 Good morning and welcome to the 16th meeting of the Public Audit and Post Legislative Scrutiny committee in 2018. Can I ask everyone in the public gallery to switch off their electronic devices, or to switch them to silence so they do not affect committee's work this morning? Item 1, decision on taking business in private. Can we have agreement to take items 4, 5 and 6 in private and to consider a draft report on post-legislative scrutiny of the Biodiversity and Biodiversity Reporting duties in private or future meetings. I agree. Thank you. Item number two is our post-legislative scrutiny item. It's Biodiversity and Biodiversity Reporting duties. I'd like to welcome our witnesses today, Rosanna Cunningham, Cabinet Secretary for Environment, Climate Change and Land Reform, Hugh Dignan, head of wildlife management and protected areas of the Scottish Government, and Sally Thomas, director of policy and advice, Scottish natural heritage. I understand that the cabinet secretary won't be making an opening statement, so we will move straight to questions. Cabinet secretary, can I kick off by asking you if you feel the reporting duty on biodiversity is working? I think there's room for immense progress. We're only in the second round of the actual reporting duty being live. The first was in 2015, of course, and it's fair to say that I think it's taking a while for public bodies to really become alive to this, so I would say that it is working, but nowhere near, I suspect, what the movers of the original amendment to the bill wanted to see, so that really is a work in progress. Colin Beattie. Thank you, cabinet secretary. Just following on on what you touched on there, in the first reporting cycle, there was a 44 per cent compliance rate in terms of reporting. The second reporting cycle finished in January. What was the figure for that? Has there been an improvement? It's still being compiled at this point, where it's 41 per cent. The expectation is that by the end of the year we will be higher than we were in 2015, but there are still a lot of public bodies, it's fair to say, who are not engaged in the reporting process. I went and pulled down a long list of the public bodies that are covered by this, and I suspect what's happening is that those public bodies that are quite far away in their actions, in their functions, quite far away from this, are probably finding it difficult to engage, so if you're the accountant in bankruptcy, it might be more understandable why you might have a challenge there. I use that, because I have no idea whether the accountant in bankruptcy has actually reported it, but the point that I'm making is that of that enormous list of public bodies there are some who are quite a long way away from in terms of their functions, in terms of their job, quite a long way away from this. It is clearly a task to try and engage them all in understanding that, no matter how far away they are, there still is a duty on them. As you would understand, if you're SNH, you're not going to have a difficulty making that report. If you are one of these other bodies, you may not really have registered at this stage, although it's fair to say that we do write out to every single one of the public bodies when we're coming up to the reporting date to remind them. We are trying to engender that understanding, but it is still the case that there are a number of them who are just not really getting it or perhaps don't quite understand what it is they're being asked to do. I think that, just again building on that, when we took evidence previously on this, there seemed to be a consensus that more guidance was needed to provide more clarity as to the duties that were required and even simply the reporting format even. Is there any thoughts that there might be some improvement on that? There is quite a lot of guidance. One of the questions that I might have of public bodies is whether they are actually availing themselves of what is already available in terms of information, because there are three different forms that are tailored to the size of an organisation or perhaps the nature of it, so there is already some nuancing that is available to them. There is quite a lot of guidance already available and I'm not sure what else at the moment could be provided for them in terms of extra to what is already there. I think that the problem may be that they're not actually going and finding it in the first place, rather than they're not being sufficient when they get there. Cabinet Secretary, do you feel that that's perhaps because a lot of those public bodies are stretched, are feeling financial pressure, are under a lot of pressure to deliver their core services? Is the biodiversity reporting duty just a step too far if it's out with, as you said in one of your responses, if it's out with their core function? Well, it has been legislated for in terms of functions, so in the sense that when I was talking about being out with the core functions, I was talking about those public bodies who by definition are not doing things that relate to nature or biodiversity or anything and therefore it's perhaps not in the forefront of their minds and therefore it might be quite hard for them to envisage how they achieve that. The original legislative provision dates back to 2004, and that was to have the duty to have regard to biodiversity. I have no idea how I'm guessing by the nature of what happened with the bill in 2010 is that there was a feeling that that didn't really achieve anything, so perhaps by reporting on it might help to achieve more, so perhaps it has done some of that. In terms of the reporting, our view is that the reporting function is not a huge resource issue. It might be the case that different public bodies might be prepared to expend more of their time and resource on doing the actual function, but we find it difficult to see that the reporting part of it is a resource intensive issue per se. I'm not sure that that's actually what the problem is in terms of the reporting, to be honest. That's useful. Thank you. Bill Bowman. Talking about the resource and data, one of the evidence givers last week spoke about the information that was available to them in a condensed urban area, but they were part of a larger region. It was difficult to put their report in context because there wasn't any form of hub that collected information for the whole area. We were wondering if the Scottish Biodiversity Information Forum could get more support from the Government to try and encourage information being held and being searchable in a form that would give individual preparers more localised data. The SBIF is currently in the middle of undertaking a piece of work that may or may not include recommendations that relate to that. My answer to that is that perhaps that's something that we should wait and see what they have to say. It was formed at the same time that this particular clause was passed through in the bill. They are currently doing a costed business case, so my expectation is that we will see some more concrete suggestions and proposals around the area of the question. They are, as I understand it, indeed looking for support to build a better recording infrastructure. The difficulty with all of this is that what we are actually talking about is the reporting recording bit of it, not the actual doing part of it. My feeling is that I would also want there to be some focus on the doing part, not just the reporting part. I'm just a little bit worried about putting an enormous amount of time and effort into a reporting infrastructure that runs a risk perhaps of becoming slightly top-heavy and becoming more of a resource issue and then detract from the actual activity of having regard to biodiversity. The regional reporting idea was interesting when I read that. We think that that would become very difficult to manage because, apart from anything else, there are national bodies that you would then have to somehow disaggregate into regional figures to try and make a regional hub. How does that get hosted? How does that get run? You're then ramping up the infrastructure of reporting. I'm not sure that, if they're not reporting now, they're necessarily going to report any more frequently to a regional hub. I'm not certain that the regional hub idea, from my perspective, would really solve the issue here. I think that it was also partly to give them information for when they're deciding how they deal with biodiversity and not just report it. Ah, but that's interesting then, because that's not what this clause is about. This clause is about the reporting, the function of doing, and that's why I made the distinction between the two things in my earlier answer. I think that there's perhaps more of an issue about them