 Good morning, and can I welcome everyone to the 20th meeting of the local government and committee in 2017, and can I make everyone present the turn off mobile phones, and as the meeting papers are provided in a digital format that may be used by members during the meeting. We have no apologies, we have a full house with us this morning and we move to agenda item one. The committee will take evidence on the Housing Amendment amendment Scotland Bill at stage 1, so can I therefore welcome, and I'll go through all our witnesses together, George Walker, chair and Michael Cameron, chief executive of the Scottish Housing Regulator. Sally Thomas, chief executive Scottish Federation of Housing Associations. David Bookbinder, director Glasgow West of Scotland Forum of Housing Associations. Darren FitzHenry, Scottish Information Commissioner and John Marr, senior policy adviser UK finance. Thank you, everyone, for coming along. We'll move straight to questions. I think we've seen quite a structure today in asking the questions, because it's quite a technical build that we have before us, but that said, we always start off with a very general question. That said, can I ask witnesses whether they agree with the Scottish Government's policy intention to ensure that ONS can reclassify RSLs as private bodies in particular what would the implications be if RSLs were not reclassified as private bodies? So everything else works around that premise that the policy intent is correct, so we should get some of that on the record. Who would like to go first? Mr Bookbinder. Thank you. I think there's widespread recognition certainly within the housing association sector, but I think well beyond that that this is a necessary bill and that the steps are necessary. Day to day, the reclassification, thankfully, hasn't had an impact on the way housing associations run their business. Ultimately, as the committee will be aware, it's about how housing association debt is treated and having to be treated as Scottish Government debt if we don't get a reversal of that decision. That treatment of debt would be a bad thing at any time. It's a really bad thing at a time when there's such a welcome and hugely ramped-up development programme. I know a number of us have whimsically wondered how and why we've all spent so much time, all of us, as the bodies here today and the Scottish Government, to dealing with this when we looked down south at what's just happened in the last week or two, a reversal of the decision. You wonder about all that time and effort, but we know that it's absolutely necessary, just purely in terms of the debt. There are issues that a number of us will want to take forward in discussions, particularly with the regulator, about looking at a slightly different kind of regulator regime, but I don't think that there's much doubt within the sector about this bill being very necessary. Implications, if the bill wasn't, if the bodies weren't reclassified, what the implications would be? The obvious one is the impact on the development programme. I don't think that we could build 50,000 homes because so much of the money would have to be set aside to set against our associations borrowing. I'm particularly as a representative of community-based housing associations. There's a real feeling amongst associations. Certainly in our sector, I suspect that it's shared across Scotland in the sector that housing associations truly are not public bodies. Yes, they benefit from public money and perform a number of public functions, but they're managed by voluntary committees and boards. That symbolic sense of, although this is only a statistical reclassification, it still means something. It will feel better to be reclassified back into being private, even though private itself doesn't necessarily do us justice. I follow on with that by reiterating the point that David has made. SFHA is absolutely over the view that this reversal of reclassification is necessary. I think that there are two points that I'd like to make in that respect. One is that it protects the interests and ambitions of the Scottish Government in terms of the housing programme. That has cross-party support, so far as I understand it. The housing that people of Scotland need and deserve is going to be protected if we reverse the reclassification. It also provides assurance to lenders. The lending industry is absolutely critical to that programme, to the ability of housing associations and corporatives to be able to build at scale and to be able to build within a timeframe that is going to be appropriate to the needs of the population. We also think that it achieves a level playing field across the UK, which is important in terms of the lending industry and the financial profile, and it gives us the sector, the headroom that we need alongside the lending industry, to be able to fund the programme that we need to provide in the coming period. George Walker. Yes, we absolutely agree that this is an appropriate right and proper response, and ultimately, while the Scottish Parliament will of course operate within any legislation that Parliament lays down for us, it feels to us like an absolutely proportionate bill and will deal with the issues at hand. The point that I would like to make very clear is that our statutory objectives and functions as a regulator are not impeded or changed by this bill. Now, while there are certain elements that mean that we will have to operate in different ways, we are broadly comfortable that we can do that, and indeed the coincidence of us doing a regulatory framework review, which I think that we flagged up last time we visited the committee, is very fortunate because it means that we can take into account in that framework review the issues that the legislation raises, so we are very comfortable with the approach being taken. Yes, just picking up points made there by Sally and George and speaking as the trade body that represents our members who are commercial funders and investors to the RSL sector in Scotland, we certainly agree that it's appropriate to take this legislation through the Parliament, and having had a look in detail through the proposals, we see that