 I welcome everybody to this. The second meeting of the Public Audit Committee in 2023. The first item on our agenda is for members of the committee to consider taking agenda items 3 and 4 in private. Are we all agreed? Agreed. We are agreed. Thank you very much. The principal item that we have on our agenda this morning is consideration of the 2021 to 2022 audit of the Scottish Government's consolidated accounts. I'm pleased to welcome our witnesses this morning, the Auditor General for Scotland, Stephen Boyle, who's joined by Michael Olyphant, who's an audit director, and by Helen Russell, who's a senior audit manager at Audit Scotland. We've got quite an extensive range of questions to put this morning, but before we get to that Auditor General, can I ask you to make a short opening statement? Many thanks, convener. Good morning, committee. I'm presenting this report on the 2021-22 audit of the Scottish Government under section 22 of the Public Finance and Accountability Scotland Act 2000. The Scottish Government's annual consolidated accounts are a critical component of its accountability to Parliament and the public. The consolidated accounts cover over 90 per cent of the budget that was approved by the Parliament for that year. The accounts show what the Government spent against each main budget heading and the reasons for any significant differences or variances. They also show the assets, liabilities and other financial commitments that is carrying forward to future years. My independent opinion on the consolidated accounts is unqualified. That means that I'm confident that they provide a true and fair view of the Government's finances and that they meet legal and accounting requirements. I would like to highlight three areas of my report. The first is on budget performance. Net spending for the year was £49.2 billion, £2 billion less than budget and underspend of just about 4 per cent. Spending levels remained significantly higher than pre-pandemic financial years with around £5.8 billion of the 2021-22 expenditure relating to the Covid-19 response. The second area is on financial sustainability. The Scottish Government is facing intense challenges in managing its finances as tough for economic conditions such as higher inflation and increased interest rates emerge. Public sector pay issues remain unresolved in several key sectors. The demand for health and social care services remains unsustainable and the number of people accessing social security benefits is significant. Those highlights are just some of the areas that will add further financial pressures both in the current year and beyond. I welcome the Government's increased focus on financial sustainability and the longer-term focus on managing its finances. It will be important for the Government to ensure that its policy choices and spending commitments are fully costed in forthcoming budgets and to ensure that its approach to using reserves is more transparent, particularly where there are funding implications for the wider public sector. The third area is on financial reporting. Last year, the Scottish Government committed to a revised timetable for the development of a devolved public sector account on a two-stage basis. However, progress in finalising the stage 1 draft account remains slow. The need for a comprehensive assessment of the state of Scotland's public finances has never been greater and I am therefore asking the Scottish Government to move more swiftly to fulfilling their commitments in delivering this important account. As ever, my colleagues and I will do our best to answer the committee's questions this morning. I am going to turn straight away to Craig Hoy, who has questions about financial management issues. Craig, you report identifies a £2 billion underspend across the capital and resource budgets. I wonder whether you consider that level of underspend to be reasonable. Is it reasonable to reflect and expect that the reason for a significant portion of that underspend relates to the Covid pandemic and the expenditure of those funds, especially given that, effectively, we are in year 2-3 of Covid, so we should have more predictability in the way in which those funds are dispersed? I will bring Michael in in a moment, Mr Hoy, just to set out some of the Covid dynamic of the underspend. In our paper today, our report at Exhibit 1, we look to set out the range of underspends across different departmental headings that contribute primarily to a resource underspend, so a resource underspend of just under £2 billion. There are two main departmental lines that contribute to that more significantly—fans and economy, education and skills, a third net zero and transport and energy. What is true is that the underspend is larger than we have seen in previous years. We make the connection in our report that Covid and some of the unpredictability that I think we have been speaking to the committee over the past year, 18 months or so about how moneys would be spent for Covid and then when they were actually delivered. As at the year end—this is something of a snapshot that relates to the end of March 2022—moneys that had not been spent would be reflected in that underspend. We go on to the report. Michael might want to say a bit more about this. What that means is that, as the public health crisis has ebbed that moneys that had been intended for a Covid response might not necessarily now need to be used in that way and will be available for other purposes. Before passing to Michael, the last point that I would make is that there is a transparency component to that as well. There is a visibility of what the money was intended for and what it will now be used in future. We are again making the point in the Government to improve the transparency of how it spends money relative to what was originally intended. I will pause, Michael. I want to say a bit more about the Covid dynamic. In relation to overall underspend, although it is higher than it has been in recent years, it is still low in percentage terms by comparison previous years underspends have been just over 1 per cent. The underspend that we have seen in the last year is 3.7 per cent. The Government cannot overspend its budget, so it has quite a challenging job to get underspend as low as possible. Looking at the underspend, it is important to be aware that only a proportion of that is money that can be that is effectively cash, and that is transferred through the Scotland reserve into subsequent financial years, which the Scottish Government has budgeted for. The vast majority of it, including £674 million in relation to student loans, are technical accounting adjustments. They do not represent cash. For example, there was £300 million in relation to capital borrowing that was not used. That decision was made after the last opportunity to amend the budget, so your underspend ends up being higher than you perhaps would otherwise have wished. The spring budget revision represents the last opportunity to amend the budget for the year. Looking at the Covid-related funds, it appears that business support and energy programmes are the two areas where there was perhaps a significant underspend. Does the scale of the underspend in those areas reflect any kind of structural issues in the way those funds were built or any weaknesses in the approaches to the programme planning? For example, in relation to some funds that constituents contacted me about, the window of opportunity to apply for them was very short. Therefore, there was underspend in relation to those programmes initiatives because they were undersubscribed. Is there an issue perhaps in the way that those funds were constructed? Not that we're aware of or not that we've found during the course of the audit. Given the nature and the dynamic of the Covid pandemic as it emerged, for example, the Omicron variant that emerged towards the end of last year, the Government has to move quickly to pull funds together to make available funding for these different streams. I think that clearly they're spent less on what they thought they would, but that money is not lost. It's then re-routed to other parts of the public sector. For example, the £184 million underspend in business support schemes and also the self-isolation support grant, they've got to be led by applications, so the demand has to be there in order for the amounts to be issued. Obviously, there are rules governing how much can be carried over from one year to the next into the reserves. Is there a risk that any money was lost during that process, so can it all be redeployed into other areas? The final amount is yet to be confirmed, but it's within the levels that it can put into the Scotland reserve and draw down, and it's in line with what the Government had announced to the provisional outturn statement back in June, around £650 million to transfer into fallen years, so it's within the tolerance levels of the Scotland reserve. In