fulfilling that function of having regard to biodiversity. For some, it will be tougher to see how they do that than it is for others. There's no doubt about it. If you're not really one of the land-holding agencies, there aren't perhaps the obvious opportunities that there might be, but that doing part—this sounds a bit nursery, but it's to distinguish between the activity that was legislated for in 2004 and then the reporting part, which was legislated for in 2010. If the reporting part is— That happens, Secretary. Sorry. I think that you're very clear on that. I think that's useful. I mean, in a sense, they're meant to be, but the reporting is about the doing, and if you're actually not engaged in the doing, they may feel that there is nothing to report if they're even aware that they should be reporting. Willie Coffey. Thanks very much. It leads me nicely into what I was going to ask anyway, to scratch below the surface of the reporting and see who's doing what. We heard some good examples last week, particularly from while East Ayrshire submission, the paper that was submitted, they embed their duties in a number of the engagements that they carry out in East Ayrshire. For example, they have a species survey that they create when they're thinking about maintenance of buildings and capital programmes. For example, they have a local record centre, and they have enhanced species protection when they're thinking about planning and building standards. Despite the fact that we're hearing about the lack of reporting, when we looked a little below that to see who was doing what, there was quite a lot of good work going on there. It was really to ask, have you any similar evidence from the other public bodies who do have a land interest, whether they're actually doing the doing, as you just mentioned? Yeah, I mean, there will be a lot of public bodies in that same position, and I would hazard a guess and say that most local authorities are having regard to that function. Now, there's a lot you can do. It can be easier if you're a landholder, so you will find, for example, health boards are beginning to look much more closely at what's happening on their estates. There are a number of other public bodies who work very hard at this. Scottish Water would probably have an incredibly good story to tell about everything that they're doing. Yes, there are some incredibly good examples. The lack of reporting doesn't mean that there is a lack of action and good work being done. The question is being able to gather it in and then show it in one place across the whole of Scotland, and that's the bit that we're finding difficult. We also asked the convener about how those processes embrace and engage with the public, the wider public. They tend to happen anyway in some of the estates, but there's no formal requirement to engage the public in a new plan, for example, from a diet by a diversity perspective, as I understand it, but it does happen. We were testing the water with that last week, and it seemed to be piecemeal in terms of whether the public bodies go out proactively to engage with the public when they're considering any new piece of work, for example, in their area. So, just to get your thoughts on how we could perhaps strengthen that kind of engagement process with the public in this. I think that public engagement is really important. In some cases, it's about simply being clear and explaining why they're doing what they're doing, or in some cases, with local authorities now explaining why they're not doing something that has been done. There's a big debate about roedverges and roundabouts and things like that, and local authorities are taking decisions about what the planting looks like and whether they're going to mow or not mow or when they're going to do it and all the rest of it. It can mystify, I think, members of the public as to why something is not happening that used to be happening. There might be a very good reason for it. That is about communication. Each public body will have its own way, and some public bodies will be a lot better than others at that direct kind of communication. When it comes to local authorities, my experience would be that there is quite a lot of engagement with people, because a lot of the activity that goes on in this particular area of delivering that function involves vast numbers of volunteers, and we're still in volunteers week. I want to say that, even for public bodies, a huge amount of the activity that they undertake will involve volunteers. I'd be amazed if that council wasn't harnessing that army of volunteers to do that, and that is a very strong level of engagement. Again, we're talking about the actual function of the duty rather than the reporting part. The question is, how do we actually get all of those public bodies who are doing this to make sure that they are reporting it? I'd be surprised if they are not, and those who are perhaps not really having this at the forefront of minds to understand that they should be thinking about it in the course of their business. That was what was asked of them. We weren't asking to turn them all into mini SNHs. We were asking them to have regard in the course of their normal functions to biodiversity, and then, some years later, we asked them to report on what that meant, what that looked like. I suspect that, out there, there may be a bit of a confusion as to what exactly they're supposed to be doing, and, in some cases, I suspect that they don't really have much of a notion. Liam Kerr. On exactly that line of question, if I may, first of all, on the reporting, I'm not aware of there being any sanction if the report doesn't come in. Is that correct? There are no sanctions if the report doesn't come in. I did indicate that what we do is write out to all the public bodies in the run-up to a reporting deadline. Somewhere on somebody's desk and every single one of those public bodies, there will be a letter saying, by the way, that you need to think about this, but no, there aren't sanctions. That wasn't part of the original debate in 2010. To be honest, from where we stand, there isn't always a relationship between sanctions and more effective reporting. When you're talking about public bodies, it's difficult quite how you would build a sanction regime into it when you're talking about public bodies. That would be a curious conversation to have to have. For example, there are no sanctions for failure to report on climate change duties, but we get 100 per cent reporting on climate change duties. I think that this is more about people's understanding of perhaps the importance of or the relevance of or whatever rather than a deliberate set-your-face-against-it idea. I'm not sure that sanctions in this would necessarily help. I'm just trying to be honest about that, so I think it's more about actually getting them to understand what that 2004 duty was and how they have to report on it. Perhaps an exercise that we could undertake now, given that we did write out to everybody in the run-up to the deadline, is to write out to them again and flag up that we're now halfway through the year. There is now parliamentary interest in the lack of reporting. It might generate a little bit more engagement. That makes perfect sense to me. I was wondering if you ended up in a situation in which, let's say, a public body didn't have the resource, for example, or perhaps it didn't have the sufficient knowledge, but I suppose you would say, well, we're writing out to them, so they're going to comply. In every single public body, there is a letter sitting on somebody's desk. One could ask quite why that doesn't trigger at least some response. I don't know. The reporting duty, as far as I can see, would be a matter of going on to the website, downloading some of the template. I don't think that the reporting part of this is the resource thing. I suspect what might be happening is that those public bodies that haven't really paid any attention to the original 2004 duty kind of don't report because they've got nothing to report. I suspect. I'm looking at officials just to get—I suspect that that's perhaps what's happening. They see a letter and they get to go, well, we don't really have anything to see. Would you or Sally like to come in on that? Sally heard some of the evidence last week. Would you like to add to that? I think that, as the cabinet secretary said, there is a lot of really good and detailed guidance there, and it's about raising awareness, either through that guidance or maybe through a more tailored approach with some of the public bodies which find it difficult to report. The guidance includes a number of case studies which were worked up in conjunction with public bodies after the 2015 round of reporting to