 Thank you. Item number one is the decision on taking business in private. Do members agree to take items 4, 5, 6, 7 this morning in private? Thank you. Item two is section 22 reports, the 17, 18 audit of NHS Ayrshire and Rathbone. Y 1718 audit o NHS Ayrshire a Arran a'r 2718 audit o NHS Highland. I would like to welcome our witnesses today, Caroline Gardner, Auditor General for Scotland, Lee Johnson, senior manager, performance and best value Audit Scotland, Joanne Brown, director Grant Thornton UK LLP and Pat Kenney, director of Deloitte LLP. Can I invite the Auditor General please to make a short opening statement? Thank you, convener. The first report this morning concerns financial pressures in NHS Ayrshire and Arran. The external auditor gave an unqualified opinion on the 2017 accounts for the board, but it is facing significant financial and performance challenges. In 2017-18 it needed £23 million of brokerage from the Scottish Government to achieve financial balance. At the beginning of the year, the board's potential deficit was £13.2 million but that increased during the year to £23 million. The board faces an extremely challenging position in 2018-19 and beyond. It is projecting a deficit of £22.4 million in 2018-19, the current financial year, with an additional £13 million in 2019-20 before projecting a balanced budget in 2020-21. An external review of the board's approach to efficiency and transformation concluded that its current plans are not substantial enough to achieve long-term financial sustainability. NHS Ayrshire and Arran will find it difficult to address the financial and performance challenges that it faces and to implement the recommendations of the external review. That represents a significant leadership challenge. Moving on to the second report, this highlights financial pressures in NHS Highland. Again, the Auditor General gave an unqualified opinion on the accounts, but she reported on the scale of challenges the board faces in achieving financial balance. In 2017-18, the board did deliver £35 million worth of savings, but it still required brokerage of £15 million. It faces an extremely challenging position in 2018-19 and beyond. It has identified that it needs to make £52 million worth of savings in the current financial year. So far, savings of £30 million have been identified, leaving a funding gap of £22 million. NHS Highland plans to produce a longer-term recovery plan underpinned by a more detailed operational plan setting out new models of care within the Highlands, and it has engaged the help of external consultants. Stable leadership will be needed to implement the plans, and I anticipate that the board's financial position will deteriorate before the underlying issues are addressed and performance improves. The chief executive leaves the board at the end of December and the director of finance is acting on an interim basis. That obviously creates risks around the future leadership of the board. I am joined by Pat Kenney from Deloitte, who is the appointed auditor for NHS Ayrshire and Arran, Joanne Brown from Grant Thornton, who is the appointed auditor for NHS Highland, and Lee Johnston from Audit Scotland. Together we will do our best to answer the committee's questions. Thank you very much, Auditor General. I am going to ask Willie Coffey to open questioning for the committee. Thank you very much, Jenny. Good morning, Caroline. I wonder if I could ask a few questions relating to the Ayrshire and Arran report and situation. As you said yourself, which has been well covered, the brokerage amounts in the past couple of years have been pretty substantial. In your report preceded the cabinet secretary's announcement that those would be written off, not just for Ayrshire and Arran but for all the health boards who received brokerage over the last five years, which is very welcome. I wanted to try initially to explore what some of the reasons might be behind that overspend. I do not think for a minute that that kind of level of expenditure was not required to deliver healthcare to the citizens of Ayrshire and Arran, but I would like to try to understand what the main reasons behind that substantial overspend might be. I will make a couple of points and then ask Pat Kenney to come in. The first Mr Coffey referred to the cabinet secretary's announcement about writing off brokerage. That is obviously welcome for the boards affected. It is worth noting that for both of the boards that I am reporting on this morning, their financial projections do not include any provision for repayments, so it does not change the position that I have brought to the committee's attention today. Secondly, you are absolutely right that every board is trying to balance the need to manage its financial targets, its activity targets for things like waiting times and the quality of patient care. That is very much why the challenges are so difficult to resolve. Pat, can I ask you to talk through the financial reasons for the overspend last year? Sure. The board went into the financial year with an estimated deficit of around £13 million, and that was due to underlying financial pressures, overspending and acute reliance on locom and agency bank personnel. There was an underlying financial pressure of £13 million, and that increased to £23 million during the year. The main reason for that was additional demand. The board was assuming that certain beds would be closed during the course of the year, but that was not possible due to demand on the board. That resulted in another £6.3 million overspend, and the nursing costs associated with that were keeping those beds open. The balance of the overspend came from a failure to deliver assumed efficiency savings during the year, so that gets you to the £23 million brokerage figure. We know that Ayrshire and Arran's health indicators are not as good as the rest of Scotland's. What I am trying to get at here is that there is something particularly unique about the overspend in Ayrshire and Arran that we are perhaps not seeing in the rest of Scotland in terms of the demands and so on and so forth. From our work across the NHS in Scotland, I think that all boards are facing significant financial pressures. There are very understandable reasons for demographic change in the ageing population and the increasing demand that that brings, but each board tends to have a different combination of factors that is causing its specific local challenges. As Pat says, the board had made its budget dependent on assumptions about the ability to close some beds. In practice, those beds were needed to meet the demand for unscheduled care and the other savings provided difficult to achieve in practice. Every board will have its own set of circumstances. There will be three section 22 reports on NHS boards this year, where those challenges have resulted in the need for brokerage, but the reports that I published last week on the NHS as a whole showed that all boards are struggling with balancing those three bits of the triangle, finances, waiting times and the quality of care. In terms of expecting Ayrshire and Arran and indeed any other health board to deliver in the transformation agenda, how much of that do you think that they control themselves and are able to deliver themselves? We know that there are three local councils that make up the health board authority north-east and south Ayrshire. If you look at some of the factors such as daily discharge, you will see quite a variable pattern there within the local authorities that make up the health board. My question is how much can they really affect change in themselves and how much are they relying on their partners within the local authorities to make that effort to get performance up? There is no doubt at all that tackling this in every health board depends on the whole health and social care system working well and the integration joint boards are increasingly important in doing that. Pat, is there anything you want to say about the specifics in Ayrshire and Arran? I think that it is a combination of both factors to deliver the savings required. At the integrated joint board level, the three councils—I am the auditor for the IJB and the councils as well in Ayrshire—they are making some good progress in terms of moving some care from the acute to community. There have been some excellent examples in the health and social care space of improvements in care at home and things like that. End of life care is another good example where they are making really good progress, but I think that there is still a long way to go in moving the services from the acute to the community side. I think that there is a feeling certainly from the health board perspective that the community sector is not resilient enough yet to absorb the demand that it needs to allow the efficiencies in the acute side to be made. Is it fair to say that any health board does not completely have control over the agenda? It is indeed reliant on the local authorities playing their part too. The health and social care system does depend on health boards and local authorities working well together. We are publishing a report in a few weeks' time on progress with the integration authorities, but the bigger challenge is the whole prevention agenda and the way in which we are helping people to grow older and remain healthy rather than needing support for long periods of their lives as they get older. You mentioned staff, agency and locum costs were quite substantial but coming down the way. There has been quite a consistent problem attracting NHS staff to come in and to work in NHS Ayrshire and Arran and the price of that is that you pay higher fees for agency and locum costs that I think that Alex Neil raised at the committee before. Are you aware of any work going on nationally to try and help us to reduce that dependency and that high cost on this particular cost factor that hits this health board and others? At a national level, it has been a big focus for the Scottish Government. In the report that I published last week, we saw that agency costs while still high had reduced slightly in 2017-18. Lee, do you want to say something about the work that is going on at a national level there? Yes, I guess that there is work going on to try and attract people and I think that we will hear from Highland. It is another big issue for them but the Scottish Government are undertaking a number of different programmes of work to try and attract staff. The lift programme, for example, is relatively new about how we encourage people to come in and take on more senior levels as both of those reports. Leadership is another challenge as well as the staff that are dealing with it. A lot of the boards have a focus on reducing their staffing costs because it is one of the things that they can try to reduce over a period of time. I can only do it if they are successfully recruiting locally, though I would presume. There is an issue there about our inability or the problems of recruiting locally to deliver