there are broadly consistent measures that have been taken elsewhere. I think that they are proportionate to the challenges that the UNS decision has set. Certainly, in order to protect and safeguard existing and future investment into the sector, we certainly recognise the strength of regulation, and although the bill will make changes to regulation and how it works in Scotland, we are confident that those changes should still enable the regulator to deliver an effective regulatory function. Yes, although I note the policy intention behind the bill, our concern is that the committee should be mindful of potential unintended second order effects from the terms of the bill, and in particular in relation to the field of freedom of information, the possibility that bodies that are currently subject to the environmental information regulations would potentially cease to be subject to those regulations. The issue, therefore, is how that is managed and how the bill addresses that. What it would do potentially is create uncertainty where there's currently a certain arrangement whereby RSLs are subject to the environmental information regulations. Our concern is that, if that's not recognised and addressed, current rights to information would potentially be lost and, at the very least, uncertainty would be caused as to whether or not organisations were subject to those. That's helpful, although my colleagues want to pursue that a little bit further in a moment. Just before we move on, the general policy intent seems to be accepted by the witnesses, so a lot of the obvious thing to ask before moving into a bit more detail is whether there's any other way that the policy intention could have been secured. Is there anything other than legislative changes that could have been done, rather than this mechanism, to make sure that we conform appropriately with ONS requirements? There may not be, but we want to make sure that this is the only mechanism in town, if you like. I think that you just said it. From our point of view, it's the only way to do what we need to do to get the protection and reassurance and benefits that we need as a sector, but also the Government needs and we need as a country. Any divergent views in relation to that? I'll get everyone to say the same thing again. Again, anyone not agree with that? That's a very helpful setting for the committee. I want to do some more detailed questions now. Andy Wightman Thanks, convener. This is a question specifically for Mr FitzHenry. You've laid out in your evidence the risks that you see to the applicability of environmental information regulations to RSLs. In your decision notice on the Dunburton Housing Association, you make your ruling—it was your predecessor who made the specific ruling—but your office makes this ruling in the context of your legislation, which you helpfully append in relation to environmental regulations 2004. My question is now that it's clear that the ONS intends to reclassify unless the bill goes through and we relax the extent to which the regulator regulates its sector such that the ONS is satisfied that there is no longer a public body. Are you free to interpret the environmental information regulations in relation to what is a public body in a different way to what the ONS is, or do you feel that you can't deviate for two different statutory purposes? We certainly wouldn't be bound by the ONS view in relation to that. However, we would be bound by the terms of our legislation and we would have to take a reasonable and rational interpretation of the regulations. The issue concerned is that one of the key definitions that we have to look at is whether the body is under the control of a public body. The issues that are specifically being addressed in the bill are specifically addressed to reduce the level of control. At the very least, I can say that the argument that there would be control will be reduced. I can't bound myself to a decision at this stage because that will depend on the facts that are presented to me. It will depend on the legislation at that time, including any subordinate legislation dealing with local authorities. We are left in the position, however, whereby we can safely say that the current clear position will be left at the very least less clear and, potentially, the right could be lost. There may be other reasons. Perhaps there may be an argument under a different subparagraph of the regulations to argue that it is another Scottish authority, but, again, there is no precedent in relation to that. We are creating a lack of clarity for at least a period of time. I had mentioned in my written evidence that the situation could be resolved depending on the potential extension of the section 5 order for the Freedom of Information Scotland act, which would fill the gap and make RSLs subject to the freedom of information legislation, including the EIRs. However, the potential issue is the timing of that, in that, even if the extension were made, there could still be a lacuna in terms of time between the implementation of a potential housing amendment Scotland act and the commencement of section 5 order. As you say, your environmental information regulations talk about a person, a public body, under the control of a person or body. Clearly, the regulator still exercises a degree of control. Presumably, in practical terms, if the bill were to pass, you would await an application or an appeal to you for a failure to provide information under the EIR and you would take a fresh view on whether, in fact, they are bound by it. That decision would then be appealable as a matter of law in terms of your interpretation of the EIR to the Court of Session. Ultimately, the Court of Session would rule on the powers that you have to determine that question. Should my decision be appealed, yes, in relation to the Britain case, my understanding is that that was never appealed further. Do you have any sense of, apologies if this is in your evidence, of how many freedom of information requests are made, not appealed yourself, but are made under EIR to RSLs? Unfortunately, we do not currently gather that information. It is a matter that I have looked at and discussed