try and illustrate two different public bodies of different sizes and where the different ranges of functions—actually, what they could do to fulfil their duty—to show that it isn't just a duty that you need to have perhaps large areas of land at your disposal in order to be able to comply with the duty. They're even doing very small activities within the body in the way that they exercise their functions can help to contribute to the duty. I think those case studies certainly would be very useful and certainly we could recirculate those and add to the general levels of awareness. Liam Kerr. Is there any value? What we heard last week was very clear to me that different bodies—as you've rightly pointed out, cabinet secretary—have different levels of engagement and different requirements to engage. Should we actually be looking at making the duties to comply and then to report proportionate to the size and indeed the core business of the public bodies in question? Proportionality is very important and we all have to understand that particular issue. As I indicated earlier, I think that the guidance that is on the SNH website already does build into that a level of proportionality. Clearly, if you're a land-holding public body, there is a greater expectation both in terms of the function and potentially in terms of the reporting because you ought to have far more to report. There's a different level of engagement. If you're a public body, where some of your main responsibilities have a direct link to or are involved by a diversity, you're in a different position to those public bodies that are very, very long, long away from that in terms of both their functions and their capacity perhaps to do anything. In some cases, we would be talking perhaps about simply getting folk in to put in window boxes or something. If all you've got is a building and not much else, then you may simply be looking at something like that, but I'm not quite sure whether or not folk are thinking along those lines. The proportionality issue is really, really important, but the reporting, the guidance that's there, already recognises that. There's three levels of three different templates so that they ought to be able to find something that does actually fit what their public body's core function is and the size of it and all the rest of it. Very small public bodies as opposed to very large public bodies as well, but again, there is already inbuilt variation if they go and have a look at what is available. What I suspect is that they're not actually getting as far as even going to look, it's not as if they're going to look and going, don't know what that all means, not going to do anything. I'm not sure they're actually finding it in the first place. Final quick question for me, I do understand, I'm going to stay with reporting although I do appreciate that you were saying, look, that's actually the second stage, but just we heard last week about the publication date being on 1 January to report on the previous three years and a concern was raised that that timing isn't actually ideal given that there'll be holidays and what we end up doing is producing a report that actually doesn't take you right up to 1 January. The question is simply, would you be supportive of a change to that timing of the reporting cycle in light of those facts? I mean, I don't have personally incredibly strong views about that. My suspicion is that almost any reporting date will have some of those same issues. There's always going to be a bit of a time lag, there's always going to be issues there. I think that the important thing from the point of view of this conversation is that if we change the reporting date, we would need to amend the primary legislation to do so. That's actually quite a big hammer to crack what is perhaps not a very big nut. We can certainly consider it, as I said. I don't have a strong view about it if that seems to be something that really is an issue. Not clear, I don't think that it is an issue. We do accept late reporting, it's not as if that deadline is in by then and forever hold your peace. As things come in, we will take them. I don't think that reporting deadline is as big an issue as possible, as it might be. I'm just noting that the evaluation that was done of the 2015 reporting round didn't say anything about the reporting date at that point, so it didn't look like in that first round it was something that was particularly flagged up. The key thing from our perspective, though, is that it would require amending primary legislation to do it. Alex Neil The evidence session last week, one of the key issues was the absence of information on outcomes. Is there any evidence that all the reporting activity is adding any value to biodiversity? I suppose that that is a fair question. I suspect at the moment that all the public bodies are engaged in actively furthering that biodiversity function would be doing so, whether or not there was a reporting duty. Slightly ramping up the communication around the reporting duty and perhaps trying to be more proactive with those public bodies that are not reporting may engender an increased activity. Even if it was quite small, because some public bodies there wouldn't really be a huge opportunity, that would make a difference, but we would have to be making sure that we were pulling in not just those who weren't reporting but those who weren't actually carrying out any of the function either. That would be a huge undertaking. I did download a list of all the public bodies and we are at about 180 or something at the moment, so we are at an enormous range. It would be a huge undertaking to ensure that each and every single one of them was actively doing something in terms of biodiversity and then actively reporting it. That is not that it cannot be done, I just think that it is taking a while to get that out there. It means that we are only in the second reporting cycle. I have to say that the mind boggles what the accountant in bankruptcy could do to add any real value to biodiversity. I was not saying that there is not something that can be done. I spoke at a completely different event yesterday about biodiversity and I said that there is an argument for all of us to ensure that people understand that biodiversity is not something sitting up here that they have no part in. You could have a vision of every tenement in Edinburgh, every window and every tenement in Edinburgh having a window box, would create a massive big plus for biodiversity in the city, and that could apply to offices, including the public bodies, as to everybody else. There is always something that people can do. It is just that it may feel to people that they may not register that it is something that is valuable because of the small scale of it, and it simply may not be registering in their minds as something that they could be doing. Often, those things have multiple functions because the provision of—I do not want to sound trite, but the provision of window boxes—in terms of a workplace environment is a lot better in terms of people's working environment than it is to have that. You do not just get a biodiversity plus, you get a working environment plus, you begin to get an engagement, but it is still very much a work in progress. Do members have any further questions for the cabinet secretary? Can I ask you a final question? Do you think that the provision needs to change at all in the legislation, or do you feel that it is perhaps a wee bit of a challenge for your department in terms of awareness of public bodies to comply with the duty? I think that the challenge is around trying to increase the level of compliance, and behind the compliance with the reporting is the challenge in getting a number of those public bodies to understand that however little can be done, it is still valuable and does contribute. That is where the bit of the gap is, but that is not just with public bodies. I suspect that, right across society, people are understanding that even a small amount multiplied across a huge number makes a big difference. Cabinet secretary, I thank you very much indeed for your evidence this morning, and I suspend the meeting briefly to allow a changeover of witnesses. Item 3 is section 22 reports on colleges. I welcome Caroline Gardner, auditor general for Scotland, Helen Russell, senior audit manager, Mark McPherson, senior manager from Audits Scotland and Lucy Nutley, director of public services audit from Mazzars. Have I pronounced that correctly? I open the questioning from Alex Neil. Thank you very much indeed. Good morning, auditor general. I think that we are going to discuss both colleges together rather than making them as separate items, convener. In both cases, I think that there are aspects