reakey? You'll know that the infrastructure investment plan Scottish Government last published in December 2015 and there was an update published in April 2018. That includes nearly £1 billion of project opportunities that hadn't started construction at that stage. That looks at the high value projects across all sectors that have a Government involvement in them, but most infrastructure investment, as you've alluded to, is done by local authorities and other bodies, whether it be housing associations or others. There's also, on the Government's page, a click through to SFT's pipeline and we published the pipeline looking ahead for the hub programme, which you know is a programme that we manage in SFT. Again, that doesn't cover everything that local authorities and others are doing. We know that in 2016, in its follow-up report on major capital investment in councils, Audit Scotland identified at that stage that a third of local authorities published forward-looking investment plans. I don't know whether that proportion has changed since Audit Scotland last looked at it, but it did recommend that more information was published on that by local authorities at that stage. High-level plans are published by the Government, and different bodies publish their own plans. However, I agree with the premise that there's no single place to look for all investment across everybody that procures infrastructure in the public sector across Scotland. I suppose that it doesn't matter if there's not a single place as long as everybody has access to all that information. From SFT's point of view, do you have access to all the information that you need? You're obviously closer to Government than some other witnesses. The plans that are published give a good look ahead. Many people in industry have said that more pipeline information would be more useful. That's always going to be the case. People would always want to be able to look further ahead to plan their resources, but industry witnesses will be better placed in this than I do. It's one thing knowing what's coming, but it's quite another thing knowing that your organisation is going to be part of what's coming and wind tenders, etc. I think that there is good information on the overall volume of activity, pretty good information on what sectors it will come in, and then you have to start looking in different places for individual projects. Again, there's attention there because if there's a central place where all of that was published, then every contractor from anywhere would be able to click on it and see what was coming in every area across the country. As we have local authorities publishing their own information, that arguably makes it easier for local contractors to have a view about what's coming locally, which some local contractors I think might see as a good thing. Everyone would like to see more information published and how far ahead that's challenging with budgets and so on, but exactly where it's published and whether it's all centralised, I think that there are different views on how that would best be done. I'm providing a bit of an outsider's perspective here, but from the international point of view I very much agree with what Peter has just said about the different ways of making things transparent, and we actually found in our case study on Scotland that was published last year that Scotland has a very high level, both in comparison to the UK generally and also internationally, of infrastructure transparency that is data that is disclosed throughout the project delivery, both for large projects above £20 million and also where the level of transparency was 95% measured against the infrastructure data standard and for projects between £4.5 million and £20 million, it was 70% of the infrastructure data standard. However, even the drawback on this is that it is a bit fragmented and scattered across different websites, different reports, so you do need to invest considerable time in finding this information. I think that that lowers the value of it both for contractors but also for citizens in general who are interested. I think that part of what Peter referred to is that industry will always want the pipeline to be as detailed and as long as possible because that gives us surety in our investments in our people. We understand that there is a practical limit to how far that can go, so the pipeline that exists at the moment is relatively good at telling us what is being constructed and about to be constructed. It is probably less good at pointing out the stuff that is coming, albeit those have a certain degree of probability about them because some of them will require funding decisions still to be made. There is a bit of a tension there between what you are able to say definitively and what advice you can give industry on what may be coming up to allow industry to make judgments. Industry understands that probability piece is what we do all the time in looking at our forward order book. We look at probabilities of what we may win. I think that Peter referred to the fact that we do not win everything, but we look at probabilities and think about our order book in that sense. I think that the points that are made by other speakers are right about the fragmented nature once you go away from the infrastructure plan. One point that I would make in relation to that is that relative accuracy is important for industry, so what we would not want to see is an expansion of the plan that degraded the accuracy of that, so it is important that there is a degree of governance across what is being put into any published plan, which I think that we have with the infrastructure plan at present, or that there is an understanding or a threshold of certainty that the agencies need to meet, whether that be at national or local level, in order to give the industry surety about what is coming forward. If you took something like the A9, which I think is quite a long-term plan, you could sit down on day 1 and say, well, this is what we are going to do in that year, and year 2, and year 3, and year 20. Year 20, then, in all likelihood, would just change. I am struggling to know. Do you think that we should be trying to plan further ahead, even if we are uncertain about it? I think that it is that kind of diagram that I will declare an interest in the A9, obviously, because we are involved. I think that there is a cone that one can see that, as you move further out, the certainty becomes less, but it is a conveyor belt system in that sense, so that, as we move forward in time, the certainty about where certain elements of project lie on that become greater. I think that trying to, in some way reflect on that would be useful for industry. We understand that anybody who says that we know what is happening in five years' time on that is probably difficult to say that that has got a degree of accuracy about it that is going to happen on April 14, 2025. The only thing that we say about that is that it is wrong, but I think that being able to give some indication further out of what is coming forward would be of use to industry. I think that the notion of having a forward pipeline of work is crucial, so we are not obviously included in the specific documentation that you are talking about, but we work within a regulatory cycle that allows us to have a long-term, medium-term and short-term view of the work that is coming. We endeavour to share that as widely as we can with Oliver supply chain to allow sufficient planning to be done to get the projects delivered efficiently and effectively, but to understand what capacity and capability we may need in the medium to longer term future. How far ahead can you be certain as to what Scottish waters investments will be? We are in the moment, we are in year four of a six-year plan, so we have reasonable certainty looking out to 2021. As we go back into the regulatory cycle, we will be looking to have about two years' worth of work for the next regulatory cycle understood by the back end of this year and then into a rolling two-year plan thereafter. If I was to build on Graham's point, I think that we can see with reasonable accuracy out to 2021, but we can also understand the nature of the project work that is coming up in the next period and some of the capacity and capability that we need support with from the industry. That allows us to talk extensively to our supply chain about what needs to be invested to grow that capacity and capability. The whole notion of having a forward-looking pipeline with as much accuracy as you can is very useful. I could ask more questions, but I think that that is enough. Thank you, Andy Wightman. Thank you very much, convener. First, I will follow up a question for David Stewart. Housing is infrastructure, yes? Yes, we would certainly argue that it is, yes. Public and private housing is infrastructure, okay? Just you said something that suggested it might not be. I must have misunderstood that. What more could be done to make those infrastructure investment plans useful beyond what you have hinted at in terms of giving greater certainty or giving greater forecasting further out? In my view, and I appreciate it that it is difficult to do this, while I said that, for the current Parliament, there is a great deal of clarity around funding. There is over £3 billion public money to support affordable housing, and that will be match funded by investment by landlords. Housing sometimes suffered a bit from changes over electoral cycles, where there maybe is not the long-term agreement on how much affordable housing or housing generally we need and how we could deliver it. I appreciate the point about there being not a lot of point in having a 20-year plan for the A9 because it will change, but, to some extent, if there could be consensus on broadly how we arrive at what housing needs are and then how we are going to deliver it through planning and infrastructure and land release, that would help, for example, if the housing industry is going to invest in apprentices and move to deliver it through off-site and digital, so that it attracts different groups of people into the housing, more young people, more women. Anything that could horizon scan and look to have a longer term target, even accepting that things will change because of economics or because of political cycles, that would be very helpful. In its broadest sense, many witnesses have said that there is building construction, civil engineering and house building, and then there are geographies in which people operate, and there are scales of projects that different organisations can get involved with and how they work. Any information that we or Governments are able to provide and others that, even looking further out, breaks things down into those broad categories that different firms will be interested in, such as construction, civil engineering, house building, scale of projects and whereabouts those things are going to happen, is, in my mind, interesting. You can create a perfect world in your mind where you can look at areas of the country and scales of projects and the nature of activity that will be going on and then work back to what is possible and what organisation owns which bits of data beyond that. I think that Graham Dodds and so on wanted to come in. I would largely echo what you said there. Understanding whether things are programmes or projects within programmes is useful, and particularly for SMEs to understand how they engage with, for example, tier 1 contractors in terms of programmes so that there is a forward idea of what they need to do and how they need to get engaged and whether there are elements within programmes that will be split out into projects that they could take on as an entity themselves. I think that the ability to give some classification, so I think that the Australia New Zealand system has the six classifications running from perspective through to closed out, and I think that that is useful in terms of an understanding about what the overall picture is. Again, it is not focusing just on stuff that has got all of its permissions and is shovel-ready to use a phrase, but it is giving an indication to the industry of the types of schemes that are coming forward and therefore what kind of skills the industry needs to think about having mobilised at that particular time to meet that particular need. The question is if there is a possibility to move from