with my team with a view to seeing how we can start gathering that as a particular data source. What we can say is that, if there is uncertainty, people may not be able to access information relating to, for example, the types and specifications of materials used in buildings, repairs commissioned, health and safety or fire safety assessments. There could be an impact and, where there is uncertainty, there will certainly be at least some impact, at least with some housing associations, who take a different view compared with others. In terms of the likelihood of the impact, the number of EIR requests across the border are in the region of seven and a half thousand in the past year, so there certainly would be some impact perceived. Importantly, there is also a perceptional impact. There is a perceptional impact that, when things get a bit difficult and we are looking to make changes, if information and the provision of information is seen as being the quick fix that can be discarded or put at risk, then there is a very clear perceptional impact in terms of the legislation and what message is being put forward. Make some comments in relation to this area. It may just be a question of being able to offer the committee some reassurance on the concern that Darren has raised. Obviously, we are all speculative at the moment whilst we await the outcome of the decision effectively on extension of FOI to housing associations, but was that decision to be to extend FOI at a date as yet unknown in the future? If there was a gap between the bill becoming into force, as Darren says, and FOI coming into force, I think that we would have great faith in our members that, given that they are already subject to the EIRs and that, if FOI is coming in, that will cement and extend that. They carry on responding to requests, even if it is not under the letter of the law that they just carry on responding as if EIRs were still there. If there is a small time-lag gap, I do not think that our members will suddenly think that we do not have to answer any questions about our repair service any more. Sally Thomas? I would absolutely go along with that. We would take exactly the same position. It is interesting to reflect that in the transitional or standstill period between the ONS reclassification and now the reversal of it, which has been a year or two or something like that, there has been an agreement among all interested parties that, for the purposes of what we need to do, we carry on as we did before. In other words, we do not suddenly depart from our normal relationships, processes, strategies, agreements, expectations and requirements. We carry on as previously until there is clarification, and we carry on as previously in a constructive and positive way. That is helpful. Darren Fitzhainry? First of all, I appreciate very much the intent from both previous speakers on that point. The one issue that I have to raise in relation to that is that although they may wish to comply with the spirit, ultimately, if an appeal comes to me and I feel that I am bound not to hold them to be subject to the EIRs, then there would be no appeal in law to me. I would be unable to grant any redress in relation to a decision that the applicant had disagreed with, so I think that still there is a practical risk. I do not know whether a suggestion as to a possible remedy to that would be welcomed by the committee. It is just in relation to a potential consideration of an additional provision whereby it is made clear in the legislation that the EIRs would apply to RSLs. Potentially that could be a new provision in the bill stating that they were to be treated as Scottish public authorities for the purposes of the EIRs, or potentially a consequential amendment to the EIRs themselves, either specifically adding them within the definition of Scottish public authorities or by reference to a schedule. I simply mention that as a potential solution, subject of course to advice from parliamentary council. Yes, absolutely. We will have the minister in front of us in a few weeks' time and these are the kind of things that we can discuss at an evidence session there, so that is very helpful. Mr Whiteman, do you want to progress your question? No, that is great. I would like to move on that. It has been very helpful and we will obviously reflect on that further. It is an important point. I want to move on to sections 1 and 2 of the bill regarding the appointments of managers. We have had evidence about this from you all. It has been pointed out from the regulator that you think that you would still be able to do what you do at the moment on the very few cases in which you have used those powers that would make and practice no difference. I am just wondering whether witnesses are content with the proposed changes to the regulator's powers to appoint a manager and to remove and suspend an appoint a manager as a matter of principle. Are you content? Yes, there is a variety of powers that currently exist for the housing regulator, just now, so just look at it in broad sense. Those are being narrowed. Are you content with the narrowing of those powers? Mr Bookbinder? In some ways, it was interesting that when we all got to look at or to remind ourselves what the original powers were, and I certainly think that from my organisation's point of view there was an element of surprise at the breadth of the original powers. The forum is certainly confident that where statutory managers have been appointed within this framework in recent years, it has been for much, much narrower purposes, of very serious issues happening within a small minority of associations, rather than the regulator turning to those original, rather broad criteria. In a sense, we think that what's in the bill reflects actual practice in narrowing those criteria. That's helpful. John Marr? Thank you. When the provisions were first drafted and we were engaging with government on their development, we were initially concerned about the threshold of intervention being defined as an organisation having failed or rather than is failing. We expressed a concern that perhaps that might be too late. In other words, the problem could