of those reports that pose more questions than the answer. Let me give you an example in a new college, Lanarkshire. It says that, under auditor's opinion, that the audit has highlighted concerns about the college's financial sustainability full stop, but we do not get the reasons behind that and what needs to be done to address it. Later on, for example, in paragraph 9, it says that there were unexpected costs associated with Coatbridge College. What were they and when did they occur and why did they occur and why did nobody do anything about it timuously if that is the case? In paragraph 11, it did not include any cost in its budget and the final additional cost was £400,000 in relation to national bargaining. Why not? There was no provision made in it. In paragraph 12, a very serious statement about not paying people on time in order to improve their cash flow, which is totally contradictory to Government policy right across the board. Paragraph 13, financial reporting concerns, what were they and that is from what is in the report. I have other concerns, for example, about new college Lanarkshire that I know about in terms of staffing, the relationship between the number of people at senior level and I think that the same is true. There is concern in Edinburgh College about the number of highly paid people at senior level while we are making people who are delivering lectures redundant. There are loads of concerns in there, but those reports do not bring any of that out. It is worth reminding the committee that section 22 reports are a separate category of reporting from the normal performance audit reports that come to the committee, which are generally more detailed and more focused on the underlying causes and the bigger picture. Within the report on new college Lanarkshire, which is the one that you focused on, we have given our view of the causes of some of the problems that have been identified and just to summarise in relation to new college Lanarkshire, we think that it was poor financial planning. We can answer some more detailed questions for you very happily if that would be useful, but, in broad terms, I reported in the Scotland's college's 2017 report last year about the cash flow problems that the college had experienced and reported that, at that point, the college was working with the SFC to resolve the cash flow issues and plan ahead. As it did that, some of the underlying causes became more visible and that is what we are focusing on here. In broad terms, for 2016-17, the college set a very tight budget because of the cash flow problems that it had experienced previously. In our view, as we say in the report, its target for income was too high and the actual income that it received was almost £1 million less than the target that it included in its budget. On the expenditure side, it failed to account for the full cost of implementing national bargaining. Now, it is fair to say that, at the point that it prepared its budget, new college Lanarkshire, like all colleges, would not have known the exact cost, but it did not include a provision at all and the actual cost that it faced was £400,000 in the year. The report gives you some indications of that. We can certainly answer questions about the costs relating to things like co-bridge and other financial pressures that they faced in 2015-16, but I think that the key point for 2016-17 was that its budget was too optimistic. As the colleges explored that, it has become clear that the college faces longer-term questions about its financial sustainability and on which it is working with the Scottish Funding Council. I take the point about poor financial planning, but that relates to the key expenditure in any college that is staffing. It is my understanding that, for example, there are nine assistance heads of faculty in new college Lanarkshire, each earning about £52,000 a year. Of course, if they are earning £52,000, the total cost of employment will be nearly £80,000. To the best of my knowledge, I do not know, but we are getting value for money with nine assistance heads when we are making people at the front line, as it were, in the classroom redundant. I get similar issues around Edinburgh College—allegedly excessive senior management team salaries, job titles. We do not know how much of a pay rise—this was a big issue before with Coatbridge College—how much of a pay rise the senior management team is getting in relation to the rest of the staff. Surely we should be looking behind all of this and questioning the use of resources, because that is fundamental to the remit of a section 22 report. I think that that is fundamental to the work that the Funding Council should be doing with the college to make sure that it is financially sustainable in future and is delivering value for money. As we say in the report, in return for future funding, the funding council is requiring the college to put in place what they are calling a business scenario plan, which looks at, I think, five possible scenarios for the college's operations in future in terms of both the curriculum that it offers, the way it supports students, but also the costs and its management structure and so on, the campuses from which it operates. I think that there are questions that are properly focused on the college itself and the funding council. So we should follow up with the college and the funding council on these issues? That is my view. What I have done is to bring to the attention of this committee the challenges to financial sustainability and the fact that the scenario plan is not yet agreed between the college and the funding council, but I think that there are entirely appropriate questions for the committee to explore. There are many other issues that are related, I would just give a sample. Convener, obviously we are for the later private session, but I think that we should follow the Auditor General's recommendation to follow up with the funding council and the colleges. I think that there are certainly issues in the new Lanarkshire college report that require follow-up, so we will take that on board. Taking the Edinburgh College report first, is it realistic to expect that they can repay their deficit through adjustments to future grant funding? They are struggling to make ends meet. Never mind pay what's outstanding. I'll ask Helen to come in in a moment to see the Auditor of the College, but my view is that they have made good progress so far in a difficult situation. They are now better at longer-term financial planning, which is an important requirement for any public body and that they are building that repayment into their thinking about their costs and income for the future, but I think that Helen can give you a bit more detail on that. Thank you. That is the case. In fact, the college has built in over the following three years that funding will come down and they will be able to cope with the loss in the funding. You are satisfied at the moment that Edinburgh College is performing according to the plan to deliver a balanced situation? We say first of all that they have made good progress. This year, they are due to close off the individual projects within their initial transformational plan. They have agreed a new strategy for the three years starting this August. As Helen said, that contains strong financial planning for the future, but we also say in the report that they continue to face significant challenges, like all colleges, in terms of implementing the full cost of national pay bargaining and making sure that they can continue to develop the curriculum to meet the needs of learners and employers in the area and to do that in a way that continues to be financially viable. However, so far, they have made good progress with all that. Turning to North Lanarkshire, which is obviously from my point of view a lot more concerned, I share the concerns of Alex Neil here. He did raise a couple of things here, which I do not think or I did not pick up a response on. First one was the unexpected costs at Cotebridge College. What were they? I will ask Mark and Lucy to pick that up. Mark, do you want to kick off? The colleges indicate that one of the most significant unexpected financial implications that they had from Cotebridge was the college returning a £1 million deficit when the college returning a £1 million deficit prior to merger when the budget had been a small surplus of about £20,000. The committee's predecessor heard some of that and the evidence that it took around the Cotebridge College section 22 when that issue was raised by committee members. The other issues that came up were a couple of costs associated with leases and buildings that had not been built into the original merger case, and that was about £250,000. Poor