something that is an infrastructure investment plan to something that is a broader overarching strategy. This is not our thinking but something that was recommended by Audit Scotland already in 2011 that the infrastructure investment plan should be upgraded to this kind of overarching strategy to identify some of the long-term needs and constraints for capital investment in Scotland. It was found at that time that the IP did not strategically assess the complex interrelationship between needs, affordability, political priorities and implementation capacity. It is quite encouraging that this is after we concluded our research here, but we have noticed that recently the Scottish Government has created the Infrastructure Commission for Scotland that will support the development of the next infrastructure investment plan. I think that our advice here would be to go back to that recommendation from Audit Scotland and instruct the commission and also to add value to the work of the infrastructure investment board to work on something that is more strategic, more this scenario for the country to guide priorities and decision making. I think that the Government is consulting on the infrastructure commission right now. Have you all responded? Sorry, I can help with the timescales for that. The infrastructure commission, I just wrote down the remit before I came, has been asked to provide independent informed advice on the vision, ambition and priorities for a long-term 30-year strategy for infrastructure in Scotland to meet our future economic growth and societal needs. I understand that the commission is out for views at the minute for contributions. In case anyone is interested, it closes on the 3rd of May. I clicked on the website tonight. I think that someone else will be covering the infrastructure commission, but I want to talk about the Government's plans for £1.5 billion per year investment by 2526. Is that realistic and what should we be prioritising? I think that the issue of realism is a matter for the Government. From an industry perspective, we will respond to whatever is required. Industry will ramp up as necessary to meet that need. I think that one of the two points that I would make is that we do not see that increase, and indeed our infrastructure spend at the moment, as being the first priorities to go to concrete and steel and blacktop in terms of roads. I think that there is a need for us to step back and look at emerging solutions. We are at the cusp of fourth industrial revolution, digital solutions. We need to think better about how we address infrastructure. When we go to concrete and steel, which we will do still, we need to make sure that we have chosen the best schemes to go forward across cutting and deliver not just single parts of the economy, but deliver across the board. I think that the second point that I would make about how that investment is prioritised. At the moment, we have the treasury rule book. We look at 60-year return periods on investment. If anybody—I am certainly not going to sit in front of you and tell you what the transport network is going to look like in 60 years—we have the legacy of not far from here, a bridge that has been there for almost 120 years, which is still providing and performing an important role in getting trains across the fourth. The way in which we examine and test infrastructure has to take on a lot more dimensions than simply economic rate of return. That needs to reflect what we want infrastructure to do. We do not build infrastructure for infrastructure's sake. We build it to allow our economy and our country to flourish. I follow up on that. Do you think about low-carbon, for example? Absolutely. I would say low-carbon. I think that infrastructure sits there as a means of tackling a number of issues that we have. How is it tackling health, social inequality, how is it tackling carbon and sustainability, and you can add to those. Anyone else has thoughts on the Government's plan 1.5 billion per year? If not, I'll move on. We're going to be looking at finance in the next panel, but I was wondering for the Scottish Futures Trust. Finance comes up, and there seems to be alchemy around this about how you fund particularly public infrastructure. Can you give us a flavour about where the Scottish Futures Trust is going with the question of financing infrastructure? Well, the ambition to increase investment by a billion and a half pounds a year by the time we get to 2025-26 will not be deliverable from within capital budgets as they're currently set, so there will need to be, in my view, an element of financing to deliver that amount of increase in infrastructure investment. I think that that should be a combination of public financing, where that's possible, and it may include private financing if we still need increased activity to get to the infrastructure investment levels that we need. We were asked last year to look at possible profit sharing approaches to financing of future infrastructure investment, and we're doing that just at the minute. Members of the committee might know that the Welsh Government is using an arrangement called the mutual investment model, which is similar to the MPD model that we used in Scotland in the past, but has a profit sharing approach rather than a profit capping approach that we had in MPD. It's a very similar overall arrangement, but involves up to the public sector taking around a 20 per cent stake in the projects and investing in the projects up to around 20 per cent. We're looking at options like that, should they need to be used to deliver the national infrastructure mission. What kind of project is that model anticipated for? I would say that's in the too early to say bucket at the minute, because if we can use public forms of financing, we would go to those first. It depends on the nature of investment projects that come forward in the future infrastructure investment plan and what would be suitable for that sort of investment. A lot of infrastructure now, private housing, broadband and some utilities, is privately financed now? Is there a suggestion that that increased stake for the public sector should apply to private housing, digital and energy infrastructure? Sorry, I was talking about projects that are ultimately paid for or funded by Government budgets. When it's private infrastructure, the private sector will have to finance its own infrastructure in the ways that it needs to. Is there any merit in giving the public sector more of a role? That's just as important to have electricity grids and digital grids and private housing. We haven't considered public financing interventions in private infrastructure markets. I agree with that. There's also an international dimension to this discussion about attracting private finance to public infrastructure at the moment, and there are many reasons for it against that. Generally, it's important, even more important, that there is increased transparency on some of these PPP type arrangements, because they include a different type of risk that also quite often tends to fall more on government, even if it's actually private finance that's involved a bit in line with what Peter was saying. There's another view, and it doesn't contradict this idea of attracting private finance to public investment, but that is to look at how can you obtain better value from the money that is already invested or that's already available, looking at closing some of the efficiency gaps. The IMF has estimated that in all types of countries there are efficiency gaps that range between 10 to 30 per cent from in-public investments, and I think that they quantify this for advanced economies to 13 per cent. Of course, each different country will have a different specific amount of losses from efficiency gaps in public investment. I think that there's a growing consensus about one of the ways to mitigate this or address or close this efficiency gap is to improve infrastructure governance and try to avoid some of the pitfalls that are all too well known in relation to public infrastructure that runs over time, over budget and doesn't deliver on the expected goals. That's why we promote more transparency and more accountability in infrastructure investments generally. You're sitting in one of those projects. Pardon? You're sitting in one of those projects. I am well aware of that. Just to follow up on the question of the infrastructure investment board, do you think that private sector contractors should be included on that? We generally recommend more structured and systematic stakeholder engagement, including the possibility of discussing policy options in infrastructure governance. Multistakeholder working is one of our core features. I need to explain a little bit how that consists in bringing together government, industry and civil society in an effort to pursue the goal of improving transparency and accountability in public infrastructure. In our member countries, that is usually done by forming what is called a multistakeholder working group that oversees the implementation of the programme. Now, when we started looking at, and this was in the context in which the Scotland case study was developed, we started looking at how our core features could be adapted to a high-income country or advanced economy context. This usual model of ours didn't appear as the most constructive way forward. We were very keen to look at existing institutional setups that could adopt features such as multistakeholder working. What was really interesting in Scotland was that we found that there is a quite advanced level of strategic planning and also an institutional setup to oversee its implementation. What we believe is that these institutions can increase their legitimacy and credibility by being constituted in a manner that is representative for different sectors of society. We are not suggesting that contractors as such should be on the investment board, but rather that representative bodies and associations should have a possibility. You say that it increases the legitimacy of these, but will it increase their effectiveness? Well, we believe that. There is a difference between people saying that this is a great idea and that it is actually working. If something is just going to make people buy into it at a high level, so to speak, but it doesn't actually accomplish anything, namely what you set out when you started to answer my question as the goal, that's really a question, isn't it? It's very true, and I know that there's a history of trying to improve the efficiency of this body here in Scotland. In our experience, what multistakeholder working does is that it helps building trust and enables different sectors to understand each other's point of view at an earlier stage. We have a minister in one country who has said that, basically, because we have the multistakeholder working group, there are things that we can discuss between us that otherwise would end up on the front page of the newspapers next day. The question is, can you find efficiency gains in the beginning of... Again, my question is not about what ends up on the front page of the newspaper next day, but whether or not the thing works. That's really the point, and transparency also is obviously that there has to be accountability and public accountability, so it's not about brushing things away or discussing them privately without anything working out, surely. Do you agree with that? I'd agree with that. Now, there are other committee members who want to ask questions and other panel members who want to come in, so I wonder if I could just... Dean Lockhart had a follow-up question, I think, and perhaps we would hear that. You have just a very brief follow-up question on the sources of investment. As the panel will be aware, the Scottish National Investment Bank is... legislation is being introduced to establish the bank, and one of its main missions is infrastructure development. I wonder if the panel members could explain briefly the role of the investment bank in terms of infrastructure development and what discussions you've had with the Scottish Government in terms of how it will impact the current work of your organisation, and Mr Rickey, I guess, maybe start with you, because the Scottish Futures Trust, obviously, will have a very close working relationship, presumably, with the new bank. I think that Peter Rickey wanted my point, so perhaps a dual answer. Right. I'll