relation to the capital expenditure, obviously, there was a higher percentage underspend, I think, of 7.5 per cent. That focused on energy and housing capital programmes. Is that underspending any way going to jeopardise or putting any risk in relation to meeting targets and outcomes in two quite important areas of the public policy landscape? I think that it's hard to give you that definitive assurance one way or another. Across capital programmes, one of the things that businesses, public sector and private individuals have seen is that the cost of capital programmes is increasing. There is a building inflation component that is making these projects more expensive. It's not to say that the cost will be fixed or stable. I think that we can safely say that the cost will be increasing. That there's an underspend probably reflecting elements of the progress towards the delivery of the programmes. The money's not lost, it will be there, but probably there is a need for public bodies to make that assessment regularly about the future cost to deliver their capital ambitions. Going back to Covid and the issue of transparency, there was a huge amount of money that came forward to support public services and the public through the £5.8 billion during the 2021-22 period. Do you consider it that the Scottish Government has done enough to respond to concerns around transparency and the reporting of Covid-19 spend? Is there any legitimacy and fears that money was being squirled away that should have been destined for Covid projects for other areas of Government expenditure? I think that we've been pretty consistent on this. It's a recognition that the systems of budgeting, budget amendments and then subsequent financial reporting weren't designed to cope with the volume of change that we've seen over the course of the pandemic. I've lost count, Mr Hoy, but I remember previous discussions with the committee that there were many hundreds of separate funding arrangements at the earlier stages of the pandemic. Our budget reporting system doesn't allow for that level of volatility. We've made the recommendation and we repeat the general transparency point in today's report that the need to take stock of the experience of the pandemic and is there enough transparency and visibility for Parliament and for decision makers in public bodies to support good, effective, high-quality public spending? On the question as to whether or not the moneys haven't been used, as Michael said, ultimately, within the confines of the Frisco framework, underspends whether or not a technical nature, as we refer to in student loans, will be made available in subsequent budget years through the Scotland Reserve provision. We make one final point. I think that it would be helpful for the more visibility around the Scotland reserve that the numbers are. I think that the Scottish Government's consolidated accounts would be a useful place for which to set that out more clearly. On past expenditure, as we come through the recovery, what further action do you think would be appropriate for the Scottish Government to take in order to address any remaining or ongoing concerns around the transparency of those Covid moneys? We think that it would be helpful to set out the totality of the Covid-related spending, the subsequent budget announcements and, ultimately, what we have achieved in terms of outcomes for that spending. How the Government chooses to do that would be a matter for them to set that out. It probably speaks to the point that we have made in our more recent reports that it is becoming harder to track Covid-related activity in terms of public spending. You will know, Mr Hoy and the committee will be familiar with, that there is no separate Covid-related budget as there were in the previous iterations, but there is still Covid-related activity. We are seeing some of the tale and its impact on public services. I think that rounding that off would be a helpful point to support Parliament's understanding in public scrutiny. From an audit perspective, do you plan any further work in relation to that or will you wait to see where the Government gets to and then just report through approaches such as this? We are giving that some thought at the moment as to how best to round off our specific Covid-related work. The last paper that we took to the committee recognised that there were still some unresolved public spending, so we want to just to fulfil our obligations in terms of Covid, so we hope to clarify our thinking in the next few weeks, and we will update the committee in due course. Willie Coffey wanted to come in in this area as well, so Willie. Thank you very much, convener. On the education underspend that was discussed a moment ago, it represents almost a third of the entire underspend, but it turns out that it is not actual real money. It is a technical adjustment. Mr Olfen, you gave a figure of £674 million. Why is that so high? That is a huge technical adjustment. Michael Russell is well placed to talk to the committee through that. In general terms, it relates to the scale of student loans that is reflected in the Scottish Government's accounts as a significant number. Any marginal changes in interest rates that apply to that reflect a significant adjustment. That is in broad terms Michael's better place to give a more detailed answer. The student loans model is a very complex model. It relies on a number of external factors, a lot of economic variables. Every year there is a charge to the model that represents the cost to the Scottish Government of issuing loans. That is based on the likelihood that loans will be repaid, so it is linked to future earnings and so on. What we have seen in this year that has been quite unusual compared to previous years is a big movement in interest rates. At the start of the year, the RPI was 1.5 per cent. It moved to 9 per cent during the year. That really impacts the calculation when you are discounting the values back to the present day to derive a charge. That is where you get a very significant adjustment, but it is not cash. It is a technical adjustment that is required in the accounts to represent the cost of the Scottish Government issuing loans. The difference between those two figures is the £806 million reported in the report and your figure of £674 million. Is that deployable elsewhere? Can that be carried forward to other expenditure elsewhere topics or items? Is it got to be for student loans? It will be other parts of the education budget. Colin Beattie has got some questions, but I know Colin has also got to go and give a presentation to another committee. Do you want to take your questions now or do you want to leave it? I think that there is not time at the moment. That is absolutely fine. Auditor General, can I turn to a section of the report that seems to be a recurring section of the report? That is the financial position of the Crown Office and Procurator Fiscal Service. People will have no doubt been aware of outstanding cases against the Lord Advocate in connection with the acquisition of Rangers Football Club. The report says that the cases that have been resolved total £36.5 million in costs up to March 2022 and a further £24.5 million are provided in respective cases still to be finalised. The question is one, what do you think that means for the overall financial position of that office? Secondly, could you maybe update us on where those outstanding cases are and are there still further cases yet to be settled? I will say as much as we are able to. The position that we have set out in the report is consistent with our understanding and my colleagues' engagement with the auditors of the Crown Office and Procurator Fiscal Service. Helen might want to come in a moment and say a bit more about the detail of that. What we set out in the report and the figures that you quote are the two components. One is the settlement arrangements that have already been entered into of £35.5 million. An assessment that has been made of the likely additional costs, the amounts that have been provided, brings us to a collective figure of around £60 million of public expenditure that has been paid as a result of the arrests and prosecutions of those connected with the acquisition of Rangers Football Club. You will know, convener, that the Government has committed to holding a judge-led inquiry into the circumstances. That is why we have chosen to report the public expenditure related to that through the Scottish Government, section 22. We have not taken any view of whether there will be any further audit-related reporting in respect of the matter until we see the conclusion of any judge review of the circumstances. I will pause. Helen might want to add a little bit about the other discussions that have been had with the auditors' issuitions. As at 31 March 2022, £11 million was paid during that particular year, £24 million had been spent in the previous