the service. We know that the workforce at a national level is under pressure and we are seeing increasing difficulties recruiting some very long-term vacancies, rising turnover, rising sickness absence, which is another indicator of strain on the workforce. I think that we are starting to see some improvements in national workforce planning to deal with that and at the other end of the problem, the short-term issues, looking at making better use of locum staff rather than agency staff who tend to be more expensive and less familiar with local health services. It is certainly one of those areas that is a significant problem where there is no quick fix to it and it will take time to resolve. I can pick up on one of the points that Mr Coffey raised on workforce planning and training. One of my concerns in terms of workforce planning in the NHS is the training of nurses. Of course, that relates back to how many nurses we are training and how many Scottish domiciled nurses we are training in terms of the places that are available to them and places that are available to nursing students from overseas who perhaps are more likely to return to their home countries to nurse there. Did your audits look at whether the Scottish Government is training enough Scottish domiciled nurses? Do we have enough nurse training places for Scottish domiciled students who are more likely to work in our NHS hospitals? We have a programme of work looking at workforce planning because of its importance to the NHS and the health and social care system more widely. I do not think that we have got the detail in front of us today, but we can certainly refer back to that after the meeting, convener. In broad terms, we found that there is a need for improvement in the workforce planning that is required, particularly in looking at the demand side of the equation. The first report that we produced, I think, found that the numbers of staff being trained tended to be very much the numbers needed to replace staff who were likely to retire and leave the service in other ways, whereas we know that demand is increasing and that changing models of care mean that we need different types of staff in different places. We have reported on that, but it is not contained within the reports that we have got here today. Lee-Jones, do you want to add to that? Can I ask you a specific question then? You talked about the uplift programme that the Scottish Government has to encourage people. Surely the best form of encouragement by the Government is to make training places available for people who want to nurse in our NHS. In the analysis that you did of those programmes to encourage more people to work in our NHS, did you do an analysis of actual places available? No, we haven't done that. I think that the RCN is looking at this issue. I think that what we recommend in our NHS in Scotland report that we published recently is that there needs to be more work around workforce planning. The Scottish Government has recently published three workforce plans, but at a local level there needs to be more work around the planning and how it will recruit people and train people for the future. That is a long-term undertaking. How much are they spending on the lift programme? I think that you can spend as much money as you want to encourage people if you do not make the training places available. It is a bit of a waste of money. General, I am looking at Paragraph 26, where it says that NHS Ayrshire and Arn, after discussions with the Scottish Government in June 2017, had to work with an external partner to review the board's approach to efficiency and transformation, and that was PwC. Then there were further discussions in early 2018, which resulted in the appointment of an improvement director. Yet, if I look at Paragraph 23, you are saying that currently a lack of attention is being given to detail, medium to long-term financial planning by the board. That does not sound too good. What is underlying those two paragraphs is, first of all, the board's recognition and the support from the Scottish Government to try to get to grips with the challenges that they are facing. Secondly, a theme that is common to my reporting on the NHS, is that the very urgent nature of the short-term problems that they are facing is getting in the way of their ability to think about the longer-term picture and what is needed to deal with that. Pat will be able to talk you through the specifics that he is seeing in Ayrshire and Arn, I think. What we were looking for there was a linkage between the medium and long-term financial planning and the transformational planning. Obviously, for the transformation to be successful or to deliver the targets that it needed to, the two would have to be compatible. What we found during the course of the audit was that, given the short-term pressures that the board was under, there was definitely a deficit in terms of medium and long-term financial planning, and those plans were just not available to the auditors at the time of the audit. Just looking at the bare bones of the report here, it does not sound like the board has actually had a grip of the situation. I think that they recognise the scale of the situation and they are very focused on the immediate actions that they need to take to halt the decline that we are seeing in performance and financial position. However, there is no doubt that it will be very challenging for them to make the changes that are required at the same time as continuing to deliver services. Does not happen overnight? No, and I have been reporting since 2012 about the danger that the focus on short-term targets is obscuring the underlying pressures that are facing all health boards, including NHS Asher and Arran. However, looking at that, there is an improvement director in place. What is the improvement director's remit? It is basically to turn around the financial performance of the board to implement the transformational change that is required to enable the board to operate within its financial envelope. I believe that the director has a significant experience of similar type work in other parts of the health sector. That is the remit, basically, as I understand it. However, if I am looking at some of the reasons that have been given for the overspend, and this is touching on something that Willie Coffey was talking about, on paragraph 19, page 8, it is talking about key factors, the older age profile and high levels of deprivation in the Ayrshire and Arran population. Now, that is not going to go away. So, how are they going to be able to bring in those changes that paragraphs 17, how are they going to be able to affect those changes? I think that the underlying solution to the challenges that NHS Asher and Arran and right across the NHS are about changing the way that services are provided. That is absolutely in line with the Government's 2020 vision for providing much more health and social care in people's homes or closer to their homes and avoiding unnecessary admissions, making it easier for people to be discharged quickly if they need to be admitted to hospital. The problem is that we are not seeing progress happening quickly enough on that, partly because of the continuing focus on short-term financial targets and on the local development plan targets, which tend to be for aspects of the acute services such as waiting times for elective treatment or A&E waiting times. What I have been recommending for some time is that boards need to find the space to pull back to look at the way the overall system works, to understand what services are being provided in the community and the impact they are having, and to rebalance the system to meet the needs of a population that is aging. As you say, that is not going to change. Again, just looking at the report, it seems to me that this problem has been there for some years. The Board, by your own statement here on paragraph 23, has not been really addressing it. The Government seems to me to have stepped in and put a bit of pressure on them and put someone in place to help them along with this, which is not wrong. However, it seems to me that this has been allowed to go on for quite some time and the Board has not been addressing the problems. Is there not a better mechanism for picking this up and for making sure that these boards get the support that they should? I do not think that the Board is alone in the challenges that it faces. You have got two boards being reported on today facing similar problems. The committee is very well aware of the challenges that NHS Tayside has faced in achieving financial balance. My report last week on the NHS shows that the whole system is facing similar pressures with both financial performance and performance on things such as waiting times declining. The underlying reason for that is the ageing population that we have in Scotland and the changing types of care that we all need as we get older. The signs of that pressure have been visible for the time that I have been in this job. I welcome the fact that the Government is now trying to make space for that longer term view. We have seen some announcements from the Cabinet Secretary over the last few weeks that are demonstrating the commitment to making a bit of breathing space to tackle the underlying challenges, but you are right that they are not new issues and I have been reporting on them for some time now. You mentioned earlier that there are pressures right across the system in every board although we are focusing in this morning on Ayrsharnarn and Highland. If you add up now the number of partnership boards we have and the number of NHS boards we have plus the three regional structures that have been created, that is a total of 56 different organisations, each with their own board, each with their own chief executive, many of whom are in film star salaries and each with their own structure of finance director and all that kind of stuff. Is the time not come, given the financial pressures, to be looking at the massive overhead that is involved in having 56 different organisations delivering health and social care in Scotland and that is without including the 32 councils? I do not want to veer into the territory covered by my report on the NHS published last week, which I know the committee will be considering soon, but one of the themes in that report was very much the growing complexity of the governance of the health and social care system in Scotland and the risks that poses to people's ability, first of all, to get the right leaders in place to do what is needed across Scotland and secondly to be clear who is accountable for what and therefore what progress we are making. We can discuss those when we are discussing your latest report, but it is quite interesting. Highland is the only part of Scotland where the single agency model for the delivery of health and social care, where there is only one board delivering as opposed to the 31 partnerships elsewhere. Although Highland has got clearly financial