try my best. On the SNIB point, I was involved in some of the early work in the SNIB, but I've not been involved in that for some time now. It is a source of public funding, and therefore it can provide its finance to projects that are ultimately in the private sector, but where there is a policy interest in those being taken forward. So we might think about renewable energy projects that will ultimately be part of the energy system. We might think about increasing the energy efficiency of buildings that's ultimately paid for by the occupiers, but because of that structure where it provides a source of public finance, it won't be able to fund things like schools and hospitals and roads because of the rules around balance sheet treatment that would just be seen as public capital funding and wouldn't deliver any additionality. So I think it does have a role to play in the infrastructure sector on possibly new areas, possibly low-carbon areas, and that rather depends on the missions that it's set over the period before it gets set up, but we will certainly be keeping close to that and working closely with it. Should I come back to the IIB briefly? If you want to very briefly perhaps. I just thought I should probably say that I'm a member of the IIB infrastructure investment board and it functions as an internal governance system that sits over projects and programmes. I'm really pleased that the Government set up the infrastructure commission for Scotland to look at longer term plans for infrastructure and has on that a set of stakeholders from across industry and academia in other interested bodies. So for me it's particularly important that all of those stakeholders are involved in looking to the future and helping us to set good priorities for Scotland. Just to answer the question on what the bank might fund, I think that there's a couple of major challenges in housing. One is while one might be available, it's often difficult to fund infrastructure necessary to develop sites, so if the bank could actually help with that and strategically enable the development of large sites by putting infrastructure in up front, that would be extremely helpful and I think a more effective way to fund development. The second one is going back to Peter's point. There's a great need to increase the energy efficiency of existing housing to address fuel poverty and make climate change targets. There's a need to switch to low-carbon energy and particularly low-carbon heating. So if the bank could help to fund that for all 10 years of housing, I think that that would be extremely helpful. Over the course of this inquiry, the committee has heard varied views on whether the actual construction sector has the capacity to deliver the country's infrastructure needs. What are your views on whether the appropriate skills and the capacity within the industry actually exist, Mark Dixon? I think that something that's critical to the future is being mindful of the capacity and capability that is required in working with the sector to make sure that those skills are introduced. Our experience is that the industry will grow to deliver what we need to be delivered, but equally our experience is that we have to work closely with them to facilitate that by promoting the intake of graduates, apprentices, attracting different types of people into the industry and working with them to understand the different mix of work that's coming in the future. We've heard earlier on about the impact of digital, the need to focus on low-carbon. One of the challenges that we face is that we will be moving more and more to investment to maintain our existing asset stock. It will be a lot more about mechanical and electrical type of work as well as civil work. It's a key question that you ask, and I would just summarise it by saying that we think that the capacity and capability exists, but we recognise that it has to grow and that we need to work closely with all of our suppliers and tend to work with them on a long-term basis if we can to facilitate that. I'll come back to that in a second. Given the current pipeline, do you consider that the capacity is there to deliver what's in the pipeline? From my perspective, as we look forward over the next 10 years or so, we're going to have to grow capability and capacity for certain types of work. We're not sensing, at the moment, from talking to all of the people who work in the industry that that cannot be done, but we need to grow into certain types of work over two, three or four years. It's linked into the forward planning of the pipeline, so I think that the capacity and capability can be there if you move gradually into the new types of work that are coming down the pipeline. The core skill sets are certainly there. Just to say that, from my understanding, there is a challenge with capacity. There's an aging workforce, certainly in housing construction. It's often quite reliant on EU migrants, so there's a potential challenge coming there. We've entered a partnership with the construction Scotland Innovation Centre to promote the potential of site construction and the use of digital technology. That's partly to increase capacity and to increase the quality of buildings produced, but it's also with the understanding that we need to attract new entrants into the industry and different entrants. At the moment, the profile is very much of an aging workforce and a largely male workforce. There needs to be a real effort to modernise it and to make it a more attractive career for a wider range of people. Am I correct in taking off what you're saying that at the moment the capacity isn't actually there to deliver what's in the pipeline, but it's hoped that it will be? I would say more the capacity might be just about there, but we've got anecdotal feedback that, as our members are working to increase the delivery of affordable housing, and there's been quite a step change from a 30,000 unit target in the last Parliament to 50,000 in this Parliament. We're already hearing that in certain trades, such as bricklaying, there's a difficulty in attracting enough workers and there's a premium in certain trades, so I think that it's something certainly in the medium to long term that there needs to be action taken to remedy it. Is that any different from what it was before? Historically, there's always periodic shortages in certain trades and it corrects itself and so forth. Are we not just in the same situation at the moment? I think that the difference here might be around the fact that the workforce is ageing, so it's not just to think that there's a shortage now, but what happens when many people retire? Historically, I can remember years back people talking about the ageing workforce, but it always seems to adjust itself as time goes on. In the natural course of time, people retire on a fairly high percentage at any time will be over 50, let's say. I would think that that might be different. I don't know about the period that you're referring to, but if you have a workforce where the profile is very much top-heavy, I think that there's a need to make sure that there are new entrants and apprentices coming in and that the industry scene is attractive to these people. Is there enough apprentices coming in at the moment? I think that there's a challenge around that. We hear the word challenge a lot. What does that mean? Yes or no answer. Are there enough apprentices coming in or not? No, I think that there arguably aren't, and there certainly needs to be something that's more attractive to women, for example. Graham Dodds wanted to come in and then Mark Dixon. Thank you, convener. A few brief points. First of all, remember that industry is largely reacting to client needs and it's what we're good at doing. So, when client requirements need us to ramp up, we do that. We've done that for a long, long time and I think that it's something that we will continue to do because we're market driven. Perhaps a couple of lenses looking at the issue of capacity. If you look on the national and international capacity perspective, we know that Ireland is very hot at the moment in infrastructure terms, so there's a great deal of going on there and there's a great deal of demand for skills. We know that we have major projects like HS2 and such like where those will soak up capacity. So, we can't see Scotland in isolation in a capacity sense. Those things have impacts on skills and people. What I would say is that the tier 1 projects in Scotland, tier 1 projects will always get the high level of skill that they require, just because of their profile and what they are. I think that the danger when we have any pool on skills and resources is that it's the tier 2 projects that will tend to suffer as a result of that. So, that kind of global and national lens—I think that there's a local lens as well, which is that when we're constructing or designing in particular parts of Scotland, we can max out the supply chain base pretty quickly in some areas. Having that wide supply chain base across Scotland is important for consultants and contractors in being able to bring that forward. We also need to see that the infrastructure of tomorrow is not going to need exactly the same skills base that we have in the infrastructure of yesterday and today. For example, we have developed a whole new division around digital solutions, which is a significant investment, but we see that as a major area of growth. I think that the final point would be that Scotland is one of our global design centres, so we have a major amount of skills and resources here. One of the things that we do in balancing off the demand that we have locally in Scotland is that we have those teams operating on an international front. Just as an example, my real signalling grouping, we're working on Australian stuff the other month there, but that's people sitting in Scotland working on international projects. I just wanted to bring this issue to life and link it back to planning. The issues that colleagues have talked about are bringing in apprentices and graduates. It's a live issue for us all, and we are working hard to bring in lots of new people. To link it back to planning, we know, for example, that over the next five to ten years, we will probably need to double the level of investment that we make in maintaining our existing assets. To do that, we'll probably need to double the amount of work that we do on mechanical and electrical installations. We're working with our supply chain to build that capacity. The key to that is planning, because you can't switch it on overnight, but if you plan forward, you can build the capacity, particularly if you've got some good long relationships with the supply chain. The key to that is understanding what's coming and ramping up to have the capacity. Clearly, if we double the investment in a certain type of work tomorrow, we wouldn't have the capacity, but if we know that it's coming two or three years down the line, we can work with the supply chain and ramp up to get that capacity. I think that we recognise that it's not just about capacity, it's about capability as well. It's a live issue, but we've got to tie it back to how we plan for what's coming down the line. You've raised a very good point. Perhaps we haven't put a lot of emphasis on maintaining the infrastructure that's actually being built, because that will take resources away from the new infrastructure, presumably. I'm not sure how well that's been factored in. We've certainly put a lot of time and attention into that, because we see more and more investment in the future being on maintaining the existing assets, ergo, the nature and the type of projects will be different. Ergo, we've got to grow skills in that space as well as the new build space. I think that that's going to be true of all types of infrastructure. As you maintain that, I'll link it back to the point that Graham made, you've got to grow additional skills, digital skills as well as traditional civil skills. It's certainly something that we're alive to put a lot of time and effort into right at the minute. I'm certainly very clear that investment in infrastructure equals investment in new infrastructure and investment in maintaining the infrastructure that we've got already. It's all part of the same overall thing to me. At risk of oversimplifying this, I think that if we're going to increase our investment levels by a billion and a half pounds