have transitioned through into an actual failure before intervention could occur. However, as a result of our engagement and the relatively wide definition of failure, if you like, that's included in the legislation now, those concerns have largely been addressed. However, you'll see in our evidence that we did suggest, perhaps consideration to including on the face of the bill a specific element of the definition to make it quite clear that failure included a failure to meet some of the requirements under the regulatory framework. I think that the reason for us suggesting that is that, whilst lenders and investors who are familiar with the sector and with how regulation works would be able to see the link through from the face of the bill to that definition of encompassing a failure to meet a regulatory requirement. There's a potential for, I think, less familiar investors, investors who might be contemplating coming into the market here in Scotland. Those who are distant perhaps at the moment and not so familiar might not be able to quite so easily make that link and that could cause some degree of reticence perhaps in their decisions about whether or not to step into the market. Thank you, Sally Thomas. For us, this is about minimising risk. I think that we're probably that's something that we'd all agree on. Certainly, we want to work closely with the regulator—we already do—and with other colleagues to make sure that the impact of this change, if it happens, is certainly not to increase risk and it is to minimise it and to work on minimising it and giving that assurance and confidence that we need to do collectively to our individual constituencies but also collectively as a whole to make sure that the changes have a positive effect and don't lead to any great increase in concerns, problems or risk exposure. George Walker. I guess that my comment, convener, would be that, as the new chair of the regulator, I have been—it's been very visible to me that the word proportionate in the approach to regulation has been taken very seriously at SHR. Therefore, SHR really is only intervening where the judge that an issue really is quite serious and intervention is absolutely warranted. Thus far, from my perspective as chair, there's no evidence that these changes would have hampered us in any previous cases to step in and intervene in an appropriate manner in the proportionate way that we have. Michael may have a comment, I don't know, on the past interventions and how he feels about that. Thus far, I think that the proportionate word is the key one here because SHR has and does and will continue to act in a proportionate way, and that change won't stop us doing that. Just to emphasise the point that we certainly set a high bar for the use of these powers, recognising the significance of them and the word proportionate is absolutely to the four of our minds when we're considering whether we need to use such powers. It's probably just worth picking up on the point around regulatory standards and whether it would be helpful to have those on the face of the bill and ultimately the act. Although that would certainly aid clarification or clarity in that regard, having read the bill, we are pretty confident that regulatory standards are referenced in terms of the way that the bill is constructed. It points to statutory provisions, and regulatory standards are set through statutory provisions, so while it would be clearer, we are still pretty relaxed that regulatory standards are the touch point for us in terms of interpreting whether we need to intervene in an organisation or not. OK, thank you very much. Do you want to follow up on that, Andy Wightman? That's fine. Basically, the regulator you're saying that, in practical terms, you don't consider that this would make any difference to the way you've exercised these powers hither to, in essence. I'm just a very brief final point on the regulatory standards question. Forgive me, but are regulatory standards a thing in law? If you were to put that on the face of the bill, would that demand more articulation about what that really meant if we were to follow that recommendation? The 2010 act, as it stands, includes a requirement of us to put in place standards for governance and financial management for registered social landlords, so they're empowered under statute. So it would be a relatively straightforward thing if we were minded to think that that would be a good thing to recommend. You'd certainly be able to make reference back to those statutory provisions. OK, thanks. Just before we move on, Mr Marr, you've probably already answered questions around the failure of RSL, which should be clearly defined, including the failure to meet regulatory standards, and we've been talking about that. You put some stuff on the record. Will we ask something of more detail in relation to what you thought it might impact and investor confidence with a number of questions around that? You put a lot on the record already, so before we move on, is there anything that I would like to add? I think that just picking up the point there of the regulator being quite comfortable that regulatory standards are the touch point, except the points that have been made there, and possibly as part of consideration about how or whether or not to address the point. It may be that the explanatory notes to the bill could be elaborated to include that reference more specifically if it's felt that the place for it isn't necessarily on the face of the bill, so we can add that into the mix as well. I think that that would be a very useful exchange during this evidence session, so thank you very much. We'll move on now to Alexander Stewart. Falling on from some of the questioning that we've had from the regulator, can I look at the loss and the removal of the consent powers and how will that result in a loss of regulatory intelligence going forward? If I can have some sort of clarity on that, that would be useful. Certainly. At the moment, all register social landlords are required to come to us for our consent in relation to certain disposals and also to certain constitutional changes. Where they do that, they will present a business