reporting by Cotebridge College, was it an error? I think that no one had picked up that those costs could occur. I cannot say for certain whether it was down to Cotebridge or whether that should have been picked up as part of the diligence prior to that. How much was that? About £250,000 in total. It is not a small sum. Yes, it is not. As we say in this report this year, the colleges tend to operate in very narrow margins. As we say again in the report, New College Lanarkshire had set itself a very tight financial budget for 2015-16, although it was aware of those issues when it set the budget and believed that it could accommodate them. The other issue, just to cover off, was a clawback of ERDF funding, European funding, which amounted to about £206,000. That question of leases is fairly fundamental. Would it not, in turn, have picked us up? I cannot comment. I do not have the background on how the issues precisely came to light. It was clearly discovered that we make reference to some legacy issues in our 2016 colleges overview report from a couple of years ago, when we note that the New College Lanarkshire, having identified one legacy issue, decided to investigate a number of other issues to determine whether there was anything else that it should be concerned about. Would it be possible to find out exactly how that came about? There must be some record of it. In turn, Lord, it must have picked her up at some point. What triggered sudden knowledge that these leases were omitted from the calculations? I think that the broader background is, as Mr Beattie, that you were aware as a member of the committee throughout this period, that there were significant problems around the inclusion of Coatbridge College in the merger into New College Lanarkshire. The previous principal and members of the board were, first of all, very against the idea of merging, then agreed to the merger, pulled out again and then finally the merger went ahead. The due diligence was troubled as a result of that. We reported on that and the committee explored that at the time that you were looking at the issues related to the 14-15, I think, orders of Coatbridge College. The point in relation to New College Lanarkshire, though, is that by the time of the 2015-16 budget, those costs were known about and the college felt that it had included them into the budget, but the budget was tight at that point. I reported last year in my overview report on the cash flow problems that came about as a result. We have now moved on from that and, in 2016-17, they again set a budget that was over-optimistic in terms of the time of the income target that they were expecting to receive and the cost to staff of national pay bargaining. I am aware of the problems that were around Coatbridge College prior to its merger, but I would like to know exactly how the question of the leases was identified at what point. I think that that is important, because you would have expected that such a significant omission and such a basic issue would have been found by internal audit. I know that New College Lanarkshire did commission its internal audit service to examine this to determine whether there were other legacy issues. I think that one of the issues that cropped up was in relation to a contract that they believed could end up in additional costs, but it proved not to be the case. However, the New College Lanarkshire, in the interests of ensuring that everything had been double-checked, asked its internal audit team to review again a number of issues, and that is where the lease came up. It came up as a result of an internal audit that was commissioned by New College Lanarkshire. That still does not explain why it was not picked up before. That is an eye at this stage. Moving on to the other issue that Alex Neil brought up, which is the question of delayed payments to creditors and trying to accelerate payments from debtors. It is fairly classic, is it not? You would expect that to be picked up in five minutes. Did the internal audit pick this up? I reported it in my report on Scotland's colleges last year. The auditor reported it in her annual report on the annual report on the council last year. At that point, the college thought that it was on top of the short-term, what it then thought was short-term financial issues it faced. That proved not to be the case, and the report that you have in front of you today highlights the scale of the challenges that they are facing and the financial support that they have required from the funding council. Can we say that this fairly dodgy practice has now stopped? I think so. Lucy, is there anything that you want to add on that? There is no indication that the payment days have increased significantly from 16-17 audit. It seems to me that don't colleges normally budget to break even, rather than have surpluses. I see in paragraph 18 there that they are talking about possible surpluses. If you are going to have a surplus £1 million, that is not normal for a college, is it? It is not now. Before colleges became part of the public sector for accounting purposes, they were able to carry reserves and some of them did budget to make a surplus so that they could carry that forward for known purposes, for investment, for future cost pressures that they were facing. Now, as the committee knows, they are within the public sector accounting boundary and they cannot carry forward surpluses unless they are able to transfer them into their arms length foundation on the basis that they will be able to request them back later. In paragraph 18 is incorrect, because 2019-20 surplus of £1.1 million, 2020-21, £997,000 and so on, that is not going to happen, is it? Well, there are forecasting surpluses within the business scenario planning that they are doing with the funding council to bring them back into financial balance. Part of the reason for forecasting that, I assume, may be so that they can negotiate with the funding council what funding they require and also budget to repay additional funding that they receive in the meantime. You have heard from Helen that Edinburgh College is confident that it will be able to repay funding to the funding council in order to do that. It will have to make an operating surplus, so there is funding available to do it. I think that the same is true of new college language shifts. I think that Mark would like to add to that. I would like to add that we are talking here about the underlying financial deficit or surplus position. You will be aware from last year's colleges report that we have encouraged a number of adjustments to be made to account so that people have more clarity around the current financial position of the college, rather than the position that is affected by longer-term commitments such as pensions and asset revaluations that can affect the figures, but which are not within the colleges control. Just coming back again, somebody came to my mind about this question of delaying payments to creditors and so on. Who approved that as a policy? Anybody who would need to approve it, I think the council could do it at its own hand, and I think it was done within the finance department, but Lucy, I guess, can give you more detail. So the finance department thought it was a good idea? I think the finance department were probably focused very heavily on trying to manage the cash flow position. Now that is clearly not a sustainable way of running the college for the longer term, but I think that was a primary focus. I reposted it in my college's report last year, because it is clearly not a good practice. That surely is against all accounting principles. The person running the finance department should be aware of that. Did they, while doing this, raise it to the board? The board was aware that that was happening. It is clearly poor financial management and poor financial planning. I do not know if we are able to say at this point what happened, respecting that that was back in 2015-16 and was reported in my report last year. Because it brings a governance issue in as well. Lucy, do you know if it was reported to the board within the financial reporting in 2015-16? I do not know for 2015-16. In 2016-17, an internal audit review was commissioned on budgetary control, which did highlight a number of significant findings across the finance function that were then subsequently actioned by the college. As I said in 2016-17, there was no indication that there had been extension of debtor days and creditor days to manage cash flow. Did that report highlight any other irregularities that perhaps should be raised to the board and was it raised to the board? Yes, the internal audit report was delivered to the audit committee of the Lanarkshire board and all recommendations in that report