a year by the time we get to six, seven years time, we don't have that much spare capacity sitting on pegs in the industry at the minute. There will need to be investment by the industry in its people and its productivity. Probably more people and probably more output per person, which is productivity, so the digital arena and manufacturing, whether that be off-site or on-site. As a public sector, in my view, our responsibility to help industry invest in its people and its productivity is to make sure that they've got visibility of the pipeline and they've got the procurement approaches that allow them to invest. I see that setting of a long-term ambition as the right thing to do, but there's work for the industry to do and there's work for the public sector to do to allow the industry to do that over the next five or six years to get that. I wonder before I proceed on to my question, which is about procurement, could I return to Scottish Water for a minute just to prove something of what you said? If there's clearly going to plan quite an increased amount of capital spend to protect your existing infrastructure, what order of magnitude is that compared to your current expenditure? I'm interested in who pays for it and is there an increase in people's water bills as a consequence? Ultimately, the investment undertaken by Scottish Water is funded through customer charges and supplemented by borrowing, so I didn't enter the question earlier on about the bank. In terms of the needs coming down the line, we probably see the need to increase investment on maintenance. We're going through the planning cycles just now, but we're probably seeing at the moment about 50-50 is between new infrastructure and maintaining existing infrastructure in terms of needs, but we're probably moving more towards 70-30. Please don't take these as gospel because it's just going through the planning cycle at the moment, but in the order of probably 70-30, 70 towards maintaining existing asset stock and 30 towards new asset stock, in terms of what that will mean in total levels of investment that is still getting worked on through a multi-stakeholder group. In terms of therefore how that will be paid for, I can't really comment on it at the moment, all I can really say is that most of our pipelines, most of our infrastructure was built post-war and many of our non-infrastructure components, water treatment works and wastewater treatment works, were built in the early 80s. When you've got water treatment works or wastewater treatment works that are getting to 25-30 years old, a lot of the component elements are starting to get to the end of life, and we've got pipelines that are built post-war and a lot of them are starting to come to end of life, so therefore we'll have to refurbish and maintain our asset stock. If it helps, I'm making no criticism of ensuring that our existing infrastructure is maintained. I'm interested in knowing how we pay for it, because if there's going to be a substantial increase in spending, there used to be a principle that water infrastructure investment was taken over generations and the repayment of it was taken over generations because it impacted on more than just the existing generation. I'm not clear if that principle still exists or whether the current billpayers are going to pay the cost of all this infrastructure investment. Well, I'm probably not best equipped to answer that question just now, but ultimately in our sector is the customers there for who pay whether that's through charges in the short term or through repayment of borrowing in the long term. You spoke about external capacity of contractors and your naturally working with your supply chain. What about internal capacity? Isn't it the case that Scottish Water actually use a lot of agency workers to supplement your own staff? Is that true? We do use agency workers. We tend to use agency workers, but predominantly most of our own staff are Scottish Water employees. We do use agency workers to deal with peaks and troughs, particularly if we're needing a certain skill set for a period of time, where that period of time may not be sufficient to bring on people. What percentage of the overall Scottish Water staff or agency workers? Oh, I couldn't tell you that. It's been suggested to me that it might be about 20 per cent. Is that the figure that you would recognise? I need to check. In my own part of the business, in the capital investment part of the business, it flexes between 15 to 20 per cent, usually to bring in skills for particular work types. In terms of the company as a whole, I don't have that information to hand, but I can certainly supply that post to the meeting. That would be very helpful. That's great. Thank you, convener. Can I move on to the question that I was supposed to ask on procurement? The committee has obviously received evidence to suggest that procurement hurdles act as a disincentive to firms actually bidding for public sector contracts. Do you think that current procurement arrangements act as a barrier for firms? If you do, can you tell me what improvements you would make to make it easier for firms, particularly small and local firms, to tender to access supply chain opportunities? Maybe Peter Reeky might want to start. I can happily start. The first thing to say would be entirely wrong for me to disagree with that statement, given the evidence that you've received so far during this inquiry. I think that it's also true to say that public procurement is very difficult to do well. As compared to procurement of works and construction works in the private sector, then we in the public sector are required to work with a significant volume of regulation and guidance to make sure that everything is fair play and transparent. That's not wrong, that's right, but it does add to the complexity of what we have to do. We also have to deliver on a lot of agendas aside from building a new asset. We have to work on community engagement on training opportunities and on working with SMEs. None of that's wrong, it's entirely right, but it gives procurers a lot of things to do, as well as focusing on what asset they're going to buy during that procurement stage. We've also got, as you slightly alluded to, competing priorities, which I think you've probably heard evidence on already, which is that elements of the industry that we deal with that supply to us would like to say to us that if we bring demand together and create framework opportunities and long-term opportunities for them, then they will be able to invest in productivity and invest in their people that will allow them to deliver better for us. We have another subset of people that we work with that say that it would be better if we procured everything individually and on a local level so that smaller firms can have access at the top level of supply chains rather than in the supply chains delivering projects. What we have to try and do is make sure that the right sorts of projects are able to appeal to the right sorts of contractors so that there's a good fit between those operations, and we can't go all one way and we can't go all of the other way. The skills base in public procurement I think can always do with more investment, so wherever we can help people in SFT as a central body, we do that, but most of the procurement activity is done for social infrastructure probably in health boards and local authorities, and it is a very challenging thing for people to do well. Everyone is doing the best we can, but there's always more we can do on suiting both of those two things, which I think are needed. We do need to give some areas more long-term opportunities that allow people to invest, and we do need to keep some things small and local to allow SME contractors to get in at the tier 1 stage delivering and then to hopefully grow to become the next generation of larger contractors after that. I'm far from saying we've got everything right in that. My organisation is trying to do better. We've just restructured so that one of my directors is looking explicitly at this area of the interaction between the public sector and industry to try and help improve that over time. I would largely agree with what Peter just said. I can't disagree that public procurement rules can be complex and can therefore be challenging or could potentially put off SMEs from bidding. Equally, we find in our sector where the public procurement rules apply. It can be a challenge for housing associations. The average housing association in Scotland has less than 1,000 units, so they don't have the same capacity in terms of procurement teams or expertise as perhaps an NHS trust or Police Scotland would have. On the other hand, I think that the procurement rules are in place for good reason. It's public money that's being spent. It's right that community benefits are sought. Valley for Money has sought that practices around fair work are encouraged. I can't provide a magic solution, but I can maybe say a little bit about what we've done as a sector and other practices that I'm aware of to try and help to engage SMEs. We've provided training to our members to increase capacity. Part of that is not just helping them understand how to follow the procurement rules and comply, but also how to engage with SMEs, how to help them understand what housing associations are looking for, and also to deliver better community benefits from spend. We've also worked with the supplier development programme, which has, as it's mission, to engage with suppliers in particularly small and medium-sized enterprises to allow them what they have to do to be able to comply and succeed in bids. A final thing I could say is that it's often possible for contracts to break them up into smaller lots so that not only very large contractors or multinationals can bid, but there is scope for local companies to bid and to bring their local expertise and also then provide local employment. I should say that if you want to add further comments in writing following today's session, please feel free to do so, including on points that we've already covered where even the kid wants to do so. However, we have limited time, so I'll ask Graham Dodds to comment and then perhaps come to Jamie Halcro Johnston for further questions. A few brief points. One point about procurement at the start of projects and assigning what projects should be is that quite often when we look at something that comes out, we think, well, if you'd asked that question slightly differently, you would probably end up with a slightly different answer or a better framed infrastructure solution at the end of the day. The scenarios where we've had prior engagement industry days and such like in the lead-in to these have been very valuable in providing conversation and feedback to agencies that have allowed them to frame the question that they want support to answer. I know that the committee has taken evidence around innovation and how procurement can drive or not innovation, and I think that one of the issues that we have at the moment is that industry largely reflects the procurement process that it stands alongside. So, if we want innovation, the procurement process needs to drive that rather than drive cost potentially as a biggest element. I know that you'll take evidence and evidence in the next session from contractors, so I won't comment on that further. In terms of improvements, I know that Public Contract Scotland is working to improve things. I think that one of the areas that is very valuable is where we have information that doesn't change except on an annual basis, so that stuff like accounts, all the hygiene stuff that goes with bidding, and actually the ability to upload that and have a one hit of that during a year is very valuable. I think that, particularly for SMEs, to some extent it's fine for companies like mine, because we have dedicated teams that operate on that side of things, but making that a more effective process for SMEs, I think, would be useful. In my area of the Highlands and Islands, there are a number of companies that are different size, but there are a lot of smaller companies, local firms that are working as well, and they have had some involvement with some of the larger projects that have been going on in the area. One of the views or some of the views that have been expressed to this committee have been that frameworks can be very positive or a positive way of managing