financial year, which totals a £35 million. The provision of £24.5 million refers to a few more cases that are still outstanding of which you will probably be aware that a payment of around £15 million was made in October of 2022. That reduces the provision somewhat down to about £9 million at this point. That is probably all that I would want to add just now. I am happy to take any other questions. You described in the report the £60 million additional pay-out from the Crown Office and Procurator Fiscal Service as unplanned costs. Can you give us an idea of how much £60 million compares to the annual budget of that public service? I can register the committee's attention to Exhibit 1. The last line but one in the table sets out the budget of £180 million for the Crown Office and Procurator Fiscal Service relative to expenditure of £185 million, so an overspend within that budget line of £5 million. The Government, together with the Crown Office, clearly has an obligation. As they have made payments out to those who have pursued, in respect of the rangers case, there have been subsequent budget adjustments during the year to allow for the additional liabilities related to it. It is not insignificant as it relates to the overall running of the Crown Office. As Helen mentioned, the additional payments being made in October of 2022 in this new financial year will also need to be reflected in the budget and the calculations for the 2022-23 year. The report notes that the Scottish Government can borrow £450 million per year up to a cumulative total of £3 billion for capital spending. It then says that capital borrowing in 2021-22 was £150 million and has been below the £450 million threshold in each of the last four years. It also says that there is limited information on how capital borrowing is being used. The Scottish Government can also borrow for resource spending up to a maximum of £300 million per year and up to a cumulative maximum of £1,750 million. Is the Scottish Government sufficiently transparent about its decisions to undertake capital and resource borrowing? We think that there is more that the Government can do in setting out its capital resource borrowing and what it is using to deliver outcomes as part of its programme of work. The parameters for borrowing are set within the fiscal framework between the Scottish Government and the UK Government in terms of resource and capital borrowing, but there is insufficient detail within the consolidated accounts. I should say that there are some disclosures within the Scottish Consolidated Fund accounts, which set out and we have used the numbers in the section 22 report to reflect that. However, in the use of a single document of the consolidated accounts, we do not think that there is enough detail. The predecessor committee, the Public Audit and Post Legislative Scrutiny committee, took evidence from Government officials back in 2018-19, where they explored the relationship between capital borrowing and what it was being used for. Our position remains the same. There needs to be a clear transparency and a clear link between what capital borrowing is being used and which projects it has been used to support. Our expectation is that that information is available. Ultimately, to secure the borrowing from the National Loans Fund and the relationship with HM Treasury is that Government in Scotland would be placed to set that out for what it intends to use. We think that that could be better set out more transparently than it is currently being done. What better information could be provided to support effective scrutiny in respect of the use of capital borrowing powers in specific projects that it is supporting? Exactly that. There is not a clear enough description of which projects the capital borrowing is being used for. Instead, it is in totality of overall borrowing arrangements. Given that there are specific requirements, thresholds and caps on capital borrowing, we think that it would be a stronger financial management description and more transparent if that was included within the consolidated accounts for Government. That sets out what has been borrowed and then how that money is being used. That remains our position that there is more transparency that could be achieved. Do you have any concerns in relation to the increasing level of repayment charges in relation to the borrowing and does the Scottish Government take any view on what it is considering reasonable? I will turn to Michael in a moment if there is anything that he wishes to add on this point. What is clear is that the Government is borrowing more as we are now a number of years into this fiscal framework. I appreciate that there are discussions on going between the Scottish Government and the UK Government about any modifications to the fiscal framework. As borrowing levels are increasing, that comes with further repayment requirements. We have seen volatility in interest rates and inflation rates. What it all speaks to is a more complex picture that requires careful management. We know that the Government is within the confines of the fiscal framework limits, but it requires careful management as the number of projects in borrowing increases. Not just for Government, but for Parliament and for the public, that is more clearly set out. Michael is closer to some of the detail of how that works and he may wish to say a bit more. I think that at this stage our concern would be that we are just aware of the repayment charges that go with that. Repayment the capital as well as the interest rates. We have noted that it is £95 million in the last financial year. The more the borrow, the more the repayments will increase. That takes up a bigger proportion of your available money in each year. There is a balance to be struck in the Government in determining how much it will borrow in each year. We need to look at the levels of repayments over a number of years, the sources of borrowing and, for example, we talked about capital. The default position is that you would borrow capital over 10 years in line with the fiscal framework. The fiscal framework allows the Scottish Government to agree with the UK Government either a smaller time or a longer time frame. Those all need to be factored in to the overall model and the repayments that would come with that. It is something that the Government needs to consider on an annual basis in terms of new borrowing, but also the level of repayments that have to make as part of that year's budget. On investment in private companies, it is mentioned. Presswick Airport, Ferguson Marine Port, Glasgow Holdings Ltd, Burntonsland Fabrications Ltd, BiFab and Lechabur aluminium smelter. What are the financial implications for the Scottish Government for continued failure to find a buyer for the airport? We set out paragraph 32. Some of the history and the totality of Government support since the airport was purchased by the Scottish Government in November 2013, up to the end of March 2022, provided loan support of £43.4 million. As any loans that a lender makes, they have to assess the recoverability, the value of that loan and Government's assessment, and that is now valued at £11.6 million. On paper, it is an important point to stress, and on paper, the loss of £31.8 million. The interest in that has been accrued at £7.4 million, which is currently valued at nil as well. Going back nearly ten years, the valuation reflects a loss of over £31 million. What we do not have detailed insight, deputy convener, is to what comes next. We know that there had been discussions to find a buyer, but that has not yet come to fruition. I do not have an annualised figure in my mind to see what the Government's support will mean for the press week. On an annual basis, many millions of pounds of public expenditure are being used to support the airport, to sustain jobs and services within the airport. That will remain the case for as long as it remains in the public sector hands. Paragraph 32 notes that the Scottish Government issued a 25-year financial guarantee contract to Cymic Lachabor hydropower limited in 2016. It also mentions the complexity of the financial arrangements. What are the implications of the continued high-level of provision in relation to the Scottish Government's financial guarantees to the smelter? I will bring Michael in on this. It is probably worth to set out in a bit of detail, in addition to what we have in the paper, the complexity that you refer to of the arrangement, the Government's support for the arrangement and the financial consequences of it. There are both annualised implications and longer term. What we have seen through our audit work is that we are satisfied with the disclosures that the Government has made in the accounts, both in terms of the asset and the fee for the guarantee, but also its longer term potential liability. All of this is complicated, of course, by some of the external factors