have been followed up. I want to go back, Auditor General, to the business scenario plan that Alec Neill asked a bit about. That is critical to developing some strategy for dealing with the concerns about the longer-term financial viability of the college. In paragraphs 16 and 17, it says that it includes things like discussing the possibility of changing structures and a voluntary severance scheme. I think that Alec Neill expressed some concern about where that approach can leave you, a voluntary severance scheme that allows simply those who volunteer to take severance can leave you with a very top-heavy structure, with senior management still in place but without the lecturers to deliver the courses in the college. That potentially could be quite worrying. I take the point that you made that that is something that we should pursue with the SFC and the management of the college, but that does rather mean that if they come up with a plan which does not work, we will only know that when it has not worked and by that time the college may be in very severe problems. It does say in the report that you will work with SFC—sorry, you have asked the auditor to keep the position with regard to the plan under review. I just wanted to ask again if you are watching the development of this plan in order to ensure that it is something that has the potential to work. We certainly are. I would say that it is nonetheless a matter of fact that the plan is a matter for agreement between the funding council and the college. However much it might be tempting on occasions in order to stop powers, we cannot stop people doing things in advance if we think that they are ill-advised. It is worth noting also that the process of agreeing the plan between the funding council and the college has been quite long drawn out. It has been an iterative process. I think that there have been five drafts submitted by the college to the funding council, which have been the subject of discussion between them. I think that we still do not have a final agreed version. I think that that reflects the extent to which the funding council is seeking to make sure that whatever is put in place is both financially sustainable but also meets the needs of students and employers in the area and that it is focused on the quality of education and training that is being delivered. We will continue to look closely at it and to report back in future as we have done on Edinburgh College. However, it is a complex matter that is likely to require changes to the way that the college delivers education and to its estate. It currently operates from six campuses. Is that something that you might report in your annual College of Scotland report as well as that place where you might report on that progress? We might well, but I doubt that there will be much more to say on this college in that report when it is published later this month. That is quite soon, isn't it? One of the particular failings or mistakes, if that is the right word, that you have mentioned on a couple of occasions and it appears in the report, was the failure of the college to budget at all for the financial implications of national bargaining. In the end, the college cost £400,000, which had not been budgeted for at all, but it is not the case that most if not all colleges at that point were saying that they did not have resources to budget for what they thought would be the potential implications. That was not an unusual position for a college to be in, was it? I think that I said in response to an earlier question, it is certainly true that at the point that they were setting their 16-17 budget, they would not have known the exact costs, but it was poor financial planning not to include an estimate recognising that the true costs were likely to be higher or lower than that estimate. The other aspect of this is that when that national bargaining procedure reached a conclusion, nationally some additional central funds were made available for disbursement to colleges in order to meet those costs. Did the college not receive money from government to cover some of that? I think that we are talking about a timing issue, but I will ask Mark to talk you through it. No, that is right. It is a signing issue. I do not think that the money was available at that point in time at the time that they set in the budget or by the end of the financial year. Since then, obviously, the Scottish Government has made a commitment to fund in 17, 18 and 19, and some money was released last year, I know for that, but that would have been after the time of the issues to which we are referring. I have a number of questions that are not dissimilar to those that Ian Gray put on the Edinburgh College report. First of all, the committee looked at Edinburgh College in quite some depth previously, so I was pleased to read the Edinburgh College report. It is an optimistic assessment, but there were some considerable issues the last time we looked at it, so I was perhaps a little surprised. First of all, how confident are you in the measures being taken and in the progress that has been made that there will be positive outcomes from this? I will ask Helen to come in a moment, but, as the report says, we think that they have made good progress with the plan, and we can see that in, for example, the fact that they met and indeed exceeded their learning target for the first time in 1617, that they managed to make the planned savings that were expected and that they are making good progress with the underlying changes to the way they deliver education and training in the area. I do not want to downplay the scale of the challenges that they still face, and we note those in the report. We also note that the principal who has overseen this transformation programme is retiring at the end of August, and a new chair, Professor Cery Endowment, has just taken up post as well, so it will be important to keep up that focus on delivering, but equally, we have seen real progress. Helen, you are close to the college. Do you want to say a bit more about the confidence that you can take from that? I can possibly add to that in terms of the budget outturn for the end of March. The deficit continues to come down and becomes much more in line with that plan. In fact, they are confident of exceeding the planned level as well. In terms of activity targets, during this year, they are above their target, and they are hopeful of getting more income from the SFC going forward as well. They have put through a lot of changes in terms of courses and the way in which they work to bring the staff on board as well in students, too. Overall, they have made a lot of progress, and they are starting to move forward effectively. It is always difficult to say whether the end result will be totally positive, but they are certainly working hard to get there. As external auditors, we will continue to watch over it and see their progress accordingly. I will explore a number of those issues, if I may. On the voluntary severance schemes, the savings that were projected have not quite delivered what was projected. That was something that I specifically brought up at the last session when we looked at Edinburgh College, where voluntary severance schemes often do not go as planned. However, why has this one not gone as planned? Why was there too much optimism built into the programme? I suppose that I can only add a comment there to say that they obviously planned it in such a way that they started off with the admin staff for starters until they had looked at the courses and what courses they intended to put into place. Then they have moved on to the other staff. That obviously brings challenges, because they do not want to lose staff across the organisation. They want to be more focused on where the staff can move from. That is what has caused the problem. They were optimistic yet in trying to achieve a number and where the staff would leave from, but it has not quite worked out that way. Although the college has advised that the fourth scheme had quite a lot of interest and hope, it will be able to achieve targets. On that, I take the point that Alex Neil made earlier on about where the staff are coming from. College today has moved on through the schemes, 112 full-time equivalent staff. It is made savings by deleting posts, but where I am struggling to square that is that they have also, in that context, increased the learning activity and are projecting to do exactly the same again going forward. They are delivering more teaching and more credits, but with significantly fewer staff. Is that, first of all, sustainable? Secondly, what impact does that have on the staff who remain in terms of their ability to teach and the pressures that are on them? To say right