procurement, so I just wondered what, how those impact on those local companies and the ability or the access of local companies to some of these larger contracts. Mark Dixon I'm quite happy to give you our perspective on that. We have, as well as frameworks, a series of rural contractors, so we have some larger alliances of tier 1 contractors and about 50 odd rural contractors and quite a number of them up in the Highlands and Islands. We endeavour to support them through procurement exercises, where the procurement exercises can be complex, so we offer to support them. We run three times a year what we call rural road shows, where we go around and meet all the rural contractors and try to do what we can to connect them with the larger organisations that are on frameworks, where there may be opportunities for them, but also connect them to our organisation and a system where there may be direct procurement opportunities. The key to that is that a lot of the stuff that we deliver in the rural areas, we need the support of the local organisations and many of our frameworks on larger contractors need the support of the local organisations, so I think that the key to that is just to recognise that and make sure that all the connections are in place between all the relative organisations. That support actually would give not just, for example, on procurement but on health and safety or training, so we are trying to take those sort of things out to the local organisations as much as we can. For me, on the housing side, it is really about frameworks being developed appropriately and with the range of geographies and the range of different projects in Scotland being borne in mind. There was one example of a framework that originated in England that actually had a housing framework with only one Scottish contractor, which obviously is not ideal, but to maybe talk about some of the players in the housing landscape, I know that we work quite closely with Scotland Excel and the majority of their business goes to SMEs. The Scottish Procurement Alliance has set up new-build housing frameworks by the good different geographic areas to acknowledge that you will need different contractors doing different scales of jobs from very rural to larger developments in Glasgow or Edinburgh. Finally, Hub West Scotland, which is a mix of public and private, has recently developed a housing offer, but it has essentially got two scales. It has got the fairly large developments, but it has also got an offer for smaller developments that allow small and medium-sized enterprises to be part of the framework. I think that it is about them being set up and used appropriately to respond to both the different needs of different clients, but also to allow smaller and medium-sized enterprises to be part of the framework. When you consider the level of information that is available on public sector infrastructure and the ability of the construction sector to engage in infrastructure projects in Scotland, how does Scotland compare to the rest of the UK? Are there other lessons that we should be learning from international experience? I will start with Mr Jensen. We have some recent research coming out from looking at the UK level. Interestingly, it shows that the level of transparency is not only higher in Scotland but significantly higher than it is at UK level. I think I mentioned, referred to the numbers earlier for large and medium-sized projects being 95 and 70 per cent of measured against the cost infrastructure data standard. In the UK, the equivalent is only 60 per cent for large and 35 per cent for medium-sized enterprises. I do not have time to explain in detail what the infrastructure data standard actually requests is disclosed, but I will be happy to submit that subsequently. Just to say that, there is a possibility of strengthening this even further by going back to the initial conversation about avoiding that the data is fragmented and scattered in different websites and reports. It is quite easy to create a single online platform that connects the location of the different data points. That could make Scotland a real leader international on infrastructure transparency. If you had anything to add about how Scotland compares to the rest of the UK, or further afield in terms of the level of information on infrastructure projects that are available and the ability of the construction sector to engage with infrastructure projects? I am sorry that it looks more internationally than we do, but we are always trying to do more, but we have a pretty good network with the contractors and we are involved in a structured set of discussions on a regular basis now between Government, SFT and the contracting community to understand what needs to change in the future. We engage on specific projects and programmes before the start of that, before they kick off so that industry has a good sense of what is coming and on individual projects increasingly we are doing early contractor involvement to bring them into the development stage of projects. I would say that it is a pretty good level of understanding between the private sector delivery organisations and the public sector. It could always be better. We can always work more on that. On the international point, we are certainly keen to learn best practice from around the world. We spent time with the New Zealand infrastructure grouping that came across here to learn what we were doing and we learned something of what they were doing. I spoke at their infrastructure conference, five video conference, I have to say. We have done all sorts of different things internationally. We are a member of some of the European investment bank groupings to share experience across Europe and the OECD has some good infrastructure networks as well. I would say that across the UK we obviously interact with our colleagues in the other nations. I am always keen to do more but we have a fairly good working relationship with industry in Scotland. I think helped by our scale and we do learn internationally as well. We have an outward and looking approach. I am conscious of time coming in. Thank you to our panel. If there is anything that you want to add to any of your answers, please feel free to write in to the committee to do so. Thank you for coming in today. I will suspend the meeting for a changeover of witnesses to the next panel. First of all, Stephen Slesser is operations director of Infrastructure Scotland from Morrison Construction and Shona Frame. He is a partner in CMS Cameron McKenna, Nebarro, All Swing, LLP and also Gavin Payton, who is a partner in Burness, Paul, LLP. Welcome to all three of you today. If I might start with a question on finance, what are the panel's views on whether or not financial institutions are properly engaged with the construction industry and construction companies? I should say before we start that Len Bunton was meant to be here but, unfortunately, I am unable to attend the panel session. Who would like to start off and give comment on whether or not the financial sector is properly engaged with the construction industry? Stephen Slesser? I think that, recently, since the advent of Cullians' recent demise, the business environment is really quite challenging for construction companies. The traditional view is that banks have really supported the business and, while mainstream lenders are still engaged with the sector, there is definitely a trend away and you can see that in terms of recently around inter-saving care, how they have been treated by markets. Average debt has risen quite significantly and that has really been born over the years where there has been a sort of significant period of time where cheap funding was available, cheap money and some companies have used that to capitalise to fund growth. In some instances, that is changing rather dramatically now, which is leading to some of the reasons why we find the market quite challenging. However, the way that construction is built upon it is quite cash-intensive and liquidity is really important. Net debt levels across industry in 2016 were 10.5 times the combined UK income of the top UK-10 contractors. In 2009, that was six and a half times, so there has been a real move towards debt in that section. In terms of SMEs, on a smaller level, they are struggling as well in terms of obtaining accessible and reasonable finance. I do not know what you want to frame in Gavin Payton. If you are involved in the acquisition of finance or the more the setting up of what is already agreed for clients, would you have any comments to make on how financial institutions are relating to the construction industry currently? I would be happy to comment briefly, principally, involved in setting up the arrangements rather than implementing the arrangements rather than negotiating them. The feedback that we get is that, in terms of finance from the main lenders, a combination of low margins in the construction sector, high-risk projects and recent insolvencies, particularly those that are certainly viewed with caution by lenders. If you are talking high-risk and low margins, then very soon you can end up in a situation where difficulties arise, as we have seen in some recent high-profile cases. The model and recent high-profile cases has had an impact, I think. Shona Ffremd, do you want to come in there? No, I do not have much to add on that. My expertise is around the other end of construction projects. Fair enough. I should also say that if you want to come in at any point, just indicate by raising your hand, and the sound ask will operate the mic, so no need to press any buttons. We will come now to Andy Wightman. Andy Wightman, following that up, we did an inquiry recently on business gateway support that is provided by local authorities to businesses. In general terms, looking across business support, business gateway, Scottish Enterprise, et cetera, does the construction sector get the same level of business support, including financial support from public sector bodies, or is it treated somewhat differently? Because of the thin margins that we operate and the procurement models that are based upon, we effectively fund public sector contracts and private sector contracts for the first 30 days. In reality, we are getting paid on day 60 after we first start on site, yet there is an expectation that cash will flow immediately down to our supply chain from day 31. On top of that, getting access to finance can be difficult, depending on some of the terms and conditions that certain local authorities or procurement bodies put in place, which can mean that, in some instances, we take decisions not to pursue certain projects because of that. In terms of getting that level of support, most of the support is targeted at the SME sector in Scotland in terms of Scottish Enterprise and business gateway. From a tier 1 contract from our perspective, it is not something that we have had a great deal of visibility of. If you were contemplating tendering to build a hospital, how would you fund that for 30 days? It is funded from our own net cash reserves, so we use a mixture of cash reserves, create credit, bank borrow and private equity finance to do that. That is one of the attractions of using a major contractor that has a strong balance sheet, and strong balance sheets are really important. Is there any experience in the panel of alternative sources of finance in the construction industry? Obviously, we have had recent experience of PPP and PFI, and there are attempts by the Scottish Future Trust to generate new models of funding, but do panel members have any comments on different ways of funding construction? My practice is focused on mainstream construction development in the public and private sector and also project finance. In the 20-odd years that I have been in the profession, we have certainly seen the availability of project finance models and the supply chain associated with them, or the pipeline associated with them, being quite spiky. That does have an impact, I think, on the market. We have got a strong core of expertise in project finance within Scotland, but it waxes and wanes as the models are available at the moment. We have got the hub DBFM model, which is delivering a lot of fantastic projects. The hub DBFM model, which is a project finance model within the hub framework, is delivering some fantastic projects. Obviously, we have seen that NPD has not been proceeding