pressures, is there any evidence so far that the single agency model is better or worse at delivering health and social care according to plan? That is a very good question and one that we are considering as we finalise our report on health and social care integration, which is due for publication in the next few weeks. I think that what I would say at this stage is that it is clear from the report on NHS Highland that the lead agency model is not a panacea, that there are still financial pressures in both the health board and the council. The ability to deal with those is constrained by the different accountabilities that those bodies have and the financial pressures that they are facing more widely. I think that it is something that we are watching closely to see how it develops. I will check if Lee or Jo want to add anything to that at this stage. From my perspective, that is fair. As the NHS Highland report outlines, NHS Highland is facing challenges around adult social care and the financial sustainability of that and some challenges around that relationship in working with the council through the lead agency model. So, while they can demonstrate some good outcomes from that model, there are underlying challenges within that and how the governance of that operates for them. Can I go back to both Ayrshire and Highland and indeed other boards then? I think that one of the issues, and you mentioned this specifically in relation to Ayrshire, is that one of the causes of the current problems is underestimation of the demand for services, in particular for acute services. That is one of the reasons, for example, why the 100 beds were not closed down and so on. Is there not a need overall to improve in this day and age? We know the size of the population in every area. We know the complexities that are likely to be faced and they are changing, but nevertheless we have got a good idea. We know the age structure of the population. We know historical demand. We can predict actually very accurately the number of people likely to be seen at an A&E department day by day. Should we not be, as a starting point for a lot of this, not getting a far better handle and a more professional, systematic approach to demand forecasting? I think that we are seeing some progress on that and I will ask Lee to talk in a moment about what we understand of the work that the Government has under way. I think that there is another dimension to it as well. This committee has heard a lot about optimism bias, particularly in relation to things like IT projects. I think that the focus on financial targets and waiting times targets means that there is a degree of optimism bias in boards' financial planning as well, that they tend to make assumptions that they will be able to achieve savings that, in practice, are very difficult to achieve. I think that both sides of that equation need to be tackled. Lee, do you want to say a bit about demand planning? Yes, so there is work being undertaken to try and plan better, but we have to think about it in the context of integration as well and moving more care into the community. I think that there is a hope that, as we go into the future, there will be less unscheduled care. I think that the other thing that the Government would point to this year is also the winter pressures. That does reoccur every year, but I think that it was a particularly bad winter this year as well, which obviously probably had an impact on your shown iron as well. Are we sure that that is overspend or were they allocated a budget that was too low in the first place? Willie Coffey referred, for example, to the economic social profile of Ayrshire, which is one of the poorest counties in Scotland. Obviously, as we know demand for health and social care is driven by levels of poverty and deprivation to a large extent. So, is that really overspend or is it underfunding in the first place? My second very specific question on Ayrshire is, as in the Rhodians, which is another health board in trouble, the chief executive of Ayrshire and Arn health board doubles up as the chief executive of the west of Scotland region. Does that now send out the wrong message? With the current situation in Ayrshire, should the chief executive not be full-time on Ayrshire and Arn? I will start off answering both of those. Pat may want to come in to add to it. First of all, on the question of whether the budget as a whole is sufficient, health boards are funded, as you will know better than anybody in the room, Mr Neil, on the basis of a national formula, which aims to take account of the make-up of the population, its age, composition, deprivation and so on. The Government has been making more rapid progress towards making sure that everybody achieves their national resource allocation formula funding. As I said in the report that was published last week, the Government has succeeded across a period of time in keeping the funding of the health service very slightly ahead of inflation, but when you look at it on a per capita basis it tends to lag inflation and we know that healthcare costs increase more quickly than inflation as a whole and the population is ageing. So there is no doubt that the budget for the health service as a whole is under pressure and in my view it is probably not possible simply to buy our way out of the challenges that we are facing here. The answer really is in reshaping the way that care is provided to meet the needs of an ageing population. The second point that I would make on the leadership examples that you touched on, I think that that is another feature of the complexity of the structures that we are seeing now in the health service, the number of bodies that are involved compounded by the difficulties that the health service is having in attracting chief executives in the number and of the quality that are needed to do the work. My report on NHS Highland highlights that the chief exec there will leave by the end of the year. We know that a number of other very experienced and senior chief executives have also indicated their intention to leave or to retire and that pressure on leadership is only going to get worse. For me, that is one of the reasons for looking at the way in which the NHS is governed and structured to make sure that we are making the best use of the leadership that is there. Pat, do you want to add to that? The only thing that I would add to that is that at Ayrshire and Arran, as I think in most other boards in Scotland, there has been limited progress in moving the set-asite budget for acute services into the community sector. Effectively, that is where the biggest bang for the buck would be in terms of improvement overall. I think that there has been very limited progress. If there could be more progress in that movement in the set-aside budget, that could really have an impact on the ground. How useful is it to explain what the set-aside budget is? The set-aside budget was basically the provision at the time in terms of health and social care partnerships being formed that was set-aside for acute services with the objective of over a period of time moving it to the community sector. General, I want to follow on from the answer that you just gave Alex Neil around the difficulty of finding leadership with the capacity to address some of those problems. As you pointed out in Ayrshire and Arran, the chief executive is leaving, the finance director is leaving. We have seen similar issues, for example, in Tayside. In your answer to Mr Neil, you said, we cannot buy our way out of the problems. We have to change how we deliver health and social care. You have also said on a number of occasions that the difficulty that the two boards and the other boards are facing is the balance between demand, the need for the level of activity and performance that we want to see and balancing the books and the finances. Is it not just the case that there simply isn't enough money in the health service to do the things that we want it to do? First of all, for the record, it is the chief executive of NHS Highland, who is due to leave rather than to announce just for the record. Your point still holds. I need to be careful here because it clearly is a question of significant Government policy. What I would say is that 42 per cent of the Scottish Government's overall budget already is spent on the NHS. That has risen as a proportion over recent years. The challenge of meeting the immediate demand for health service means that there has probably been no alternative to doing that, but if we keep on doing it, it will squeeze out the ability to spend on any other public services, including equally important ones like education and the things that will set Scotland up as a country that can thrive in the future. Secondly, there is very good evidence that continuing to meet demand as it ships up at the hospital's door is not the best way of providing care for older people. There is very good evidence that we will treat the people of Scotland much better if we are providing much more care in the community and people's homes and close to homes that keep them well for as long as possible and support them at home for as long as possible so that they are only admitted to hospital when that is what is best for them and can go home as quickly as possible. The access for younger people who do have more acute needs that can be treated and cured if you like is not slowed down by the number of older people who have no alternative but to be admitted to hospital. For me, it is not just a matter of whether we should be shoveling more money into the health service. Of course, the health service is a vital part of society, but if we do not change the way that we provide services, the demands will swamp the other public services that are equally important. It is not the best way of looking after people either. If I understand some of your previous comments about transforming the way in which we deliver services, you have talked about having to create the space in order to make that change. My question really is about leadership rather than finances, so we have seen in Highland that two of the senior managers leave and we saw in Tayside the whole senior management move in boards as well. We have seen problems. The report says in Highland that there has been a significant turnover of non-executive directors on the board. The question that I am really asking is, are we asking those in leadership positions in our health service to do something that is just simply impossible, and that is why they are leaving and we cannot find replacement? In my view, the very narrow focus that has been in the past on short-term targets like achieving in-year financial balance and achieving the local development plan standards has tended to focus people on the short term in ways that will run faster and faster and faster to try and keep up, and that is clearly becoming impossible. I think that there is a link. I welcome the announcement that the Cabinet Secretary has made about a