case and that will include series of documentations depending on what the particular consent request relates to. That will enable us to have an engagement with the organisation and in addition to ensuring that we are able to proceed with the consent, it gives us a better understanding of how the organisation conducts its business and governs itself. It gives us that level of assurance that means that we don't need to engage with that organisation in any other way to be able to be content that the organisation is well governed and appropriately managed. Falling on from that, you've touched on the level of risk that we have in the whole process. How would you address the increased level of risk for the housing sector as a result of the changes that are going to be implemented? George Brown previously touched on the fact that we have initiated a review of the regulatory framework. We will give consideration to exactly how we will be able to use the existing powers or the remaining powers that we have to ensure that we are able to obtain the same level of assurance from landlords and to act where we need to act to ensure that the interests of tenants and other service users are protected. I think that an important point here to references is that, while there are certain powers being removed or changed, we are certainly picking up no expectation that there should be any reduction in the protections that are offered to tenants and other service users. We will look at the full range of powers that the Parliament gives us to ensure that we are able to use those to maintain those levels of protection. Will the safeguards still be in place in your perception as to going forward? Will those safeguards that are provided through consents be removed? The removal of any safeguards from a system inevitably means that there may be more risk. We will look to see what we can do through our other powers and our approach to regulation that ensures that we can mitigate where possible any increased level of risk. Within the memorandum, you talk about the potential need for new staff to come in to fill that gap and you talk about the potential of having three additional members of staff. That would have a cost implication to the organisation, and you comment about up to maybe 176,000 that would be. Can you just explain a bit more about how that process will manage going forward? The identification of three members of staff and the figure is an attempt to quantify what we think the impact on our resources may not necessarily translate into three actual members of staff being employed, but that is what we feel would be a way to quantify the additional resource requirement that there would be in us to obtain the type of assurance that is currently provided through the consents framework. We may need to do more than we would through a consents framework, because the consents framework not only provides us with regulatory assurance but enables us to stop things that would not be in the interests of tenants and other service users. There is also, within the consents framework, the provision that ensures that any disposal or change that happened without our consent was void. That would no longer be the case following the proposed changes. There might be more requirement for us to engage with organisations where something has happened that should not have happened. Alexander Stewart was talking about the intelligence that the housing regulator would get through the system of consent, and you would know what was going on across the sector regarding relocating offices and the disposal of lands. You have a lot of information that, in theory, housing associations would not have to inform you about. Would you anticipate that good practice would be that you would still be informed of all those things? The housing regulator would still take a view of all those things, even if consent was not required in statute. Discussions that we need to have through the framework reviews to how we might be able to ensure that any loss of safeguards through consents were able to be addressed in other ways using other powers that we have. What we are very clear on is that we would not be looking to put in place a consents process by proxy. If Parliament decides that it is removing the consents framework, that is how we will operate without our consent being required. We will look at the need for us to run closer to more organisations if we cannot rely on the type of assurance that we would have previously received through the consents framework. I wonder whether any other witnesses would have a particular view on that. I think that it is worth stressing. I think that both we and SFHA have done that in our submissions that consent for something very significant, such as the disposal of, say, more than one property or a pattern of disposal, if you like. In theory, you could be talking about seeking consent or no longer having to seek consent, as the case may be, for converting social rented housing into something else, into mid-market rent, private rent for that matter, or simply selling it off. Associations will do a whole range of their own due diligence. I mean, no housing association in Scotland gets rid of social housing lightly. It happens sporadically in particular, tenements in particular, closest. It may make sense if you have only got one remaining flat in a close to divest yourself of that. If it makes good asset management sense equally, it is equally sensible. I would say that we do not think that it is likely at all that there will be scale disposals to worry about. However, if, and if we are looking ahead, just theoretically, if any housing association appeared to be making disposals that, in a sense, threatened the balance of their own social housing but had implications for that area, as well, and indeed for the national scene, that would become an issue not just for the regulator but for the Scottish Government as well. I do not envisage that happening because of the care with which associations consider those really important decisions. I think that I just add a couple of points to what Michael and David have been saying. There will still be a requirement to notify