relating to the variety of companies and their funding arrangements associated with the smelter. Before passing to Michael Deeb to convener, I reiterate my commitment and long-standing interest in this, and we continue to monitor the progress with the investment and the viability of the smelter through our audit work, and we will report further as necessary. I will stop. I think that Michael might want to come in on some of the detail. The financial guarantee contract is still in place. The 25 years will continue unless something happens. That is where the uncertainty is. It really relates to the financial standing of parent companies, so GFG aligns, but also the liqabur hydro and the smelter itself. At the moment, all payments are up-to-date as far as our audit work is looked at. Where is an insolvency event or something that would trigger a call in the guarantee? That's where a series of events would kick in, for example. If there was a call in the guarantee, the Scottish Government would have to pay Greensill, who is a special purpose vehicle, who purchased all future payments to the hydro coal from the smelter. Those were bonds that were placed with investors. The Scottish Government would then claim that back from GFG aligns, but depending on the financial position there, that would probably be unlikely. The Scottish Government would call on the security package that involves the land, the smelter and the assets itself. Full exposure is reduced by the value that it would get from the potential sale, and that arrives at the provision that is within the accounts. At the moment, nothing has happened to trigger such an event, but it is still quite risky, because, as we know, GFG aligns through a global refinancing under investigation by the series fraud office. There is still that risk there, and that is why it has to be accounted for appropriately. In March 2022, the Scottish Government published its business investment framework to outline its principles and approach for decisions about future investment in private companies. Does it provide a sufficiently robust framework in relation to informing decision making in this area? I think that the first thing that we say, and Michael may want to come and see, has had much involvement in this, is that we welcome the progress that we now have. The Government now has a business investment framework to support any investments that it or its public bodies will be making in private companies. The reason why it was important, and why I myself am a predecessor, is that we are commenting that it felt like a real gap in terms of Government's investment architecture, probably borne out by some of the investments that we refer to in the paper that have not been successful and are unlikely to deliver value for money. Having said that, Deputy convener, we go on to say in the paper that we think that there is scope for further development of it in terms of financial controls over interventions, a rounded assessment of how the investment will support public jobs and growth opportunities, and then the overall balance and component of risk appetite. We can define a qualified welcome as it is important that it is now in place, but we think that there is opportunity for the Government to do more to satisfy itself that provides it with the framework that it is investments. The investments that the Government is likely to make will be those at a higher risk, so there are likely to be opportunities that have come their way when companies have exhausted other opportunities, whether it is private finance or other public sector support through enterprise companies. Therefore, in matters that this is tight and all the risks and opportunities are properly weighed up, we think that there are a couple of final steps that the Government can do just to make sure that that is rounded off in respect of its management of risk. Is there sufficient transparency in relation to the Scottish Government's investment in private companies, including the rationale for investment, and the reasons behind failed or rejected bids for subsequent sale of investments, and how could transparency in this area be improved? I think that we are trying to be slightly pragmatic about this, because we recognise that these are commercial transactions and there is an inevitability that many of those conversations need to take place behind closed doors, so that respects the commercial confidentiality of it. Balanced against that, it is public money. These are public investments. The public Parliament will want to be satisfied that the Government is getting best value for its investment. Transparency has to happen, but it also has to happen at the right time. It is a long-standing point that I have made, and I know that Scotland has made, that there needs to be improved transparency around investments and outcome and exit arrangements for investment in private companies. I am going to bring Willie Coffey in, but before I do, can I just go back to what you said about the business investment framework? I think that you said that it was almost there, but if I look at the summary of the document, it says that this guidance is not exhausted because each investment decision is different and will have its own unique characteristics. That sounds like a continuation of the approach that has been followed, which is all case by case. Does that sound different to that to you? Willie Coffey speaks to the point that we refer to in the paper, convener, that there is an implication of flexibility therein and perhaps too much flexibility to support a consistent review and assessment of what Government's intended outcomes are for their investment. There is clarity on public spending, the totality of what will be achieved, whether it is growth, job opportunities and management of risk. We would not want to say that there has not been progress. I think that our assessment is that Government and its officials are in a better place to make effective investment, but we do think that there are a number of steps missing and one of those includes the extended flexibility on offer. Further into the document, it talks about the comprehensive business case that needs to be made in order to give the green light to Government intervention in a commercial business. It talks about the strategic case, the economic case, the commercial case, the financial case, the management case. Do you think that any of those cases were met, were the subject of proper scrutiny in those investments that are listed in your report? I think that that is relatively straightforward to say that the investments listed weren't subject to the rigor that the Government is now trying to bring in through this enhanced business investment framework. It probably speaks to our view that progress has been made. It is all well and good to have it down on paper. The test will be when future opportunities are applied against the new investment framework. I think that this is the harder point to the Deputy Convener's question about transparency. Where the investment is being made, the Government will want to satisfy and report that it has applied all of these tests, but it would be equally valuable where they have not chosen to invest. There is evidence that the framework was robust and led to a point that investment was not deemed appropriate because of the extent of risk. I appreciate that it is harder, but it is something that we would encourage Government to think about how it could best illustrate both where they have chosen to and not to make those investments. Are you aware of any instances where the Government has decided against making an investment according to those criteria since that was published in March? I will bring colleagues in if we have any examples to mind. We know generally that, perhaps before the framework, the Government had decided not to make some investments. The Government receives requests repeatedly from businesses where they enter into financial distress. There have been some high-profile examples of where that is not the case. In terms of more recent, since the framework has come into fruition, if not, we can check our records and come back to the committee in writing. Part of that is the development of the strategic commercial assets division that has been created to effectively carry out the work that is behind the framework. We expect that to be a key part of the work of that division. It is something that we will be looking at as part of our on-going audit work to see both the investments that they are considering, albeit with the element of commercial confidentiality, particularly in the cases in which they are committing public funds, but just an indication of where they are deciding not to invest and the reasons for that. Some of the reasons may well be that they can use enterprise agencies, they might get access to funding from banks and so on. The support is not always of a financial nature, but that will