at the very beginning, last year, they took a big hit in their targets as well. Their targets were brought down quite a lot. Therefore, the staff were able to accommodate, if you like, the new targets and the courses as such. Because of the way they structured their VS schemes, they have managed to move staff about and not lose the staff in the areas that they want to keep. However, the big hit that they took last year has helped as well. On the courses—shifting the focus away from the staff to the students now—one of the things that we looked at in the overall colleges report was that shifting funding and shifting focus can have a gender impact on who is studying at those colleges and an impact on the age profiles and whether they are part-time or full-time courses. Can you tell me very clearly, has that happened as a result of those changes within Edinburgh College? I could not tell you definitely, but I am not aware of anything from the accounts from last year. They have disclosed the gender and the student interests, but I am not aware of any great shifts. If something that we would expect them to be monitoring as the business transformation plan is taken forward, it might be something that the committee wants to explore with the college if it decides to take the report further. Final couple of things that I would like to explore briefly. Auditor General, you talked about the principle that, in the report, led the college through this transformation to a point where we are getting quite an optimistic report. That principle is now leaving. You talked about Professor Suri in Diamond coming in as chair, which is good, which is impressive, but what is going to happen with the principle position? I understand that they recently made an appointment just in the last couple of weeks, and therefore there will be continuity in terms of somebody being in place. As we say in the report, it will be very important for the new team, the new chair and principle, to keep that focus on the plan. My final question on this. Ian Gray raised the national pay and the pensions contributions. What is the practical impact on the report and the conclusions of the report of those figures? We think that Edinburgh College has done a better job of forecasting and planning for the costs of national pay bargaining on its own staff and circumstances. Those costs are included not just in the current year's forecast, but in the next couple of years' forecast as well. Assuming that nothing unexpected comes out of that, we think that they have done what they can to manage them while recognising that they are still a challenge for this college, as for all colleges. I am grateful. First, on the Edinburgh College report in the conclusion section, in number 20, you say that the college has made good progress, and you have used that term a few times, I think, in speaking this morning. I will take that as its English meaning, that it is better than average progress on what they are doing. However, you then go on to say that the management is confident that the planned financial position will be achieved. It might be news if they were not confident that it would be achieved. Are you confident that it will be achieved? Yes, we report it in those terms because we think that the planning is well founded and the first two years of the plan have demonstrated that they are making good progress. As Helen said, we are watching closely what is happening with the in-year position and it is moving in the right direction. However, until we have audited 2017-18, I think that it is very hard to give you more assurance than I have this morning and is included in the report. It is stated as a fact rather than an opinion, if you like. It is the fact that management is confident and that I think that they have made good progress so far. That is the bit that is missing, I think, just in the words. In the new college one, it said that the auditor gave an unqualified opinion, but it has highlighted concerns about the college's financial sustainability. You said that, talking about the college taking steps to improve the quality of financial performance monitoring and forecasting, I have asked the auditor to keep the position under review. I would expect that, if you were just doing an audit, you would be looking at that. What do you mean by I have asked them to keep it under review? Are you expecting some interim reporting? The code of audit practice under which the auditor's eye point to their work requires, as you would expect them to do, the straightforward financial statements review, but also picks up four aspects of the wider public audit model that all auditors are required to look at. One of those is financial sustainability. In the normal course of events, that will be reported in the annual audit report, which then informs my thinking about whether to bring matters to the attention of this committee. In the case of bodies like new college Lanarkshire, where it is clear that there are significant challenges that need to be managed, I asked the auditor to stay in close touch with events that they developed during the year and to bring that to my attention if things develop in unexpected ways from there. That would have happened already since the last report. Well, this is the first section 22 report on new college Lanarkshire. Well, last audit report. The 2016-17 audit report led to this section 22 report. Prior to that, as I said, I noted the cash flow difficulties that new college Lanarkshire faced in 2015-16. Lucy and her colleagues at Mazzars have been monitoring that closely, and that is what has led to the reporting in 2016-17. So there is no more up-to-date position as of today to hear about? I do not know anything forward or down. I have kept in contact with the Auditor General and Mark McPherson on progress being made. I have kept up to date with the college in terms of where the business plan is and the stages of approval that it is going through, and we continue to keep them updated. As of today, it has not been approved as yet, but we keep them informed. There is nothing more to report. So would we expect to hear from you if you had a concern then coming out of this? I would normally not report to you until the end of the next financial year unless something catastrophic were happening. That is not the position that we are in at the moment because of the continuing engagement between the funding council and new college Lanarkshire, but the normal route for me to report to you is a section 22 report at the end of the annual audit process each year. Willie Coffey I ask the Auditor General. We have been talking at this committee for a long time now about the role for internal audit and external audit, but I think that we should always remember that there is a clearer duty perhaps in senior management to act responsibly at all times with regard to the stewardship of the finances that they are responsible for. Picking up the example that was raised with new college Lanarkshire that you have mentioned on page 6, there was a very overly optimistic assumption about income generation. I have heard this a few times over the years in the audit committee. Whose role is it to scrutinise that and to make sure that that is deliverable? It is not just a mechanism to balance the books. I think that, as the committee has been exploring very recently in relation to Tayside, the responsibility sits in several places. First of all, the director of finance has got a clear responsibility to make sure that the plans are soundly based and solid and that they are reported well to the Audit Committee and the board of the public body. The members of the board have got a responsibility to test and challenge those and to make sure that they are asking the right questions, making sure that they are comfortable with the responses that they are receiving. As Lucy has said, in the case of new college Lanarkshire, the board made the decision to commission an internal audit of financial management because of the concerns that were coming up around cash flow management initially. That has highlighted some recommendations that they are putting in place, but the responsibility sits first with the director of finance and then with the board. In this case, we think that the board has done its work once those problems came to the fore. They were perhaps a little slow to recognise the challenges coming through 2015-16, and particularly to understand the true underlying causes, rather than the historic issues that we recognise around co-bridge. Did you say that it was £1 million less than the income target? It was £900,000, I think, very nearly. What was the actual target? I think that the target was £6.1 million, and they received £5.2 million. We thought that we were getting £6 million, but they got £5 million. That sounds reasonable, but it is a bit challenging whether that is deliverable. I wonder who's role is. It's mainly the role of the board in senior management, rather than the audit function, to say that that's a deliverable target. Would you agree? I would agree. As you say, it's the board's responsibility to be testing the targets that they get. We make the point in the report that all colleges are operating on quite tight margins, so a small difference in income and expenditure can make a big difference. That's very much the case in this college. I think that what we've seen is optimism in terms of both higher income and lower costs than were incurred in practice, and the board could have been testing that earlier once they identified the problem. They really started to explore what the underlying causes were. In the paragraph 18, in the same report, we are about forecasting surpluses of nearly £1 million in the three years to come. How comfortable are we that that's deliverable? I think that I can give the committee less assurance in relation to those forecasts simply because the business scenario plan hasn't yet been agreed between the college and the funding council. They will be going through a similar process of testing out how realistic it is, how far it continues to meet the needs of learners and employers, and what the impact on staff are. Do you know if they're based on income generation targets? Do you know that at that stage now? I don't know. I'm not sure if either Mark Orte or Lucy can know. We can't add much to the fact that it's still being discussed between the funding council and the college, I think. My other query in relation to Edinburgh, convener, was that you mentioned in page 5 of the Edinburgh report that some of the savings that they introduced related to property and IT costs—you may not have the answer, but the IT costs—was that student IT investment, or staff IT, or what was the extent of the savings, or services that were cancelled, and is there any impact on service delivery as a result of that? Do we know any of that detail? I'm sorry, I don't. We could probably find that out at some stage. I think that that's maybe something we can—I think that there are issues here, and we're going to have to explore this further. I think that that's something we could pick up with the funding council and perhaps the college itself. Auditor General, we've explored a bit already this morning the issue of national pay bargaining, a new college, Lanarkshire. It strikes me that—tell me if this is a correct characterisation, but new college, Lanarkshire, have struggled perhaps more than other colleges in managing the results of national pay bargaining. Why is that? I would say—my first reaction is that they have probably erd on the side of optimism in terms of minimising the costs for national pay bargaining in the same way that they erd on the side of optimism in the level of their income forecasts. I think that that reflects their desire to bring in a balanced budget in 2015-16 and 2016-17. All colleges started in different positions depending on what their terms and conditions were previously and, therefore, how much difference there was on to the new national set of terms and conditions. Other colleges have managed to make an estimate that has stood them in good stead without being the right number. This college stands out for not having made a provision within its budget for 16-17 for those costs. Marcus, is there anything that you want to add? Just to clarify, it was for 2015-16. The only thing that I would add is that new college, Lanarkshire, I am sure, would want to emphasise the fact that at the point of the merger of the predecessor colleges, it acted as part of the merger process to harmonise pay terms and conditions for staff at all of the predecessor colleges that were now part of new college, Lanarkshire. I am sorry, I cannot remember which of the predecessors, but one of them was already at the top end, if you like, of the salary scales within the sector, and that was the level to which they harmonised. In that sense, they had already done quite a lot of the uplift to their pay at the point of the merger that created the college. Obviously, that means that things such as national insurance increases and costs and pensions increases will have a higher financial cost for the college. They had already done some of the preparatory work, which is what you are saying. I think that they have done it as part of the merger process, which is a good practice when you are merging organisations to look at the harmonisation of your terms and conditions for all the staff. Having done that, there was still some additional cost from national bargaining as the harmonisation took place across the sector. If the college were to cite national pay bargaining as one of its biggest challenges, what would your response be to that, Ods to General? College of Scotland told us in 2016 that it was a challenge for every college, but clearly from what you have just said, some other colleges across Scotland coped better with it. To what extent can their troubles be explained away by that, in your view? I think that colleges of Scotland are absolutely right that it is a challenge for every college. As we have said, colleges started in different positions, depending on what their local terms and conditions were and how much of it had been dealt with through the merger process, where that was relevant locally. In the case of new college Lanarkshire, as Mark said, one of the three colleges that merged into new college Lanarkshire was at the top end of the scale. Some of that had already been dealt with during the merger, which formed new college Lanarkshire two or three years ago. Mark also said that costs were higher as a result of that, but that had a knock on cost in terms of the employer's national insurance contributions and pension contributions that had to be made, which were not planned for as well as they might have been in the budgets that flowed from there. The underlying issue, as we say in the report, is one of financial planning rather than primarily of the pressures that national pay bargaining placed on the college. It's not to say that there weren't pressures there are for all colleges, but what went wrong here was the financial planning for it. So it was how management dealt with that pressure? The planning for it, that's right, to be aware of it. Okay. I think that Alex Neil and Ian Gray touched on a sort of top heavy management structure. You're in a good position, Auditor General, because you've done reports on several colleges throughout Scotland to give us a sense of, do you think that the management structure at new college Lanarkshire is too top heavy in comparison with the other colleges that you have looked at? I don't think that I can give you an answer to that. There's a whole range of factors which will affect the size and shape of a management structure that a college has. This particular college is not far on from a merger of three colleges into one. It operates from six campuses. I think that that's one of the things that you may want to explore with the college and with the funding council. I have a feeling that you're going to give me that same answer to this next question, but on the issue, of course, our motivation in all this is to look at the effects on students. In terms of retention of students and attainment of students, am I right in thinking that that's not something you cover in your section 22 report, but what is your take on how this situation has affected that we're all concerned about the impact here on students and employers in the area? You're right, it's not something that tends to come up in section 22 reports, but it is something that we cover every year in our annual report on colleges. Mark, I'm not sure if you can give us a bit more detail now, or if you would like to hold off until we publish that report in a couple of weeks. Can I hold off? Sorry, just for the public record, it's... It's two weeks. We'll publish in two weeks, roughly two weeks. We'll publish the college's overview in two weeks, which will give us an indication of how retention and attainment has been affected. I'm not sure that we'd necessarily draw a direct link between what's happened here and the figures in the report, but in the report we will, for the college sector, give an indication of the levels of attainment, retention, student satisfaction and positive destinations. We will include an indicator for each college of that. Good. We'll look forward to seeing that. Do members have any further questions? Can I thank Audit Scotland very much, indeed, for your evidence this morning? I now close the committee's public session.