the regulator on completion of any disposal of properties or restructuring, and there will be a tenant ballot, of course, still. There is still a requirement to do that. That is retained. That is a very helpful protection, with which we would all agree. There will still be notification. It is simply the notification that will move in terms of timeframe, so it is not in advance, it is during and after. That is very helpful, and it takes us mostly to our next line of question, I suspect, Ms Thomas, Jenny Gilruth. Good morning to the panel. David Bootbinder, in your submission to the committee, you state that, again, our main interest has been in seeing tenant consultation and ballots protected, where a change of landlord or a group structure moved to a parent body is being proposed. Do you think that the proposed tenant consultation is going to do enough to protect tenants? Yes. We recognise that, as things stood, the current provisions had to go because they were so inextricably linked to the regulator's consensus regime. We were certainly particularly keen. The forum had a key role in extending the ballot provisions in the 2014 act to apply equally to group structure changes, where one association joins another association's group structure. We are certainly happy with the provisions as they stand. I do not think that the legislation includes the word ballot, but it is the only way, as the forum sees it, of complying with the bill's requirements to hold a ballot and to abide by that ballot. We are happy that those really important provisions, as Sally has just referred to them, are indeed protected. Just as a follow-up to that, as perhaps more broad for the rest of the panel, the bill proposes to remove the need for the regulator to have consent powers, as has been discussed. Do you think that RSLs have already robust enough governance arrangements in place that are going to compensate for that? I think that that is an absolutely pertinent question. Governance of housing associations is absolutely fundamental to everything and to their success and to providing assurance to tenants that things are being run in the most efficient and effective way and that taxpayers' money is being made the best use of. We work very closely with the regulator and with other colleagues to ensure that governance arrangements that are in place are as best as they can be. We certainly appreciate and understand, and others do as well, that we will have to work even harder at that. That is not to say that we are expecting to see governance failures or that we are expecting to see weaker governance, but as a result of that, we know that we are going to have to make sure that we are on the ball in terms of governance being the absolute best that it can, in the interests of tenants, taxpayers and the development programme. I think that the member gets to the heart of the matter. It is a very important question. What is interesting as we go through the framework review that we have touched on is that one of the key issues that is emerging from that, and indeed we will consult on in the new year, is around the idea of boards assuring themselves, so that self-assurance around that. I agree with Sally's point that I do not think that anyone is expecting an overnight failure of governance with that, but of course what we will be doing is encouraging boards themselves to make sure that they are self-assuring around those issues where consents go, where it could be in the past there has been that appropriate comfort of speaking to the regulator to say that, you know, is this appropriate and reasonable, yes or no. When that is not there, self-assurance and encouraging that will be an important part of the consultation that we will bring forward in the new year. I was just picking up again points made by Sally and George there. Due diligence was mentioned previously in the context of a disposal by an RSL, and it is certainly quite right that an RSL board should ensure that it has gone through the required due diligence before disposing of any assets. Equally, lenders would also go through due diligence as well, and clearly that can help to offset any concerns about the loss of regulatory and business intelligence. There was a mention there of self-assessments, and I think that that will certainly have a role going forward in ensuring a degree of comfort across the piece that disposals have been made appropriately where they are made. We will certainly look forward to engaging with the regulator further as part of the framework review when some of those proposals come forward in more concrete detail. I want to follow up on some of what John Marr just said. Just before I do, I wonder if I could ask David Binder specifically to comment on something that was in your submission, if you do not mind. You said in it that the provisions may make it more straightforward for sensible changes to be made, where they, for example, will help associations to prevent potentially disruptive individuals or groups from having undue influence or control over an association's affairs. I wonder if you could comment further on that statement that you made. Yes. Potentially, and hopefully, it is not something that many housing associations would ever encounter, but most housing associations are as keen to see as many people from within their share membership want to have as many people in the share membership and then want to have as many of those people willing from time to time to stand to be on the board on the committee. So the background issue to this is that a lot of associations are, I would not say crying out, but certainly really, really welcome willingness to stand and the attraction of doing that is something that we are very keen to promote to potential committee and board members. Every now and again, an association might encounter issues where they may want to change, make a sensible change to their rules, to their constitution, potentially to their code of conduct, for board members, where there is potentially one or more individuals who the association has absolutely sound evidence is not there to act in the association's best interests. At the moment, the code of conduct would