medium-term financial framework for the NHS and for thinking about where the local development plan standards fit into that context. I think that that will buy some breathing space to make the sorts of changes that will genuinely undress the underlying challenges here. It is something that the committee may want to explore with the Government about how they intend to use that space to build leadership capacity to make sure that we are not spending the capacity that we have on the right things and that the governance is clear enough and strong enough to deliver what is needed in practice. On the leadership point still, Mr Neil spoke about the number of chief executives that the current system requires, and I think that the phrase that he used was film star salaries. In the Highland report, you point out that there has been a doubling in the number of clinicians there earning over £200,000 and that two clinicians are now earning £400,000 per annum. Is there a problem in the salary structure within the clinical side of the NHS, not just the governance side? I think that it is important to say that while chief executives are highly paid members of staff, they are also doing very demanding jobs, as you said, and I do not think that I would recognise the phrase film star salaries personally. On clinical salaries, they are vital to running the health service, and I think that in Highland what we are seeing is very much in effect of the difficulties in recruiting and retaining people in remote and rural areas to provide services. I will ask Joanne and Lee if they can give you a bit more detail about what is happening there. In terms of the two individuals that we recognise in paragraph 21, that also links to NHS Highland's wider challenges around agency and locum costs, and those two specifically relate to providing suitable clinical, safe and effective care within Cathness in the Belford hospital area, so areas outwith Inverness. That has been challenging for NHS Highland across a remote and rural area and looking at where those service provisions are, recognising that the acute services are based within Regmore and how can they use then locum and agencies to provide the care that is required in these outlying hospital sites? I am not sure I understand, but we are saying that these two clinicians earning over £400,000 a year are earning that because they are temporary staff on some kind of inflated remuneration rather than permanent staff of the board. In those two instances, there are agency locum staff and it is reflecting of the specialist skills that are required in the nature of the clinical specialisms alongside the location and where they are based. In terms of some of NHS Highland's outlying hospital sites, there is a requirement there for 24k and access to a clinical specialist on that basis. That relates to the need to provide that service. I am still not sure I quite understand why somebody has been paid £400,000 because they are working in Cathness. It is to do with the specialism that they provide under the contracts and the nature of the clinical services and the nature of the pay arrangements in place. That is an on-going increasing cost for NHS Highland. The nurses who are working in Cathness, who presumably are also working in a rural area, are they also being paid twice as much as the nurses in Regmore? I do not have that information to hand. It depends on whether it is an agency or locum and then the nature of the clinical specialism and where that nurse is based as part of their employment contract. Auditor General, you talked about certain measures that have been taken in the last few weeks. One of those is that all outstanding brokerage will be written off by the end of 2019, which sounds very welcome. First of all, what is the practical impact? Can you help me out with the practical impact of that if, as you said in your opening statement, there was no provision made to pay this back anyway? Two boards that are in front of you today, the financial projections that I have reported to you do not include any plans to repay the brokerage that they have received so far. Their financial position as they are forecasting at this stage remains as challenging up to 2020-21 as it did before that announcement. There is a small number of boards whose financial plans do include the provision to repay brokerage over a period of those. NHS 24 is the most significant, and, for those boards, it will obviously provide them with welcome breathing space to look at their financial forecasting more generally and how they can use the resources available to them. However, for those boards, it will make no difference to their financial forecasts as they currently stand. I will come back to that last point that you made in a second, if I may. First of all, just looking at the report, it sounds as though all the brokerage is written off, but it looks as though, for Esher and Aaron, it is all just going to be racked up again. Your report indicates that the board is anticipating that it will require a further 22.4 million in 2018-19, but that hinges upon certain high-risk savings being achieved. Is it your understanding that, given the potential write-off, that irrespective of how much brokerage is on the books by the end of 2018-19, it will all be written off? I think that it is fair to say that we are not yet sure. Lee, do you want to say a little bit more about the range of announcements that we have heard recently? Obviously, the financial framework was published and now boards have the ability to plan over three years to break even after three years and to have a 1 per cent flexibility within those plans. Other than that, we do not have much more detail. We do not know what that means in practice. We are in the process of working through the framework and trying to understand what that will mean in practice for those boards. I am sure that the boards will be looking at their forward planning and trying to understand what that will mean for them, but we do not have details about what that means in practice. If I may say in paragraph 21 that the figures that are being projected are based on the board achieving £26.1 million worth of savings, of which £9.7 million has either not been identified yet or is identified as high risk, so it may well not happen. Do you think that, given that announcement, which I accept on paper, it looks very welcome, but presumably when they are doing the forward planning, Lee Johnston, there is a risk that the board will not strive in quite the same way to achieve those £26.1 million worth of savings, because they know that the brokerage is going to be written off anyway? The brokerage will be written off in 2019, but I think that the announcements do not address the underlying issue. However, as I said, we are trying to understand what the three-year break-even and the 1 per cent flexibility means in practice until we have a better understanding of that. We will not know what that means for what the board has said to date in terms of what they are trying to achieve. One question on something that you said earlier, Auditor General. Some boards have plans to repay their brokerage. The point was raised when we looked at the college sector and education and how financial planning has been done. Are you hesitant in using the word fairness here? Do you think that there is any concern that those boards that have made significant sacrifices, shall we say, made significant plans to repay the brokerage will look at this situation and say, we have cut our cloth very carefully and now we are being penalised for that? I am sure that those boards will feel slightly hard done by in the way that you describe. I think that my concern is probably twofold. First of all, I think that these are steps towards the longer-term financial planning that I have been recommending since I have been in this job and I welcome them. However, I think that it is important that that long-term planning is done in a way that does not undermine incentives for good financial management and that the space is really used to address the underlying challenges, as Lee was describing, that the demand pressures are only going to keep on increasing. Healthcare costs are going to keep increasing faster than the Scottish Government's resources are likely to. These are only useful measures if they are building a bit of breathing space for people to tackle the underlying changes that are required. As I said in my report last week, I really work with local people to involve them in planning health services that are more sustainable and better for the future for an Asian population. The final thing for me on Ayrshire and Arran is that your report indicates that only 60 per cent of savings were achieved by 2017-18 were on a recurring basis. How does that compare with recurring savings that have been achieved by other boards throughout Scotland? Is 60 per cent sustainable? What is the percentage that you would ideally be looking for them to achieve? I am racking my brains and I am not sure if Lee can help me. The report that we published last week contained that information for all of the health boards across Scotland. I think that 60 per cent is probably higher than the average and perhaps nodding asking him to come in at the moment. The challenge is that the higher the level of non-recurring savings, the more the board is back to square one at the beginning of the next financial years and having to look at ways of reducing costs and potentially cutting services to be able to balance its budget. We know that that is getting harder for all boards each year and it simply is not a sustainable way of delivering health services for the longer term. Pat, do you want to comment on Ayrshire and Arran? I think that, based on the boards that I audit, 60 per cent is probably above average, just to confirm that. However, I think that there are generally a problem throughout the sector that of an over reliance on non-recurring savings. I certainly find that out of the boards that I audit. In paragraph 3 of your Ayrshire and Arran report, you explained a little bit about the brokerage and then you said what it is, a form of loan funding known as brokerage, arranged based on assurance from the board that it can repay the brokerage over an agreed period. I think that what we have heard today is that it cannot repay the brokerage. What is the value of an assurance from the board? The arrangement in place until the cabinet secretary's recent announcement was that it was an agreement between the Scottish Government and the health board based on that assurance. I have been reporting for a number of years now that health boards in general are not doing enough in the form of long-term financial planning, and I think that that place is those assurances in question, as you are highlighting. How does that affect the rest of your audit when you take representations from the board? Both Joe and Pat will, and every health board auditorial, will be looking at the going concern question in