recently because of accounting treatment issues, but I think that the market would certainly welcome a further development of NPD, a new project finance model, to deliver big infrastructure projects. I just want to show you a frame. I think that you deal with disputes as in where things fall apart, so to speak. Is there a particular finance model that tends to—I mean, if we look at the question of what are the models that tend to seem to work as opposed to not work? Are you able to comment on that? The disputes that I deal with are focused around time, money and defects. Those are the constant themes that we see, and that goes across all of the methods of procurement, the different forms of standard forms and, increasingly, in recent years, PFI, PVP models. Those exact same issues are coming through, and particularly in the PFI contracts. At the moment, we are seeing a very large increase in the number of disputes concerning deductions, performance, deduction and payment mechanisms. You would not single out any particular procurement model or finance model as better than another in that sense. What we are starting to see is a trend towards more partnering and alinsing forms of contract. I have had many disputes under those forms of contract. The way to dispute management and avoidance is to live those contracts, not just enter into them. Just using that terminology and the sort of clauses that we see in NEC about acting with good faith and mutual trust in co-operation has to mean something in the way that the contract is operated to avoid disputes. I do not think that it is necessarily about the contract model. It is about parties' behaviours and how the contract is operated. Angela Constance I wonder if the panel had any experience of whether or not the building Scotland fund has helped to improve the availability of funding for the sector. I wonder whether you might have some views on that. I took a little bit of a look at some of the figures. Up until the end of the current financial year, 51 million pounds have been allocated from the 150 that was set aside. Around half of that is on one project at Winchborough Developments. Where we are in the sector, that is helpful for us because that has helped that project to come to market much quicker than it maybe would have done in the past. The challenge is the transparency and visibility of how to access that fund because there are a number of constraints around it that prevent many developers from accessing it. However, in general, it is a good idea. It helps to bring more projects to market. I think that it is probably a useful start towards the Scottish National Investment Bank, and I understand how that will be able to support infrastructure in Scotland in the next 10, 15 years. Angela Constance On that point, given that the building Scotland fund was very much launched as a precursor to the National Investment Bank, how do you expect the improvement bank to improve the sector's access to finance? The biggest challenge is going to be replacing the European Investment Bank if it decides not to invest heavily in Scotland post Brexit, whatever shape that looks like. Over the last 10, 15 years, it has invested somewhere in the region of £3 billion in Scotland delivering some of the largest infrastructure projects around. There is a £2 billion pot in place for the Scottish National Investment Bank, which leaves a gap against what you would have hoped. The other part of that is really about how the constraints that I put around that in order to satisfy accounting regulations in terms of whether it is being on the books or off the books for the Government in terms of how it is funded. For us, it is very much in the early stages. We are trying to understand what it will really mean. Our hope is that it will continue in some way, shape or form, to fill the gap left by the European Investment Bank. We have obviously heard that the investment bank will take quite a mission-orientated approach. Is that your hope and expectation that there will be a very specific mission around construction? It would be my hope, not just my expectation. The infrastructure bank has to cover lots of different things. The one area where I think it could add real values in the renewable sector and low-carbon economy is that there is a lot of opportunity in Scotland to be able to explore that. I would like to see that the investment bank can help to push it along in that direction. I wonder whether any other panel members had anything to add to what Mr Slicer has commented on. The committee has said quite a lot of a comment from people responding to the consultation about the subject of retentions, so I wanted to ask you if you had thoughts about that. Can you paint a picture for us just now as to where we are with retentions? How common are they? What percentages are we talking about? A long time ago, I did auditing and it was pretty standard. I think that everyone just accepted that retentions were part of what happened, but has that changed over the years? We typically see retention in practically every project, usual percentage between 3 and 5 per cent. Recently, I have heard of contracts where retentions have been as high as 10 per cent. That seems particularly onerous. The usual mechanism is probably aware that half of the retention is released on practical completion and the other half at the end of the defect liability period. If that was 10 per cent, which was a bit unusual, what happened there? Did the contractor agree to that and sign the agreement? I do not know whether that was agreed to or not. It is the sort of clause that contractors would assess in terms of the risk profile of the contract and whether it was something that they were prepared to take on in terms of their own working capital and cash flow requirements. That basically takes out any profit from the job and withholds it to a much later stage. It is very difficult for things to withhold as much as that and make the contract viable. I always thought that there was a certain logic to retention because then, if one was not done properly or there were odds and ends to be tied up at the end, that gave the main organisation, be it private or public, a hold over the contractor. Is that not accepted so much now? Is it used to be that kind of logic? I think that logic does still apply. The question mark is a relatively small pot. If the work is being properly managed and inspected as the work proceeds, there should not be enormous amounts of defects left at practical completion. The contract provides for people to come back and rectify snagging. You are left with a relatively small pot, but what has become a very big hot potato in terms of the headlines about the amounts of retention that are withheld comes to bear when there is an insolved saying that the retention fund is lost. However, things such as the retention deposit scheme bill are not convinced or really the way forward. I think that it might address a problem from one perspective, but it does not look at the whole issue in the round. Just to clarify, is that a Westminster bill? It is. It is a private members' bill in front of Westminster. Would it apply to the whole of the UK or just to England? I do not know. I mean, did I, as well, as want to come in at this point, or I can ask more questions? I would be happy to... Mr Payton, okay, yeah. I think that it is interesting listening to the example that Shona gave. I mean, set out the experience that the retentions are on all the projects that I am involved in, that there will be a retention normally 3 per cent, but what we have seen recently is requests for higher retentions, and partly what seems to be driving that comes back to one of the earlier issues that we are discussing, which is an anxiety amongst lenders in relation to the construction sector and also bond providers. Some contractors, I think, at the lower level, are having difficulty obtaining performance bonds, which are typically for 10 per cent of the contract. Some will provide an element of performance security, and therefore, if the contractor is unable to obtain a performance bond, the client's next step may be to ask for a higher retention. As a performance bond, for those of us who are not too technical, is that an alternative in the sense of an insurance policy? Is that how it works? It is provided by a bank or a specialist bond provider. Essentially, it is a pot of cash that can be claimed if there is a default under the contract. Normally, on the projects that we are involved in, there would be a 3 per cent retention and a 10 per cent performance bond. However, if the contractor is unable to obtain a performance bond, the client may seek to increase the retention to compensate for the lack of a performance bond. Has that become more difficult to get a performance bond in recent years? It is certainly anecdotally yes for contractors at the SME level. That is something that Stephen might be able to comment on, but that simply compounds the issue. If retention is at 3 per cent or a challenge in terms of cash flow, retention at 10 per cent is obviously even more problematic. It is quite interesting to do away with retention that would leave the client unprotected. There are alternatives, and perhaps a more measured response is to abolish retention and to find an alternative, if possible, or maybe to challenge bad practice, because retention serves a purpose and is properly used as legitimate, but if it is an abusive retention and targeting the abuse, perhaps that is a more focused response. Can we come back to that point afterwards about the abuse, if I may? Do you want to come in as a slesser at that? Just a couple of points to support some of the discussions there. I support just cards on the table. I am definitely pro abolition of retention. I think that it is a product of a yesterday's industry and has removed from our digital age where we can embrace technology such as blockchain and artificial intelligence. That will help to remove some of the client's concerns around quality and defects issues. In reality, we will often have to give performance bond, retention bond, private company guarantee and have retention taken from us in order to undertake some contracts, and that is even in public sector as well as private sector. There are three or four different methods available to clients if they wish to use them in order to provide financial security that does not impact on people's cash flow. Cash is really important, and that is not just for T1s but all areas of the business. The vast majority of defects that this pot of money is supposed to be held for are latent, something that happens five, 10, 15, 20 years down the line. What happens in some large projects can have significant sums of money being held. The employers making better times put some nice interest on that, not so much in recent times, but you get some unscrupulous employers that will use it as an advantage in a green final account sums. Generally speaking, I am definitely pro abolition. Is everybody else pro abolition of retentions? Is that the general feeling? The issues that I see with retention are disputes around when it should be released and securing release particularly of the second tranchef retention, which comes at the end of the defect liability period. For main contractors, we see a dispute around whether the conditions to allow that release have happened, and that would be rectification of any snagging works. For subcontractors or tier 2s, the issue is that their retention release is often linked to certifications up the line to the main contractor. They are relatively small sums of money individually on projects, but when you add them up, if there are a lot of projects on the subcontractors' books, then it can add up to a large amount of cash. In terms of access to a dispute mechanism that allows that to be released, it is not economic because the cost of pursuing these small debts outweighs the sums at issue, but they are a real issue in terms of bottom line and getting cash back in the bank once it has been withheld during a project. If a retention was not being released and there was not a good reason, what are the options for the person looking for that retention? Is it court or is it one of those arbitration systems? Adjudication would be an option, so that is the fast track 28 day process. Or, if it is small enough—it is not called small claim anymore, but the court procedure for