enable an association to take action against an existing board member who isn't felt to be acting in the best interests, but not to somebody applying to be a board member, so that's something where we know some of our members have been looking at potentially changing their rules. I'm certainly not suggesting that if in an instance like that, and one of our members went to the regulator today and said, is it okay if we do that? I'm certainly not suggesting that the regulator wouldn't engage on that far from it, but it's just an example of a kind of a sensible rule change that an association might want to make. It's probably quite a traumatic time for the association, and cutting out a process of having to go through the consents mechanism for that would certainly be a help, where it's evidently acting in the interests of the association, and just cutting out one stage of the process would be helpful. I don't want to make a big issue about our movement is under threat from lots of people trying to try to envagal themselves on to board, but it's just an example of where a little less red tape would be welcome. I suppose that I'm just a bit concerned about who judges disruptive behaviour and whether or not that could actually, who's making that decision, what is that kind of behaviour or is it just someone making legitimate points that the board may not be listening to or taking a different position to the board? I'm also keen to know under that, say Sally Thomas nodding, so perhaps there's something that Sally Thomas would wish to add. How do you approach making sure that the board is made up of gender recognition, with recognition of diversity on the board? How do you approach that? I mean that's something that is a big issue for the movement. The biggest unbalance at the moment I would hazard is age and the attempts that many, many associations throughout our area and I'm sure throughout Scotland are making to balance up, get some younger people for instance on to board. So we always take that very seriously, but I think I would make the broad point in relation to your question about how do we know a board is making the right decision about something. I would say, I think the regulator would say that's up to the association to get that right. The regulator is not going to decide that for you, so I think in any event that is something that an association has to get right through the experience of its board in having a real sense of what's right for this association going forward. Yeah, I have to say. That's an absolutely, yet another absolutely pertinent question and from my point of view there's no clear, there's no exact answer to that because board membership, how you attract people to boards, how you get a balance, how you get diversity on boards is an ongoing and major issue for the sector as it is for many, many other organisations and sectors. I think that issue about disruption or challenge is a well-made one and it's always going to be the case that has to be taken on its merits at the time and it's a judgement of sorts. Having said that, the issues around self-assurance, around doing more work on governance, making sure that the governance of organisations is the best it can be is front and central of what we need to do in terms of all this going forward. I think that if we do that properly, if we do that in the right way, if we have our ducks in a row and have the priorities right on that then I think we can address the issues that you've raised but it is an ongoing process. It's not one that you can safely say it's done and dusted and we've done it and we're successful and isn't it all great. It's an ongoing issue. I think the other point I'd make is that tenant representation on boards is to SFHA, to Gossip and I think to others absolutely critical. Coming from England where tenant representation on boards has been run down for a variety of reasons, it's an absolute pleasure to be in a place where tenant representation is treated as important and increasingly so and we would want to do everything we can to make sure that that is retained. Given David's concerns, which I think are credible and realistic, given your question, which is absolutely pertinent, we need to make sure that we can do the best we can to make sure that there is tenant representation in the best way possible, that those people are supported to contribute in the best way possible to the governance arrangements and we take on board and we continually review and reassess the points you've made about achieving good governance, diversity, challenge rather than disruption and we do the best we can in that regard. The next question is to follow-up. I was going to ask to join me on that. You're going to indulge the convener then because I wanted to follow-up with that but I was trying not to but that's helpful. There's a general theme around this where actually housing associations need a little bit of disruption from the same handful of tenants growing on the same board for a long period of time and well-paid officials putting through increases in rent restructurings and investment programmes that go through rubber stamped. It's at what point the board is actually part of the co-production and corporate governance of the organisation and at what point is it actually just putting things through on the nod and I think that that's a challenge in the housing association movement. Incidentally, in some housing associations that are superbly run, that will also be a challenge. It doesn't actually necessarily say that the housing association in itself is poorly run at all so I hadn't picked that up out from Mr Bookbinder's evidence but it did great with me a little bit when I was hearing about it because we actually need some really well qualified disruptive individuals challenging the housing association movement's senior officers to make sure that it's a real tenant-led organisation. Any observations on that would be welcome and then we should of course move on to Mr Marr. Absolutely. Fair comment. The forum takes very seriously that notion of committee members, board members having the right ability to challenge. Let me give you an example. Along with our colleagues