the specific circumstances of their boards. I think that they are looking at both the assurance around the narrow question of brokerage but also the wider quality of financial management and planning and the assurances that the Government is providing about their commitment to continuing to fund health services into the future in doing that. Clearly, it is a more difficult judgment in boards like this, where brokerage is involved than it is in other boards. I think that it is more than just the going concern, if they were given assurance that is blatantly not correct. What about the Scottish Government side? They are providing money without testing this assurance? I think that they are testing the assurance, and in both of the boards that are reported on today, you are seeing the measures that they are putting in place to help to make the assurances more robust by providing support for the changes that are needed. In general terms, I have been reporting for a number of years that the focus has been too much on achieving in-year financial balance and not enough on really making sure that the longer term plans are robust and that they are tested. I think that the two boards that you are seeing today are a symptom of that. I think that we have come back to the governance issues that we have raised before. I would like to explore a bit more about workforce planning, because it comes up in both reports and touched on it slightly earlier. My question is, are we training enough doctors and nurses who are likely to stay and work in our NHS hospitals in Scotland? I heard of a young doctor recently qualified in Scotland, paid for by the Scottish taxpayer to train right through university in our NHS hospital going off to take a job in New Zealand. Is she likely to come back? It is anyone's guess. I have heard, and I cannot substantiate this figure, that up to 40 per cent of doctors that we pay to train here in Scotland leave for Australia and New Zealand. One, is that a good use of public money? Two, are we training enough healthcare staff that are likely to stay and work in our NHS? You are absolutely right to identify the problems. We published a report for the committee about a year ago looking at workforce planning in the acute sector of the health service. It identified a number of problems around both the planning for the workforce that we need and the training that is under way, particularly given on the one hand the time that it takes to train professionals of the quality and standard that we need and, secondly, the other demands that are making it harder to retain them. I do not have the detail of that in front of me today, but I am very happy to write to the committee to follow up your questions from there. It is a very significant issue, and it is one of the things that is increasing not just the pressures on the services that we all experience as patients, but also increasing the pressure on the staff who are currently working in the health service and adding to the capacity challenges that we refer to in all of our reports on the NHS. Did you just say that you are preparing a report specifically on that? We published it about 12 months ago, I think, on workforce planning in the acute sector. Yes, okay, so we can refer back to that. My second question is about prescribing. You identify prescribing in both the section 22 reports that are in front of us this morning, and you also identified it in previous Tayside reports. In Ayrshire and Arran, you identify GP prescribing costs. In Highland, you say that there is brokerage required for £2.8 million of prescribing costs. Can you tell us a wee bit more about why there is pressure on prescribing costs at the moment? Again, it is a factor that is affecting the NHS right across Scotland, not just in those two boards. I think that there are at least two factors in that. The first is that with an ageing population, as people get older, they tend to have a range of different conditions, which all can be treated with medications. You end up with people having a number of different medications that are prescribed on a recurring basis for them, which increases costs. Secondly, we have new drugs becoming available to treat conditions that previously were not treated before or to treat them more effectively. They are often more expensive than the previous approaches to treating them. The combination of the volume and the cost of the medications means that we see increases in prescribing costs and drug costs, which are much higher than the increases in the funding that is available for the health service as a whole. That is not something that affects just Scotland, it is something that is prevalent right across the developed world. There are factors in some boards that mean that their prescribing rates tend to be higher than in other boards. That is, as you say, a factor in NHS Tayside, and I will ask Pat and Joanne if there is anything that they want to add in a moment in those areas, but it is an overarching problem for the NHS as a whole. Jo, anything you want to add? Just to follow up in terms of NHS Highland, similar to Tayside, prescribing rates are slightly higher than the rest of the NHS in Scotland. That is something that they are looking at as part of their financial sustainability plans. They are looking at how certain of those costs can be contained, and they are working very closely with GPs and clinicians to understand the nature of that prescribing. That is something that they are going to look at and factor into their financial plans. I mean, the bit you said at the end there, Ms Brown, really intrigues me because I think what we're getting to is a case where we're asking GPs to think twice before prescribing basic drugs. Auditor General, does that not undermine the Government's policy of free prescriptions? It's very difficult to comment on specific circumstances where auditors not clinicians. We've done work in the past on prescribing costs, which shows that there are significant variations across Scotland in the patterns of prescribing for some common drugs. It's not always clear that that is accounted for by the makeup of the population in terms of age and sex or by deprivation levels. The Government and health boards have done a lot of work locally to address that. For example, we know that the rate of prescription of generic drugs has increased significantly, which generally means that patients are getting the drugs they need at a lower cost to the health service. However, because of the scale of the cost of drugs to the NHS and because of the rate at which it's increasing, that's not an area where either Government or health boards should be complacent, I think. Liam Kerr Thank you, convener. Just very briefly, at paragraph 22 of your report, you talk about areas where savings will be required to be made by Ayrshire and Arran specifically. Two of those are closing unfunded beds and workforce costs. The question is, if the health board does that, what is the impact on the quality of care? What is the attendant impact on the ability of Ayrshire and Arran to meet national targets and standards? To be clear, the reference in paragraph 22 is not to what I think the board should be targeting for its savings but to their planned savings. I will ask Pat to talk about the process that they have been through in identifying those savings. Yes. Those are the savings that they are working towards. I think that they are reliant, obviously. The closing unfunded beds are reliant on the health and social care, the community sector, resilience factors, so there is a risk factor attached to that. The workforce costs are homing in on the agency locum elements of the cost to try and drive down costs there. Those are the actions that they are trying to take to reduce the costs in these certain areas. The impact does that have. Presumably, when they are doing that analysis, they say, okay, this strip is cost out of the system, but they presumably also factor in something that says what is the practical impact on patient care, for example. Has that been done? This is back to the rationale, the 6.2 million that I referred to in the report, that the community sector was not ready to absorb that. The board was not able to close the beds that they initially had anticipated just because of excess demand. I think that they do look at that carefully in terms of the impact. Obviously, when they close the beds, they feel that it is safe to do so. I have had several conversations with the chief executive at the board. In many respects, as I said earlier, he does not feel that the community sector is ready and resilient enough to absorb that demand. That is why he thinks that the board cannot safely close those beds at that particular time. Forgive me, Pat Kenny, if I may just press you. I understood the point that you were making. I think that you said that the chief executive cannot close the beds at this time because the social care sector is not ready to pick up what it needs to. However, I look back at the report and they seem to have identified that they have to close those beds to make the savings. It sounds as though they are going to do something in the full knowledge that the social care sector is not ready to pick up the slack. Am I hearing you correctly? No, I think that they are making that assumption on the basis of certain respects and targeted areas that they can close the beds safely. Obviously, sometimes what they are expecting to happen will not happen on the ground and the demand is still there, so they cannot safely close the beds. I think that there is that consideration that is obviously made, but I think that they will obviously only close the beds when they feel that it is absolutely safe to do so, which is obviously the right thing to do. Do members have any further questions for our witnesses on those reports? Yes, Alex Neil. You said, Mr Kenny, about the set-aside monies, and that is not just the reassurance and many of the other boards as well. When we were emptying the Victorian so-called asylums many years ago, there was bridge funding for health boards because there is a period, a transition period, during which you have to run in parallel existing services until they are run down and start up and provide parallel services in the community. That bridge funding I think was regarded as a major part of this infrastructure in making the transformation in mental health from these Victorian institutions to care in the community. The fact that the set-aside money is not being set-aside fatally, is that not indicative of the need for some kind of bridge funding as we transfer people from treatment in the acute sector to treatment in the community? I think that it is a very good question. I think that it is one of the questions that the Government should be considering as it develops its medium-term financial framework for the health service, particularly given the financial and service pressures that we are seeing on health boards right across Scotland, not just in these