smaller debts applies only to under £5,000. It is tricky because there is a cost to adjudication. The parties fund that themselves. There is no recovery of cost and they have to pay for the adjudicator. It is difficult when someone has a list of retentions on their books to try and recover that. Particularly when it is linked to certification up the line, it is something over which they have no control. The defects in a very early subcontract might have been dealt with long ago, but if the main contractor's retention has not been released then it is very difficult for the subcontractors to get release of theirs. I think that somebody suggested to us that even though there was an adjudication process that, sometimes even after it is decided that the payment is not made, you still have to go to court and chase the payment. Does that happen? That can happen. My experience is that most adjudication decisions are implemented. There is a small number of them that go to the courts for enforcement procedures, but it tends to be for larger ones and where there is a real issue around the process or the jurisdiction of the adjudicator. The courts have set out their stall that they will enforce adjudication decisions unless there is a very good reason not to. Mr Payton, you were the one who mentioned abuse of the retention system before. Can you expand on that? I think that, to some extent, coming back to my original comment about the pressure on cash flow, low margins and high risk, that can lead to poor behaviour in some contractors by certainly no means of the majority, but it can lead to poor behaviours in terms of keeping their own business afloat that retention can be a means of making it to the end of the week. I suspect that the poor practice is not the majority, it is a minority. To some extent, it is driven by financial necessity. The other interesting is the private members' bill on retention and deposit schemes. It is interesting that it is not particularly well developed because it anticipates that there will be detailed statutory instruments in the various territories to cover the implementation of it. The other end of the spectrum creates an interesting issue in the sense that, if retention is a concept that is going to exist, whether it is in the form of a cash retention or retention deposit scheme, it would be a very big difference for the client that a retention deposit scheme would have to draw down the cash and put it into the deposit scheme. For example, if a developer is taking bank funding, they are drawing down that bank funding sooner and ring fencing it in the deposit scheme, which I suppose will add to the overall cost of the project. However, I can quite understand why contractors would say that that should be the client's issue and that the contractors should not be funding the project. It would make it safer in one sense, but it could push up the cost of the overall project. Yes, because if you are taking funding, you are drawing it down sooner and the interest costs are running at an earlier date. Equally, perhaps that is a fear outcome from a contractor perspective rather than funding the 3 per cent for the duration of the project. I can follow up on one point on that. The abolitionist position is at where to get rid of retention altogether. Do you not feel that that could go against smaller firms? Obviously, the client has to have some security for seeing the project completed. Smaller firms might be less well placed to get the required bond or the cost would be prohibitive. In order to get past some of that, we need to take a more long-term view and wider view of the sector. That comes down to how we procure things. If we are looking to engage with SMEs and a supply chain across Scotland that we want to be fair to—in my mind, that includes the abolition of retention as part of the question—we need to have a framework or a way of working with SMEs that allows them to grow and build resources and capability but allows them to bid and maintain for work. We need to take a more mature approach to procurement around SMEs to facilitate that. In order to ensure that the client is still getting protection from SMEs in that instance, bonds are available. It does not necessarily need to be a performance bond. There are retention bonds that are available that can be procured. In some instances, it may be that if we still have retention having that fiduciary trust that the retention deposit bill talks about, it may help because one of the biggest issues is insolvency, especially if there is a subcontractor to a tier 1. I will use an example. There are a lot of subcontractors where there would have been in a much better place because that money would have been held in a trust that would have been able to access. That, to me, is the only real benefit of that. Again, if we want a mature industry that is going to develop and deliver the infrastructure that it needs for Scotland in the next 25 years, and we need to start having a more mature discussion about how we treat our supply chain and the expectation that it will not come back and rectify a defect, it is part of that discussion. If it is here for the long-term and the area of local SMEs, of course, it will come back and repair that defect. How prevalent are the late payments in this sector? How much of a problem is that? I would be happy to start with you. I deal with construction disputes. A lot of the cases that I deal with are to do with payment. I do not know whether it is late payment, the ones that I see are more around disputed levels of payment. The industry is very heavily regulated through the construction act in terms of payment procedures that flow through to the standard forms of contract. What I see is more around disputed values rather than timing. Do any of the other members of the panel have a view? The dispute is generally about values. I suppose that the issue about delayed payment can be used up the contractual chain as a means of improving cash flow. If there is a 30-day payment period at one level and a longer payment period at the other, that does have cash flow benefits. Given that we have been advised that there is a problem in the industry, particularly the larger contractors delaying payments to subcontractors that are perhaps less able to absorb that sort of delay, do you think that there is an effective and accessible adjudication process to deal with that? I think that you raised some legitimate points and I think that it would be wrong of me to sit here and say that there are not payment problems within the industry. There are. That is not to say that there are not things that are being done to help that. From my own experience that I agree with Shona that most adjudications and disputes relate to the value of the payments rather than being paid themselves. Where you have difficulty in getting paid on time, adjudications are one potential way of dealing with that. However, in my view, in respect to my learned colleagues to the left of me, solicitors in general seem to have hijacked the adjudication process over the past 10 years. What should have been a relatively simple, short and sharp way of obtaining cash or putting it in the place where the person who believes he owns it has become a drawn out affair that can cost significant amounts of money by having representation at adjudications, adjudication fees going through the roof. It is not a real viable alternative for those chasing cash. While it has a purpose and it is a perfectly excellent way of resolving some disputes, in terms of payment and getting cash early, I do not think that adjudications are suitable for that. Mr Bunton, in his submission to the committee, states that the issues that he is dealing with are the worst in 20 years in terms of the level and the value of the adjudications. That would imply that adjudications are going up fairly significantly. I have read Mr Bunton's paper with some interest and a couple of observations around it would be that the payment disputes that he refers to are those that are on the sum's due, and, largely, that comes from two reasons. One, the types of risk that contractors will once and no longer will undertake and how those risks have been managed. Two, the initial budgets just aren't wrong. Contractors, being the way they are, will always try to get to the lowest price, because that is how procurement in Scotland is driven. In safaris, where Mr Bunton's report gets to, there are the conclusions that he can draw as the root causes of that. In terms of actual speed of payment, I do not believe that adjudications that he refers to are around about speed of payment. I think that it is more the quantum of what the payment should be. Given that we have heard quite a number of witnesses over the weeks referring to late payments as being an issue, especially for the smaller contractors, how much leverage does the small contractor have with the main contractor in extracting payment? Generally speaking, in my experience, quite a lot, because we rely, especially in Scotland, on our regional supply chain to deliver works for us. If we are working in some of the more rural parts of Scotland, there is no chance that we can keep our credibility for delivery or to be able to go back and do repeat business if we cannot work with the supply chain there. It is a symbiotic relationship and there is a lot of mutual respect between us. In the part of the business that I work in, we self-deliver a lot of our work, so we directly deliver, so we do not use a great deal of subcontractors. Most of the work is when we do use subcontractors on a specialist regional basis to help to support that. My experience has been that they do have a lot of leverage. Still, we hear that it is a problem for them in getting payment. I am not saying that it is crossed the board. I totally accept that. I am not saying that I am just giving you what my experiences are in terms of the wider supply chain SMEs. Yes, there are contractors there that are scrupulous or treat the supply chain with disdain, somehow financing schemes. I am not saying that everybody has the same principles as we do, but there is a challenge there that needs to be addressed. I do not get the feeling from the panel that there is a general concern about late payments. The risk of repeating my own voice, as I have seen from what I am doing a lot of speaking. There is a concern for us of late payments, even at our sector, because some of the payments that we get from public sector clients are late. That puts pressure on our cash flow because we are still expected to pay our supply chain within 30 days. When we are working on large projects, we can generally do it. However, there are times when we will have some disagreements over the value of those payments and sometimes SMEs feel that the disagreements over value also relate to the speed of payment. You need to separate the distinction between what the true value of the work is and how quickly it should be paid. Do you think that the public sector acts fairly in terms of how it schedules its payments? Generally, yes, but there are some specific instances where some elements of the public sector seem to treat construction companies as an additional revenue stream. Can you say which part of the public sector? Specifically, but in so far as we have to finance projects for certain amounts of time, so as we discussed earlier, we are effectively financing projects for 60 to 90 days in some instances. In terms of a public sector contract, it can be a fairly large sum of money. It can be. Are there particular areas of the public sector that are— There is no particular area that I could give you any observations on, but what I could say is that, where we work collaboratively with people like The Hope and Scottish Water, we find that we have a really good relationship with them, and payment is not a problem. They have some great practices there, and there is a lot that others could learn from them. I will let you off the hook on that. Thank you very much, Mr Beattie. May I ask you a question that is slightly different on the same line? What are the reasons given for late payment when it involves the public sector? I mean, are there legitimate reasons why late payment occurs sometimes? Are you able to comment on that, what the reason given for that sort of thing is? Generally speaking, there are usually some reasons behind it. Often it is because there is a funding decision where they