really bring to fruition how successful the framework has been. As Auditor General said, we feel as if there are steps that it could do to strengthen the framework beyond its current status. I just want to touch finally on the situation with the GFG Alliance. I welcome your commitment this morning, Auditor General, that this is an area of continuing interest to you. In the financial year covered by this report, the supply chain banker Greensill Capital, the supply chain banker to GFG Alliance, went into administration. As Michael Olliffant mentioned, the Serious Fraud Office is looking at the GFG Alliance around concerns over fraud and money laundering. GFG's own audit is quite unusually resigned. I think that the finance director left. It has been described by another parliamentary committee as being opaque in their corporate structure. I understand that the most recent accounts for the Lucarbus Melter are not going to be audited. Do you have a view about the overall risk that we now seem to be facing here? All those are concerning factors, convener, about the transparency and complexity of the arrangement. As Michael Olliffant describes, there is exposure to the Scottish Government in annual terms and totality that is set out in the accounts. At the initial point of the deal, they took steps to safeguard their risk. There are guarantees and there is security in place. However, it is unclear yet what all of those factors will mean about ultimately whether that complexity of transaction will have to be unraveled. Ultimately, we are keeping a close eye on it, but you can see from the detail that is set out in the report and you describe it as a volatile set of circumstances. As we have seen in other fast-moving cases, that can all unravel potentially quite quickly. We know that the Government is watching carefully what it means. We make reference in our report the role of Highland Council, similarly to secure the provision and the continued operation of the plant. Beyond our on-going commitment, convener, we are keeping a close eye on that and, as necessary, we will be undertaking further audit work. As the Auditor General, do you have a view about reports that the most recent accounts of the Lacharbus melter are not going to be audited? I think that that is concerning. We would agree that for all investments that public bodies make, we would want to see that level of transparency. Not having a set of accounts audited is a concern. It matters therefore that Government, as one of the investment partners, satisfies itself about the integrity of its investment. That is my overall point, as we continue to engage with Government so that it can satisfy itself about the integrity of its investment and its associated liability. It is very much part of our work during the 2022-23 audit. Willie Coffey, you wanted to come in. Thanks again, convener. Auditor General, can I take you back to press week air? Of course. Briefly in some of the comments that you have made in relation to the airport, and you have said a couple of times in response to questions that this investment and maybe one or two of the others that have been discussed are unlikely to achieve value for money. I am interested in how Audit Scotland defines value for money, because when you look at the wider circumstances at something like press week, you can see that the investment with the Government saved the airport, saved the jobs. That also harmed at Ferguson's, where the workers agreed with that. The investment saved the jobs. Their shared growth deal depends greatly on the existence of the airport to support the wider economy in the aerospace industry there. The Mangata investment is coming, bringing in 575 jobs, which probably would not come if the airport was not there. Given those wider circumstances and all those impacts in the economy, how is it possible that you can say that it is unlikely to deliver value for money? We have informed an overall value for money judgment on the investment in press week airport specifically. We have come closer to being definitive about some of the other investments, but we have qualified our assessment on it. What we have not done is made a detailed review of some of the investments in the way that we have had a more focused interest in other areas, such as our report on the Clyde of Hebride in Ferries, where we have said that it wants that effect unlikely to deliver value for money back in our report in February. In terms of the original investment—we have discussed some of the figures in the press week already—when the investment was made, we were clear that the Government had not formed a totality of its understanding of what the overall investment would be, what the intended outcomes for that investment would achieve. Typically, as we have seen from the new business investment framework, all those components need to be factored in at an early stage. We are not challenging the value that has come from the new jobs that you refer to the airport, but those were not part of the assessment at the time that the original intervention was made. That is why we are welcoming a stronger framework to make assessments on what the intended outcomes most crucially would be and part of that is value for money. If there is a qualified position from us absolutely at this stage and we are in the event of undertaking any further work in terms of performance, audit and value for money, that would be part of our thinking. Is it a matter of getting the money back that you invested? Is that the principal concern for years on at Scotland? Is it about getting the money back when you look on balance at that investment and the other investments and benefits that I have described there? For you, is it principally about financial transaction and getting that cash back at some point? No, it is not. It is not about getting the money back. It is about when public money has been invested that the intended outcomes are clear as to what is going to be achieved from that. Clearly, those are long-term commitments. They have taken many millions pounds of public expenditure. Really, for any investment, whether it is public sector or private sector, we are investing a lot more. It really goes back to business case. What do you intend to achieve from that? For many of the investments that we set out in private companies, the intended outcomes were less clear right at the start. The financial value is one part of it, but much more significantly for all public investment is what was actually achieved, what was hoped to achieve. That is the measure that all of our audit work is based upon, where the policy objectives deliver and ultimately produce value for money. I think we are going to turn now to you again because I know that you have questions around the replacement for European Union structural funds and how they are going to be audited and overseen. So, Willie, back to you. Thank you again, convener. In order to general, it is really about the section in the report about European structural funds and their replacement. We had some wonderful news last night announced on the media. Some of the initial projects in the levelling up fund totaling £177 million, I think, very welcome as it is. You know, I know, members know that we pride ourselves in this Parliament, in this committee, of the scrutiny of governance and accountability processes that apply in the rigor that applies to those processes. So, where do you see those functions actually in that process of replacing the European structural funds with the levelling up funds? Where is that rigor scrutiny and accountability taking place? We are as enthusiastic as the committee is, Mr Coffey, that there is a rigor transparency of public expenditure where it is being applied in Scotland. The levelling up fund is a successor arrangements and a shared prosperity fund. There is no statutory role for Audit Scotland or the Auditor General in respect of the successor arrangements. Previously, we have provided the Public Audit Committee with information around structural funds. We look to do so today as it relates to the flow of funds through the Scottish Government consolidated accounts. Both myself and the Accounts Commission for Scotland, which audits local government in Scotland and Audit Scotland, are keen to maintain a level of transparency to support the committee's interest in how those funds are being spent. That would be to support your information rather than providing you an audit opinion on how the funds have been spent. Ultimately, the flow of funds is now from the UK Government to individual bodies, public sector or third sector in Scotland. There will be a variety of arrangements. I and the Accounts Commission for Scotland are working together to support the committee's interest. I look forward to continuing to engage with you, but it will be a different set of arrangements than we have known previously. Nonetheless, we are keen that transparency of