two. Colin Beattie I have a couple of questions on the NHS Highland. On paragraph 25, it says here that the board commissioned an external independent review of governance arrangements. It seems that this hiring of consultants and so on is almost a reflex when the boards get into these difficulties. NHS Tayside did it, NHS Anand did it, NHS Highland did it. How much is this costing? The review of governance had no financial cost attached to it. It was an initiative that was started off by the health board chief executives working with the Government to commission almost a peer review process of governance. The review was led by the chair of Greater Glasgow and Clyde, NHS Greater Glasgow and Clyde. Both boards have, at the same time, received some consultancy support for their transformation plans, which is referenced in the two reports, but that does not apply to the governance review that you have highlighted in your question, Mr Beattie. Colin Beattie Is there a pattern of consultant costs arising from the situations where, by reflex, almost they reach out and bring in our next general consultant? I would say that it is not by reflex. Our sense is that the Scottish Government has been increasingly aware of the pressures that health boards are under, and as they have demonstrated their unable to deliver their plans, the health board has worked with them to bring in support for transformation. As long as that is done well, I welcome it. I think that often people think that the hard work is done when a plan has been produced. Of course, its success depends on the quality of the plan and the quality of the implementation, so I am not against the use of consultants per se, but it needs to be managed well and to demonstrate good value for money. Just briefly, I am just looking at Exhibit 2 on page 7 of the report and it details the reasons why brokerage was needed. Those seem to be exactly the same reasons that we looked at previously in this committee when we actually went up to Inverness and met with the board and so on. Regmore hospital, it was a problem then, it seems to be a problem now, it does not seem to have a grip of that. In terms of the struggling to recruit sufficiently skilled staff, there seemed to be evidence last time around that they were actually managing the vacancies to try and create cost savings. Is there evidence of that again? Starting at the beginning of your question, you are right that I produced a report back in 2013-14 on NHS Highland and some of the cost pressures were very similar to the ones that we are seeing now. I think that NHS Highland is interesting in that it appeared to be making progress in dealing with those cost pressures. It was able to deliver financial balance in a couple of years and then the position has worsened again and I think that reinforces the point that these are underlying pressures rather than simply poor financial management. As Joanne has said, the particular workforce challenges in NHS Highland are definitely exacerbated by the fact that they are as remote and rural as they are and the normal ways of providing services that we are used to in more urban areas simply do not work well here. The progress that they are being able to make in finding sustainable ways of providing those services that reduce the need to rely on locum staff, whether from agencies or banks, is getting more difficult given the workforce challenges that they are seeing. The number of vacancies is going up and in order to continue delivering services, they are having to rely on agency staff in some areas. Lastly, just to put my mind at rest, the governance around the board, I presume that there is no issues with that. Last time, we had problems with governance in terms of the way that the board operated. At this time, I presume that it is transparent and above board. I say in my report that the financial reporting to the board is much better this time. The problems were being signalled to the board and the discussions about the need for brokerage were held properly and in good time, which is a contrast to the last report that I made. That is not to say that there are not some governance challenges. You referred to the review of governance and that identified some areas for improvement. As my report says, the chief executive will be leaving at the end of the year and the director of finances is acting on an interim basis, so there are challenges in that sense to the governance of the board. Any further questions from members on these health reports? I thank the witnesses very much for your evidence this morning. I am going to suspend us for two minutes to allow a changeover of witnesses. Item 3 is the section 22 report of the 2017-18 audit of Scottish Government consolidated accounts. I would like to welcome our witnesses. Today is Caroline Gardner, Auditor General for Scotland, Stephen Boyle, Assistant Director and Michael Olyfant, Senior Audit Manager of Audit Scotland. Can I ask the Auditor General to make an opening statement, please? Thank you, convener. As the committee knows, the Scottish Parliament has new responsibilities for taxes, borrowing and social security. The changes enhance the Scottish Government's ability to manage its spending, but they also introduce more complexity and risk. This increases the importance of comprehensive, clear and consistent financial reporting to support this committee and the wider Parliament in your vital scrutiny role. The annual consolidated accounts are a critical component of the Government's accountability to Parliament and the public. They cover around 90 per cent of the spending approved by Parliament in 2017-18. My independent opinion on the consolidated accounts is unqualified. I am content that they provide a true and fair view of the Government's finances and that they meet the legal and accounting requirements. I would like to highlight, though, for the committee three areas from my report. First of all, financial management. The Government managed its budget for 2017-18 within the overall limit set by Parliament, and budget management was effective. The Government borrowed its full annual capital limit of £450 million in line with plans outlined by ministers as part of the 2017-18 budget. At the end of the financial year, the Government had net capital borrowings of £1.036 billion, around 35 per cent of the overall £3 billion cap. The Government still needs to finalise the policies and principles within which it will manage its new borrowing powers. It is important to support decision making about the level type and timing of borrowing and to avoid excess borrowing and associated interest costs. The Government has taken policy decisions to provide significant financial support to private companies, which inevitably increases its exposure to risk. My report highlights the need for more transparency about its approach to supporting private companies. Although business cases were clear for the loans provided to two companies during 2017-18, there is no framework to guide support of this kind. That should cover issues such as financial capacity, risk tolerance and the expected outcomes, and it would provide Parliament with better information and greater assurance. Secondly, financial reporting. The Government has improved its financial reporting this year through its first medium-term financial strategy and fiscal framework outturn report. Both play important roles in the Parliament's new budget process and will develop further over time. However, the use of capital borrowing powers for the first time in 2017-18 reinforces the need for the Government to improve the reporting of its overall financial position, as I have recommended before. There is currently no appropriate audited account that sets out all of the Government's assets and liabilities, including borrowing by Scottish ministers. That would provide important information about the impact of past decisions on future budgets and potential risk to financial sustainability. The Government has committed to producing a consolidated account covering the whole public sector in Scotland, but it is now overdue. Thirdly, performance reporting. The performance reported included in the consolidated accounts complies with reporting requirements and the accounts direction. However, the accounts still do not report on the performance of individual portfolios or the Scottish Government as a whole to the outcomes that it is seeking to achieve. There is a need for more detailed and transparent performance reporting, linking spending with outcomes in line with the Parliament's new budget process. Convened, my report on the 2017-18 consolidated accounts is intended to support parliamentary scrutiny of the Government's finances. It provides assurance and it also identifies a number of areas for further improvement. As always, we will do our best to answer the committee's questions. Thank you very much indeed, Auditor General. I am going to ask Ian Gray to ask the first question. Thanks, convener. I want to ask a lot more about the second of the newer elements of the consolidated accounts that you referred to, Auditor General, which was the support to private companies through the provision of loan finance and so on. You say in the report and reiterated this in your opening remarks that the publicly available information about the extent of those loans is very limited. One of the reasons that the Scottish Government has argued that it has to limit what is available in terms of information is commercial confidentiality. I just wanted to ask if you felt that was reasonable or if they were being over cautious in terms of withholding information for that reason. I think that there are two levels at which I would answer the question. First of all, the consolidated accounts do not contain very much information about any of the support to private companies. It is contained as notes to the accounts, but the Cabinet Secretary for Finance has provided information to the Finance Committee in more detail than what is included in the accounts in most circumstances. I think that there is a case for more transparency, not just about the loan support and other guarantees that are provided, but about the principles that the Government intends to use in making decisions about that support, the overall amount available, what factors it takes into account, what risk it is prepared to bear in doing it. So I think that there is a case for greater transparency in general. In relation to commercial sensitivity, I accept that there are circumstances where there may be a good argument for keeping information confidential for a short period of time, for example, while a significant negotiation is under way or while a significant contract is under procurement. Again, I think that that commercial sensitivity test should be applied sparingly and it should be time limited. I think that that is something that the Government should be covering as part of its framework. Given the inevitable risks associated with that type of support and the fact