have entered a contract and they are waiting for a funding to come through, or they have got to spend so much money within the financial year. There is no really set trend in my view. There is a legal framework in terms of protection for contractors and subcontractors. In addition to their relationship points, which Stephen MacDonald mentioned, it is an industry where there has been an enormous amount of innovation in terms of implying terms and forcing terms into construction contracts. We saw that through the Housing Grants Act 1998, which was tightened up in 2011 with the Local Democracy Act, those apply equally in Scotland. In terms of the structure of payments, payment notices, pay less notices and the whole certainty overpayment, there is regulation in place that deals with all those backed up by adjudication as the dispute resolution method, which is at least cheaper and quicker than the alternatives. I am not convinced that more regulation is the way forward. I think that just picking up on Stephen's point that the whole way that people work together and leadership coming from government, from public sector bodies to not just talk about better payment practices but actually put those in place is going to be more of a way forward than more legal remedies and more contractual remedies. Certainly what we have experienced in the past is that at every step in the chain, there can be issues with payment. In some instances, those do arise at the client level, at the public sector level. Sometimes that is a consequence of there perhaps being a lack of skills or under resourcing to properly manage and administer those contracts. The contracts that are put in place for high-value projects are generally quite detailed, generally quite complex and require a reasonable amount of management and administration. It is important that we talk about skills at a kind of apprentice level but equally skills at the client level in terms of having the skills and the resource available to properly manage and implement contracts. If that is not there, that can lead to issues with payment, for example. I turn to project bank accounts, because it is fair to say that the majority of submissions that the committee received question the effectiveness of project bank accounts in improving cash flow and payment issues. I wonder if I could ask you your views on project bank accounts. I am conscious that the threshold was £4 million. I do not think that one project bank account was used when it was at that threshold, but it is now £2 million. Do you think that that will help? I am happy to start anyway. Certainly, what we have experienced prior to the reduction in the threshold was the relatively new to the Scottish market in relative terms. There is still quite a lot of work going on on all sides with parties wrestling with the implementation of them. That is not a comment on whether they are a good thing or a bad thing. It is simply the practicalities of dealing with them. That is still being wrestled with. Certainly, what we are hearing is that there is a cost associated with setting up and implementing a project bank account that would not exist if they were not being used. The introduction of project bank accounts has an impact on cash flow. You do not have the large chunk of cash passing down through the supply chain. It is around the main contractor and around the second-tier contractors. I suppose that recognising that we will look at the previous model was that the cash flow through the main contractor, if you take that cash flow away and you have a low margin, that is an impact on their business. That is not a criticism. That is just reality. If the cash is no longer flowing through, it has an impact on them. It is whether there is a recognition that that cash flow disbenefit to the main contractor will be reflected in the pricing of the job. With the reduction in the threshold, if the guidance is complied with, that will lead to the greater use of project bank accounts. The set-up costs and operating costs of a project bank account do not directly relate to the scale of the project. To some extent, reducing the threshold compounds the issue of the cost of setting up and implementing a project bank account, because of the lower-value project, it can less sustain the cost associated with setting up and operating the project bank account. What percentage of the contract would it normally cost to set up a project bank account? I could not comment on the percentage. You do not know what the relative cost would be? No. Maybe three points on project bank accounts. First, I echo in Gavin the increased level of administrative burden on the people operating those accounts and making sure that the correct amount of money flows to the correct people at the right time is probably more complex than is appreciated. The second point is about the interaction of timescales. The construction act, the scheme and standard form-building contracts have specified timescales for payments, for issue of payment notices, which are mandatory, for issue of pay less notices in advance of the final date for payment. When you overlay them on to the drawdown dates for trying to extract money from a project bank account, that whole timeline becomes quite complex, and when you are operating on the 17-day fair payment guidance, it is very difficult to make those timescales work properly. There is a practical consequence around the use of project bank accounts. The third point is about the removal of working capital from the supply chain. There tends to be a gap between payments coming in and going back out again to flow down the supply chain. That period of time when the money is sitting with the party is using that money as working capital. If that is removed from the equation, in a circumstance where people are working on very low margins with low pricing, taking on high levels of risk, you are almost creating a perfect storm in the market when you do something like that. Mr Slesser. I could summarise it better than Shona, to be honest. If we have no cash buffer, the rate of failure will rise, and the margin will need to compensate for that. Given that it is not the magic bullet that some people would hope it would be, give me your top measure to improve financial management of construction projects. What would you recommend to Government if you had the ability to tell them to do this and that might fix the problem? Set a realistic budget at the outset instead of constantly trying to value engineer savings that do not exist. Are you going to agree with Mr Slesser? I will add a different point, which is around looking at the whole life cycle of the asset. Not capital cost of the build, but what is the cost over the entire life cycle? Lowest cost for the capital expenditure of the build is not necessarily best value when you look at the whole life cycle. If you have low cost, there may well be an impact on quality, and over the length of the asset it might end up costing more. I think that looking at inception right through to end of life of the asset is what I would suggest that we look at more closely. Taking a bit of a sideways step is if project bank accounts are challenging, problematic. If you look at different procurement routes, design and build is a big focus at the moment and that involves main contractor, subcontractors and the cash flowing that way. There are other procurement routes available for construction management being one of them. You cannot have the tail wagging the dog, but if you adopted a construction management procurement route, the importance of project bank accounts would be less significant. To some extent, that is the tail wagging the dog. Any further questions from committee members? Dean Lockhart. We have heard about the challenges facing the sector very briefly. What do you see as being the main opportunities for growth in the sector? Can I ask how the sector in Scotland can take advantage of the UK construction sector deal? There are figures of £600 billion of investment coming through the pipeline in the next 10 years. For me, at the risk of repeating myself, digital construction and adopting digital ways of operating is the one massive opportunity that the industry in Scotland has. Digital technologies such as robotics, blockchain and artificial intelligence need to be able to invest and research them and harness them to be able to deliver the kind of infrastructure that Scotland deserves in the future. In order to do that, as contractors, we need a strong pipeline of work to be able to invest and the wider UK construction industry deal is something that we are already looking at in some detail. We have a number of projects around robotics and artificial intelligence that we are looking to deliver in Scotland as part of our commitment to working here. For me, we need to move away from the fixation on lowest price piecemeal bidding and concentrate on the more qualitative aspects of what construction can bring. Outside of digital construction, the other big win for me in terms of opportunities is what we can do in social value and community benefits. Procurement can be a really powerful tool for obtaining great social value benefits. We really need to start assessing how we deliver projects on a wider scale and just lowest cost, but taking into account those things. I thought that the other panel members have views on the UK sector deal. Yes. Not the sector deal so much as you asked about opportunities for growth as well. We did some research in my firm amongst main contractors in the UK. We approached 150 main contractors and the opportunities that they see—this is coming from the marketplace—is very much around the themes of innovation and technology. That is seen as a very real way to achieve benefits in cost savings, in quality improvements and in just a better built environment. That was something that came out strongly. In terms of how that can be achieved across the sector, the big theme coming out was collaboration and the need for partnership in the approach to delivering projects. The only thing that I would add to that is that it is an relation to off-site manufacturing. We have talked on various occasions today about the high risk associated with construction projects. Part of that arises because they are implemented in uncontrolled environments to an extent, whether related particularly. I suppose that the hope is that off-site manufacturing should help to increase productivity and improve quality and perhaps help with programme certainty. That follows, but to ramp up in terms of off-site manufacturing, that requires quite significant investment. To achieve that, there needs to be the environment that supports that investment. I thank all of our witnesses for coming in today. We will be moving straight into another item, so please feel free to leave us to carry on with that, if I can put it that way, and thank you again for coming in today. The next item on the agenda is number 3, which relates to the dual blocking regulation revocation EU exit regulations 2019. The committee has been asked to consider a notification from the Scottish Government relating to the dual blocking regulations, which prohibit certain forms of discrimination encountered by customers buying certain goods and services from traders in the EU. That applies regardless of whether the sale is processed online or offline, or if the customer is a consumer or a business. In the event of a no-deal exit from the EU, preserving the dual blocking regulation would, with reference to reserve matters, mean that UK businesses would retain the same obligations to EU customers under UK law, while UK customers would have a substantial loss of protection. That is because UK customers would be outside the EU internal market, meaning EU traders would not retain the same obligations. Repealing the dual blocking regulation will ensure that UK businesses are not subject to non-recipical demands, which would act as a burden without any benefit for both UK businesses and customers. At its last meeting, the committee agreed to seek further information on the regulations, and the response to that is contained in members' papers. Is the committee content for these issues to be dealt with by statutory instrument laid at Westminster? As the committee is content, I will write to the cabinet secretary to notify him of the committee's decision. I will now suspend the meeting and move to private session.