the totality of the money is clear, but as I say, Mr Coffey, it will not be an audit of individual allocation of funds that will be a matter for the UK Government. I was speaking only last night to the leader of Eastershire Council, who himself is not aware of any scrutiny, governance or accountability arrangements being requested by anyone. It has been a recurring issue for the committee for quite some time now about where that scrutiny lies. Infectively, what we seem to be getting in order to generalise public investment announcements by press release could hardly pass as the rigorous process that we pride ourselves in in this Parliament, would you agree? It is a matter for the Department for Leveling Up within the UK Government as the funder for it to determine what audit and assurance arrangements it wishes for its public expenditure, a conversation that it should wish to have individual audits undertaken that it would pursue with the UK National Audit Office. As ever, we look to support that, we look to support the Public Audit Committee and the Scottish Parliament's on-going interest. Together with the Accounts Commission, whether it respects local government funding, we look to provide information to the Public Audit Committee and the Scottish Parliament, but as I say, Mr Coffey, that will fall short of an audit, given that it is not part of our jurisdiction. Can I turn now to another area of interest that the committee has highlighted in the report? That is about the use of reserves. You make the point in the report, again, the transparency issue. You say that there is a need for greater transparency over the Scottish Government's policy and approach to using reserves to manage existing cost pressures, particularly where they are. There are funding implications for the whole public sector. Can you elaborate a little bit on that and tell us what your concerns are? I am happy to do so, convener. I bring Michael in as well to support my answer. I will turn to an example and build on the question that Mr Hoy asked us earlier this morning about the totality of the use of reserves. How the Scotland reserve operates is set out by the fiscal framework. There are reserves in other public bodies, principally local authorities in Scotland. This year, in the current financial year, there have been engagement between the Scottish Government, local authorities and integration joint boards about accessing some of the funding that has been intended for Covid to be used for other purposes, principally to support public sector pay arrangements. All of that has, perhaps by necessity, had to be quite flexible responding to events, but it does not really support transparency, parliamentary understanding, public understanding of what funding is sitting in reserve, how it is intended to be used, rather than it feeling quite flexible, reactive. It brings us back to our overall point that there needs to be more transparency about how monies that are sitting in reserve carried forward from one year to the next will be used on a more medium-term and longer-term basis. You go even a bit further than that, do you, when you say that the reserve balance is not disclosed within the Scottish Government. It is not just a matter of where it is and the transparency over the movement of it. You are saying that the figure itself is not even disclosed in the consolidated account. That is correct, convener. I might want to explain why that is currently, but we are absolutely clear that there is a bit of a gap here, given how important the Scotland reserve is its place within the fiscal framework arrangements of Scottish public finances. It would provide an overall picture of what is available to the Government to fulfil its ambitions for monies that have not been spent. Given the scale of Covid investment, there has been the larger than typical underspend that exists this year. We think that it would be more helpful to map that, to report that more clearly publicly, and the consolidated accounts feel like a very useful place with which to do that. Michael can say a bit more, convener. That is really the central point. We feel that it is a missed opportunity not to have it within the consolidated accounts. The balance is in the movements in and out of the Scotland reserve. It is reported in other places, but it does not make it transparent. It has to be accessible to the user and clearly understood. I think that I mentioned earlier in the session that the £650 million that we have talked about will be put forward into next year's budget, or sorry, this year's budget. It was first indicated back at the provision and out-turn statement to members of the Parliament back in June, but that is six months away from the conclusion of the account. There are further sums that can go into the reserve balance, further drawdowns that can be made. It just feels that, in the absence of any other account, it feels that that would be the natural home for it. It just provides that clarity of sight around the money that has been transferred from one year to the next. That leads me on to my next question, which is about where we are with the production of whole Scottish Government consolidated accounts. I think that, rather diplomatically, you said that you have been introduced at too slow a pace. Can you tell us why there has been this lengthy delay and what justification has been presented for that delay? There are two or three factors that I would highlight. The first one is seven years beyond the date that the Government first committed to preparing a public consolidated account. There have been factors in the current year that have brought about slower progress. The stage one account was provided to Audit Scotland for common. We have done that over the course of the spring and summer of this year. We have not yet received it for audit. The second stage thereafter was for the Government to bring in the wider parts of the public sector beyond the Scottish Administration, which is the consolidated accounts and a few other bodies. That has been delayed because the Government in Scotland is planning to align the arrangements with the whole Government accounts. The whole Government accounts suffered delays this year as a result of IT issues. Those are relevant factors in the current year. As I said at the start, we are now seven years into this. There will always be in-year challenges in the work that we prioritise. We have a real gap of a single picture of what Scotland owns, what it spends and what its income is each year. We have touched a number of times this morning about transparency, which matters, but a single public sector account will help better decision making. Especially as we are moving into and we are in challenging financial times prioritisation to support the Government's plans around public sector reform delivering its outcomes. Our public sector account is an essential component of our rounded financial reporting. We repeat the call for much quicker action to deliver it. We may have the permanent secretary before us to give evidence in the ensuing weeks, so it may be something that we will raise with him. Colin Beattie has happily rejoined us. I know that you have questions on social security, which is again an important part of the report. I am going to invite you now to put those questions to the Auditor General. I am looking at an area that we have discussed before, which is about fraud, specifically on the social security side. The benefit expenditure, administered by the Department of Work and Pensions, is £3.3 billion. According to this, you estimate that overpayments in Scotland could amount to £67.5 million. There are two questions on that. How do you calculate that out of thin air? Secondly, is that a normal level? Is that what would be expected? There is a model and a rationale for the calculation of both benefits that are subject to audit through the audit of Social Security Scotland. With any benefit system, there is an inherent understanding that some payments will be made in error, whether as a result of claimant error, public body error or more significantly for fraud. There is an assumption that not just the auditors, but primarily the organisation themselves, have to come up with an approach and a model that sets out their assessment of fraud and error. Helen can come in and say a bit more about how that is undertaken. It then follows upon a role of the auditors to take a view about how robust that model is. The auditors of Social Security Scotland have assessed that, taken a view that that is a reasonable assessment and that, consequently, arrived at a figure out that you mentioned a £67.5 million of potential overpayment of benefit expenditure. There is a formula, but you can look back and see how close that formula has actually been in the past to reality. How close has it been? Helen can say a bit more about that, but that is an important part. Mapping all of that is quite