that the Government's appetite for providing it appears to be increasing over time, it is now important that Parliament has that framework that lets it understand better what is happening in practice. In terms of the transparency about the principles and the framework, is it right to say that you are making a specific recommendation to the Scottish Government that they produce a framework that outlines the criteria that they will apply and the potential scale of support for private companies? That is a specific recommendation. Yes, I have recommended that the framework should be public and it should cover things like the capacity for providing support, the risk appetite, the criteria that they will use in assessing individual cases. Presumably, you have not had a response to that recommendation yet because the reports the accounts are new. I do not think that we have yet had a response in the annual audit report process. I will ask Stephen to pick that up. We have had no confirmation yet that that forms part of the Government's planned response to the report, so we will continue to follow that through during the course of our audit work over the next few months. Maybe I can start by confessing my ignorance that the internal audit directorate provides the service to the Scottish Government and to a number of other public bodies who opt in to receiving their internal audit service in that way. Curiosly, what are the other public bodies? There is a range of public bodies. One that comes to mind, Mr Beattie, would be the Scottish Public Pensions Agency, Transport Scotland, Registers of Scotland and so forth. It is a host of public bodies, many of whom the financial results are captured within the consolidated accounts for the Government. It is clearly not NHS. No, you are right. It does not provide internal audit services to NHS boards, albeit it would cover the Scottish Government health and social care directorate as part of their work. Looking at paragraph 46, I am a bit alarmed that it says that you found that the internal audit directorate does not comply with significant aspects of the standards. In the next paragraph, you are talking about significant improvements being required, audit planning, audit documentation, audit reporting and management review. That is all pretty basic stuff. You are saying, presumably, that there is a deficiency there. I think that, certainly, these are important matters and ones that we have reported to the Government to its own governance arrangements and captured them in this report, too. The scope of our work is under auditing standards, and that requires us to look at the work of internal audit as something that external auditors would do routinely on an annual basis. Yes, we did identify some deficiencies against the public sector internal audit standards, certainly not all of them, but the ones that we did identify, we thought, were material and requiring improvement. I am also pleased to say that the Scottish Government internal audit directorate has taken that very seriously. They have invested in what they are terming a back-to-basics approach to ensure that there is on-going work to improve their arrangements. It is probably worth mentioning, Mr Beattie, that there has been a host of improvements and changes in the internal audit directorate over a number of years to transform the service and we have regular dialogue. We are confident that the work that they are now doing will improve the provision and standards to where they want them to be. Is there a timescale for that? They gave an update to the Scottish Government audit committee in September, and they are content to track that progress. For our own purposes, we will pick that up through our review of their work early in 2019. Out of interest, what is the reporting line for the internal audit directorate? The director of internal audit reports to the director general for Scottish Exchequer within the Scottish Government. He reports the outcomes of their work to the audit committees that they provide services to. For the Scottish Government it would be to the Scottish Government Audit and Assurance Committee and to the range of other audit committees for other public bodies that they provide services to. Willie Coffey I wonder whether, General, you could say something a wee bit about the forecasting that we have to use that you have mentioned in paragraph 28. For my sins, I serve also in the finance committee and there we see huge variations really between the forecasts that come from the fiscal commission and the OBR, the Office of Budget Responsibility, which is a UK agency. Now, as I understand that the Scottish Government is tied to using the forecasts that come from the fiscal commission but we do see big differences between the two, does that in itself present as with more difficulties in actually getting more accurate forecasts for the budget in years to come? One of the starting points for my report to you this time is that the Scottish Government's finances are becoming more complex and more volatile, more risky to put it crudely because of the new financial powers. That would be the case anyway because we are now relying on taxes raised in Scotland that reflect the performance of the Scottish economy relative to the UK economy, but the fiscal framework means that that volatility is even greater because of the interaction between the fiscal commission's forecasts of what is happening to the Scottish economy and Scottish taxes and the OBR's forecasts of the UK economy which affect the block grants adjustment and the way that the two of those moves can either reduce the impact on the Scottish budget or amplify it. I produced a briefing on the risk in the Scottish budget a couple of weeks ago, which was sent to the Finance Committee for its interest and information, but it is certainly one of the factors that means that financial management for government is more difficult and which I think reinforced the importance of the recommendations that I am making in this report for things like a consolidated public sector account and clarity about the principles that will be used for the new borrowing powers as well as support to private companies. It certainly challenges members of the finance committee convener that we get such variation in the estimates and forecasting between the two bodies. In relation to VAT, VAT assignment is coming soon, but as we understand that these are going to be based on surveys and estimates rather than any actual out-turn data, which we understand is very difficult to gather in and is not recorded as Scottish in that sense. Does that present as any difficulty, you think, in constantly dealing with survey data to estimate VAT assignment? I do not know any more than the Finance Committee does about the basis that will finally be agreed for apportioning VAT receipts to Scotland, but I understand your correct that it will be based on survey data and that clearly brings with it its own risks that will need to be managed. We will be watching closely to see both what the agreement says and the way that is implemented in practice by the two Governments. You also mentioned the common agricultural policy in paragraph 24, and you say that the value of that to Scotland is about £500 million. I do not want to make any political points about it, but when do we need to know that that money is going to continue to come so that it works its way into the Scottish budget? What is the time cycle for knowing that that will be made available? Anybody making firm predictions about the impact of EU withdrawal is on Dottie Ground at the moment? I will ask Stephen to tell you where we are in terms of the current position. It is probably not terribly much more tidal than the fact that we conduct an audit of Scotland's share of the UK common agricultural policy. We do that on an annual basis, and that is scheduled to conclude in February of this year. As the Auditor General suggests, the uncertainty as to what will happen post Brexit, whether there is any transitional period, will enable to play into the duration of that funding as it relates to Europe, and then what happens to whether the funding comes from the UK or the Scottish Parliament thereafter. Does it have to be announced by a certain point in the year, for example, in February every year, or something like that? Do we have to have an announcement of whatever the amount is by a fixed point in time so that it can start to work its way through the budget? Is it a bit more flexible than that? I think that the budget will be based on assumptions that the current EU funding period will continue in line with the assurances from the UK Government. However, what will happen in the event of, for example, a no deal Brexit at the end of March or changes to the UK policy for the way that funding is allocated across the United Kingdom? I do not think that any of us know that. It is another element of uncertainty in the budget that will need to be managed. I have a few more questions. I would ask members to try and keep their questions tight and witnesses likewise. Bill Bowman, please. I will give a couple of questions on the financial statements, if I could. A simple one to begin with. Notate an inventory of £106 million 2017-18, £106 million 2016-17. Are these coincidentally the same? NHS inventories, as it says. You give us a page number, Mr Bowman. 88? 