complicated. Ultimately, that will break down to individual claimant circumstances that change over time. At one point, you might have an overpayment, then a legitimate payment and back payments. It is not a linear process, as I am trying to describe. The process over all speaks to the fact that the auditors have made the assessment that is robust and that there is a reasonable figure of between 1.5 to 5.2 per cent of expenditure. Looking forward before passing to Helen, benefits expenditure in Scotland is going to be growing as more benefits come online, and that is going to increase the range and potential of the risk. Up until now, it is largely being drawn from DWP estimates, but some of the Scotland-only administered benefits, as we have set out in our report on Social Security to the Committee last year, will be an important component of Social Security Scotland's own evolution, in that it has robust and reliable arrangements for estimating fraud and error. To reassure the committee, that remains part of our audit of Social Security Scotland and we will be reporting further as necessary. I will stop for a moment Mr Beattie. I am going to pass to Helen, who can say a bit more. The estimate is calculated over the range of payments made by the Department of Work and Pensions. This covers such areas as the personal independence payment and attendance allowance and a few others. It is calculated over the £3.3 billion, and each type of benefit has its own percentage rate, if you like, applied. It has been assessed by the Department of Work and Pensions. Each benefit has been assessed at different times as well. Some have been looked at closely, and they have worked out a more exact percentage, according to their own processes. The latest one being for attendance allowance, which was assessed in 2021-22. As you have already heard, the range covers 1.5 per cent up to 5.2 per cent, and across each of those individual benefits, the total is 67.5. It is important to stress that this is an estimate of fraud and error within the overpayments. The increase in benefits that will be made from Scotland covers areas such as the Scottish child payment, which, during 2021-22, was the first full year of reporting totaled £56 million. That was an increase of more than £50 million from last year. There is a range of other benefits that will be increasing as well and will be taken on board by Scotland. As you said, the 67.5 is the average across a number of different component parts. Historically, how accurate has it been? I can be a bit more about that. This is ultimately referring to DWP's estimates of fraud and error. I will come to Social Security Scotland in a second. The auditors of the DWP have drawn attention to the reliability of that estimate in their annual audit report for many years about the concerns about the overall reliability of that. That is encouraging DWP to undertake more work and more sample testing to improve the reliability of it. You are saying that it is not that accurate? If so, which way? Accuracy is a term that we would hesitate to apply. These are estimates in terms of fraud and error. Ultimately, it relies on sample testing to assess it. We are now in a position in which we assess that the estimate is more reliable than it had been as a result of additional investment that DWP has put into reviewing the approach and methodology. That allows the auditor of Social Security Scotland to form a view about the reliability of that estimate. That is something that they are satisfied on. Just to complete, Mr Beattie, what it still leads the auditor of Social Security Scotland to do is to amend their audit opinion. They have drawn attention to this level of overpayment, ultimately because an overpayment of benefit is money that had not been intended by the Scottish Parliament when it approved the budget. There is a complex series of linked connections about assessing the individual claims, sample bases through to the overall assessment of the expected level of fraud and error through to what the auditor's judgment has been. We are seeing progress from DWP because, back to the point that I made about, it matters now that Social Security Scotland has its own parallel arrangements for the Scotland-only administered benefits. What I am not hearing from you is that the estimated figures that are being produced annually are actually able to be compared back to an actual figure that somehow is thrown out even if historically. That is not something that we have looked at during the course of the audit. Ultimately, it will be a matter for DWP and its auditors as they progress through to the preparation of robust arrangements for the prevention and detection of fraud and overpayment. What we do know in building on evidence that was provided to the committee in previous years on Social Security is that those arrangements are improving. However, what I do not have today, and we can come back to the committee in writing, is to what the level of estimated fraud has translated to any recoveries or precise accurate calculations on top of the estimates that were produced. It would be interesting to see the estimates over a period of several years to see how they have swung back and forward or if it is fairly constant. There is quite a range. We spread across a number of benefits between the 1.5 and 5.2 per cent. We will look at what further detail we have and can share that with the committee in writing. If there is anything further, it may be that DWP or Social Security Scotland can support the committee's interest. In the early years, when Social Security Scotland was put in place, there was a relatively relaxed regime in terms of fraud. That was gradually tightened up as the volumes increased and the complexity moved on. Do you think that the Scottish Government has given you enough assurance around the assessment of fraud in this year's account? That is the order of view, yes, that they have been satisfied with the level of assessment, but they are drawing attention to the increasing volume and risk, as Helen mentioned. As more benefits are coming on stream that are Scotland only, it will be the balance for Social Security Scotland to strike between having a benefit system in Scotland. That meets the original intentions of supporting dignity, kindness and fairness in respect of people accessing the benefit system and the most challenging periods of their lives, but at the same time securing public expenditure. They make that recommendation in their report that, as Social Security Scotland further invests in its fraud prevention arrangements, that it continues to have a foot in both camps. There has got to be a robust set of processes, but one that is also consistent and fair. The auditors are very clear that that is part of their interests and my interests for their audit work in this year and next. Are there specific gaps or are there areas that the auditor believes that there are certain weaknesses that the Scottish Government should be focusing on? The report that we did on Social Security Scotland's progress in delivering devolved benefits, one of the areas that we talked about was both the investment in the size of the team but the training arrangements, investment in IT to support anti-fraud measures. All of those will be components of it. We have the right information, but the data flows where relevant from DWP. Social Security Scotland knows the factors with which it needs to invest to have that rounded regime. We are alert to it. We are continuing to factor that into our forward work. Just on a slightly different angle, you may recall some months ago we had a discussion on Covid-19 and the business grants payments and the fraud levels there. That came through local government, of course. I raised an issue that south of the border the fraud levels were massive, running into many billions and yet in Scotland it was considered to be extremely small, which I'm pleased about, but you're suspicious about it as well and you were at the time having another look at that. According to that, there was a recovery of £504,000 in fraudulent Covid-19 business grant payments as of July 22. Does that really reflect the level of fraud? Does it reflect good progress? I remember our discussion on that, Mr Butie. I think that there is a healthy skepticism about the comparability between Scotland and the rest of the UK in terms of anticipated or suspected fraud or error in Covid grants. I think that we repeat the figure here that we've done in our Covid-19 reports of estimated for error or between one and two per cent of business grants. That is a sharp contrast between some of the Covid-related fraud concerns elsewhere. Bounce Back Loans, for example, has been the very high profile example of UK schemes that have been subject to high levels of fraud and error. Part of the reasons that Scotland hasn't had that experience is that it has, rather than setting up a specific new scheme in arrangements such as Bounce Back Loans, that it has deployed existing arrangements through local authorities, used their existing fraud and error detection arrangements, principally through the work of internal auditors in Scottish local authorities. Those arrangements have served them well. We look at the totality of fraud relative to the scale of the schemes. The hundreds of thousands of error in overall terms will always be fraud and error in some schemes, particularly where there is pace with which to get money to where it was needed, as was absolutely possible. Local authorities and other public bodies will continue to monitor progress and recover as necessary, but overall, I think that this is something of a success story relative to what we've seen elsewhere. So, half a million pounds is good progress? Michael Wight might want to say a bit more about that, but I don't think that the comparability of that figure stands poorly against some of the scale of other figures. None of us want to see any public money being spent in error or fraud, but given the pace with which money needed to be spent during the pandemic, for all the reasons that we recall, that will be a good progress. That level of fraud and error, between 1 and 2 per cent, is not a significant risk or concern that we are commenting on. Michael Wight said that. To say that, that figure that you quote, £504,000, will increase because it's provided in the accounts as a figure to date. The Scottish Government are actively working with the local authority partners to analyse those levels of fraud. It takes a bit of time to identify a fraud and confirm it's a fraud. There's quite a lot of process to go through, and then, from that stage, claiming that the money back can often be challenging. That will be an on-going process, and the number will rise as the Scottish Government gets richer information and on-going information from local authorities. We're up against the clock of it here, so if it's a very brief question, I'll allow you to come in and ask it. It kind of relates to what I spoke to before about is Social Security Scotland taking enough measures or other measures that it should take to assess levels of fraud and error with the benefits that are administered directly by them? That's effectively the challenge that we speak to in the paper, that as their responsibilities grow so too will their fraud teams and the overall arrangements to secure that fraud and error is minimised as closely as possible. We're continuing to track back progress against the recommendations that we made in our 2022. Indeed, it is happening, but what we haven't come to a view yet is how successful those arrangements have been. We are against the clock. There are some areas that we're going to follow up in writing for completeness, but there are a couple of final areas where we've got questions that I do think would be useful to put to you this morning, so it's on the record. I'm going to turn to Willie Coffey, who's got some questions about reporting on performance. I'll put those questions into one question to save some time, but just in relation to the previous discussion that we had at Auditor General about the public sector consolidated accounts, you referred to an IT issue at HM Treasury. Is it resolved and does it prevent us from making the progress that you will make? I'll ask Willie Coffey if he's got an up-to-date position, but the whole of Government accounts, as you may know, brings in all of UK public expenditure. There is that single view, not to labour the point, but we think that there needs to be a Scottish version of that. The IT position has delayed progress and effectively this is submissions from public bodies, from auditors into UK Government to collate all of those numbers. That's been a relevant factor in why it's been delayed if my cause is an up-to-date position. As far as I understand, it has been resolved, so it's now for the Scottish Government to allocate the necessary resources and prioritise them, if they so wish. My question is just on performance reporting, convener, that is a common thread at the committee, just to give you an opportunity to say a few words about this and our pursuit of linking spend to outcomes and targets and so on. Could you just say a few words about what your recommendations will be in that area and I'll leave it at that, convener? Many thanks, Mr Coffey. It is really that. We would like to see the consolidated accounts have a closer connection between public spending and associated outcomes against the find measurable targets. The commentary on performance reporting, although it has improved this year and is important that I recognise that, still tends to be about performance spending against budget rather than the benefits, the outcomes that have been achieved from that. Having a more rounded picture analysis of public spending against measurable targets, contributions to the national outcomes would be a step forward for transparency understanding of how well public money has been spent in Scotland. Would you similarly recommend that approach be adopted in the level in up money spent? As you know, Mr Coffey, it is not for me to make recommendations to the UK Government, so I am happy to confine my comments to the Scottish public bodies. The final area that I just wanted to ask a final question about was sponsorship arrangements, i.e. the relations between the Scottish Government and public bodies. In 2021, an external review was commissioned by the Government, which produced 14 key recommendations. All of the 14 recommendations were accepted by the Scottish Government, and I think that the permanent secretary gave an undertaking that all of the recommendations will be implemented by the end of calendar year 2022. I know that we are only in mid-January 2023, but I do reflect on the fact that, in your report that is before us today, you went so far as to say that the Scottish Government has committed to improving its sponsorship arrangements of public bodies, but I remained concerned as to whether the timescales will be met and whether actions planned will fully address each recommendation. Where are we today with that? I will give my view on where we are at. Convener Michael can come in and say a bit further and correct me if I am misleading the committee. I understand that 11 of the 14 recommendations have been completed. As you know, we have gone further in the paper just to express some reservations about whether that will lead to improved sponsorship arrangements. The committee heard evidence from the Government towards the end of last year, and one of the features of that was the level of turnover within sponsored teams, the level of seniority, with which to support public bodies from within Government. That is not something that is going to be easily replicated to have that detailed understanding, the sophistication of guidance that sponsored teams need to provide to public bodies. Even with all the recommendations, which I am sure will ultimately be delivered in short order, it matters perhaps a bit like the investment framework that we spoke about earlier. That is subject to on-going review and testing. Like other factors, I do not feel in a position to give assurance yet that those arrangements, even with the recommendations, will yet be effective. It is going to be part of our work on an on-going basis, not just in the Scottish Government but elsewhere too, about how well those sponsorship arrangements are working in practice. I will stop for me. I think that Michael may have wished up to you. The 11 out of 14 has been complete. That was the picture, as reported to the Government's Audit Committee in November. Of the three outstanding ones, there was nothing that I saw that would mean that the December timescale or anything significantly beyond that would be under threat. The key point that the Auditor General made is that those are actions that the Scottish Government has taken to respond to the recommendations. Whether that fully addresses the recommendations is where we have concerns. For example, the role of portfolio accountable officers to clearly understand the roles and responsibilities that sponsored teams across public bodies is quite a big recommendation. The action taken is to provide more guidance. That is a slightly different issue. It will help, but it will take more time for those recommendations to be fully implemented beyond the initial actions taken by the Scottish Government. That has been a really useful session for us. I very much appreciate the input that you have given us. Michael, Helen, Auditor General, thank you very much indeed. As I said, there may be things that we will want to follow up, which have come out of the questioning and some things that we did not quite get to in the time allocated this morning. Thank you very much for your evidence this morning. I would now like to close the public part of this morning's proceedings.