88, thank you. Exactly that, Mr Bowman. It is a coincidence. A little bit of context, as best as my memory will serve me, is that it predominantly relates to theatre supplies and stock that individual hospitals hold. It is subject to audit each year and I think it is just that. It is not just the same stuff getting older. We are confident that it has been properly covered. If you turn the page to 89, you mentioned that some of the comparative numbers have had to be restated. As I understand, it happens because either you change your accounting methodology, therefore to make it consistent or because there is an error to be corrected. Are there any other restatements in the financial statements? I will maybe do my best to start with that point. I think that the note 9A gives an analysis of the loans or the non-current financial assets that the Scottish Government has across a range of categories, from loans to Scottish Water to housing loans, to the very specific one that the Government has sought to do in this note this year and a consequence of it to restate is to provide more detail and more transparency on the loans to farmers, as a consequence of some of the challenges from the IT system. I think that we think that that is welcome and appropriate to provide additional transparency in the financial statements. I am not sure if, in terms of other restatements, I am just going to check on the core financial statements. I am not aware of any restatements off the top of my head, but we can double-check that for you. I will prepare page 36. Not within the core financial statements, but in relation to the First Minister's benefit and kind of bute house, there was a restatement required to the 2016-17 figure. That was a result of an error identified by the Scottish Government in relation to the calculation of the benefit and kind that is provided for accommodation at bute house in Edinburgh. The restatement was required because of an error over a number of years, and the Scottish Government picked us up in August last year and held discussions with HMRC to arrange for a back payment of £16,765 to cover that. As part of our discussions with the Scottish Government, we asked that the prior year figure should be restated to bring that into line with the current years figure in 2017-18. Would that settlement figure be borne by the public purse or by the First Minister? The Government took the decision for the Government to meet it because it was an error in the civil servant's calculation of it, which would not change the fact that it is a personal liability of the First Minister's, so their taxes have been paid by the Government. The adjustment of the benefit and kind for the use of bute house, given the period over at which it occurred, and the relatively small amount of the money involved, the Government took the decision to fund it directly. Auditor General, just on the borrowing that you talked about in your opening statement, you told us that the Scottish Government borrowed up to its limit this year for capital funds to £450 million. Overall, the net borrowings are £1.036 billion. You said in the opening statement that there was no borrowing policy in place. I have written down the word that it needs to have one. Should there be a borrowing policy put in place, do other jurisdictions have such a thing? How imperative is it that there is a borrowing policy? The new borrowing powers are a significant element of the financial powers devolved under the Scotland Act 2016. There is an overall £3 billion cap for borrowing, as you say, a £450 million annual limit. The Government has now net borrowing of £1.036 billion, so significant amounts of money. I have made a couple of recommendations relating to the new borrowing powers. The first, as you quite rightly say, is that I think that there should be a statement of the policies and principles that the Government will apply in using those borrowing powers, both to guide its own decision making and to support parliamentary scrutiny of the budget and the financial statements of the Government. The overall total of £3 billion is a relatively small amount of money, and it is important that the Government is thinking over the long term about how it wants to use that to support its investment in the assets and infrastructure for Scotland as a whole and that it is making sure that it is drawing it down at the right time rather than incurring borrowing before it needs it with the associated interest costs that go with it. Other jurisdictions and other Governments have that. I think that it is a good part of good financial management. In many ways, it is close to the prudential approach that applies to local government borrowing, where councils are required to have a policy and a long term plan for the way in which they will use their ability to borrow. I think that it is entirely consistent with good financial management. Have you recommended this previously? If so, when and what has happened as a result? I think that, from memory, it was one of the recommendations in my report on the consolidated accounts last year, as we knew that the borrowing powers were coming along. We do not yet have the publication of a policy and principles from Government, and it is something that the committee may want to follow up with them. I also think that it is worth the committee noting that that borrowing does not appear on an audited account anywhere. The borrowing comes in and out through the consolidated fund, which is a cash account and does not have a statement of financial position or a balance sheet, as it is more commonly known. It is not recognised on the balance sheet within the consolidated accounts, and I think that, again, for transparency it would be a good move for the Government to fulfil its commitment to having consolidated public sector accounts, which includes the balance sheet with all its assets and liabilities. Thank you for that. That is very useful. On that borrowing policy, do you get any sense of when it will be done, when it will be in place? Do you want to add anything? Under consideration by the Government as to how and when it will be developed, much of that, we expect, will fall to the work of the new directorate for Scottish Exchequer to fulfil as part of its core responsibilities. Earlier answers, Mr Kerr, are something that we are keeping a very close engagement with Government on over the course of the next few months. The first one is that, even before the new borrowing powers, there was a limit of 5 per cent that no more than 5 per cent of the Government's revenue could be used to fund repayments for borrowing PFI deals and all the rest of it. Is that still the case? If it is, is there a case now for reviewing that 5 per cent? For example, if that was allowed to go up to 6 per cent, it would allow a 20 per cent increase in capital spend in principle. Is that something that is still happening? I will ask Michael Kerr to come in in a moment. The 5 per cent cap is still in place and it is one that the Government has set for itself. It is not like the 450 million annual cap one that is within the fiscal framework. I think that it is closely linked to the questions that Mr Kerr was asking about a framework for borrowing. I think that it is part of the overall capacity that the Government has for investment and I will ask Michael Kerr to update you on where we are with it. It was just really to say that it is still in place, the medium-term financial strategy or Scotland's fiscal outlook, as it was called, that was published over the summer by the Scottish Government outlines the projections and where they are at and plan to be against that 5 per cent limit. I think that if memory serves me right, it is close to the 4 per cent at the moment. As the Scottish Government borrows more through capital borrowing, so the 450 million that was referred to in the report for 2017-18 will increase that more towards the 5 per cent. Obviously, as repayments are made from borrowing previously, that will have the opposite effect as well. As we know from members who will be aware from the 2018-19 budget, the Scottish Government plans to borrow a further 450 million, which again would increase that pressure. There are some changes to the status of, for example, regulatory asset-based funding for rail projects that change the status of that, and we still have to find out from the Government how that will affect the 5 per cent affordability cap. Obviously, as the Government increases its revenue in the last year of the increased income tax, the revenue that you would expect to go up is 5 per cent of a higher frigate and gives you the ability, if you increase revenue sufficiently, to fund more than 5 per cent. So, would it be prudent to look at that 5 per cent figure as part of the review and designing a new policy for the new circumstances? I think that the Scottish Government, as they are outlining a policy for borrowing, will look to the 5 per cent affordability cap. As a self-imposed cap, it has to be said, so it will be within their gift to raise it or lower it. As you say, as the total budget increases or maybe decreases, that obviously affects the underlying amount behind the 5 per cent. Can I go back just to follow up on Mr Coffey's question? We have seen the issues around getting our share of the EU agricultural money, but there is a wider question whether it is next year or the start of 2021 when we will stop paying our annual EU contribution at current levels. It will obviously be substantially lower. Spice has indicated that, if you take the existing gross figure, Scotland's share of EU contributions from the UK annually is about £1.6 billion. If we got that money and we funded every single EU programme that exists in Scotland right across the board, we would have £800 million a year left to spend on other things. Once we know those figures, is there any work being done in looking at the impact when we are looking two or three years ahead of getting our share of the EU-UK funding? That is the question that you have to ask Government. That is work that I imagine they would be undertaking. It is not something that we have done any work on at this stage. Can I refer you to Exhibit 1, please? In your report, Auditor General, on page 6, is the total expenditure resourcing capital. I just wanted to clarify where the local government spending comes. Is it under each portfolio headline? The main local government settlement is under the community social security inequalities line in the table there. The money that is given to local authorities that is then spent on education, is that under communities social security inequalities or is it under education and skills? Most of it is within the settlement and is therefore under communities in the line that I refer you to. On the education and skills budget line, it shows the largest underspend of any Government department, but we understand from the First Minister that it is her number one priority. That seems to me a little strange. Is there any explanation that you have for such a large underspend? The accounts themselves include some information about them on pages 53 to 63, but I will ask Stephen to talk you through the specifics of that line. Thank you. Page 55 of the consolidated accounts follows a similar format whereby all of the individual departments within the Scottish Government analyse their revenue and expenditure over the course of the year. The set format, convener, is that any variance against budget that is over £3 million comes with an accompanying explanation. Specifically, there are a couple of explanations around the education department, one of which relates to the calculation of student loans, which is captured under that budget heading. I will just quickly refer to my notes in terms of the other difference very briefly. One is another one in terms of the lower than anticipated funding required by the Scottish Funding Council during the year. The detail of that and what lies underneath that is something that we would probably need to either come back to in writing or maybe for the committee to explore directly with the Scottish Government. I think that I would like to do both. Could you come back with more information in writing, Mr Boyle? That would be okay. Do members have any further questions on the consolidated accounts for the Auditor General and her team? Okay. Before we close this meeting, I would like to put on record my thanks to Ian Gray, MSP, for his service on the Public Audit Committee at Ian's last meeting with us today. I am very sorry to see him go and thank him for all his scrutiny. I will close this meeting of the Audit Committee.