at share, the forum is about to produce in the next week or so a small booklet aimed at committee members on knowing the basics of sound financial management and knowing when to challenge and to do so when it's important, when you don't understand something, when you're uncertain about something, to give that confidence because lack of challenge is not a well run housing association and we could never claim that. We've also done a piece of work this year on succession planning about being fit for the future, about making sure that your committees and boards are fit for the future and having people with the right experience and that certainly includes the critical local input that you can only get from local people but we take succession planning and good governance really seriously. We've produced a lot of work on that. Thank you Mr Marr. With specific regard to sections 3 to 7, could you tell us a bit more about the kind of risks that the removal of the regulatory powers of consent could pose for funders? I think that you've touched on that previously but if you could expand a bit more on the kinds of risks. Yes, we're talking here about the transfer from a system of consent to a system of notifications not only in relation to disposals but to organisational changes, which could for instance be proposals for RSLs to merge or form different business structures. We mentioned in the earlier discussion that although notification might mean that there could be a degree of loss of regulatory and business intelligence, we're comforted and we take reassurance from the fact that associations through their own due diligence and lenders themselves through their due diligence undertake and possibly also an increased role for self-assessment could help to fill some of the gaps that might arise through the change. Clearly in terms of existing loan agreements there would be provisions within those requiring the borrower to seek lender consent for specific events definitely around constitutional changes and lenders will still be going through that process of engagement with their borrowers to provide consent or otherwise to those changes upon merger. I think that even though we are moving under the proposed legislation to a new approach, lenders can still take comfort. I think that existing practices in terms of their own processes through their loan agreements and changes down the line from changes to the regulatory framework will provide sufficient reassurance. You did say in your written evidence that you expected funders would have to ramp up their own due diligence, but you also touched on in your answer and in your evidence that funders would expect boards to strengthen their own self-assessment regime. Would that perhaps result in increased costs for RSLs? There may be associated costs with some of those changes. It's difficult to forecast what they might be from this distance out. I touched in the evidence that we provided about lenders ramping up their own due diligence and the possibility of their being costs associated with that. I'd emphasise that those would not be changes to costs of funds per se, but more transactional and process costs associated with striking a deal. I wouldn't expect that those would be significant in the grand scheme of things, but they would continue, I think, to be proportionate in relation to the deals that are being progressed. Perhaps we can maybe just ask the RSL if there are any comments that they would like to make on that. The question is about possible cost to boards of increased selfishness. Yes, absolutely. I think that what we'd be hoping to do as part of the regulatory review alongside David and John as well, of course, is to try and look at ways in which that was limited as much as possible, minimised as much as possible. The way that we'd do that is to try—SFHA Gossough would be trying to provide as much information, advice and support to advise and, when necessary, strengthen board activity and self-assessment in particular at a minimal cost to the organisation. There's a huge diversity of organisations in the sector from very small to big. Clearly, the ones at the bigger end of the scale can probably do what they need to do in their own means, without a big hit on their resources. Others will find it much more difficult and time-consuming and resource-intensive, proportionate to their size and activity, and we will be making sure that we focus our resources that we have as a support organisation to make sure that they're targeted in the right way to, as I say, to minimise the cost and effort involved to individual organisations. Our lenders are our key partners, so I'd just like to welcome John's assurance that any further due diligence would indeed be proportionate. That's, of course, now on the record. It's not binding, but it's on the record, Mr Leitchhinder. Will anyone else? It's a question for Mr Marr. You make reference in your written submission to a suggestion that should be a sunset clause in section 8. I wonder if you can expand on that. Yes, indeed. We can quite understand the rationale for the inclusion of this power. Certainly at the time that the bill was drafted there was still a fair degree of uncertainty about how the ONS might view the provisions and whether or not they would be sufficient to achieve the outcome of restoring the private classification. Now that we've seen the ONS move relatively swiftly south of the border in restoring the private classification to English housing associations, after the Westminster Government implemented the final pieces of the puzzle in the deregulatory measures of the Housing and Planning Act. Given that those measures are broadly consistent with the measures proposed for Scotland, we can perhaps take comfort that implementation of this legislation here would enable the ONS to move as quickly as it did down south and reverse its decision. That being the case, you could say is this provision, which is open-ended, really necessary in the circumstances. Our concern was that including it, and as I say, we understand why it was included, but leaving it entirely open-ended would prolong the uncertainty for investors' thinking of coming into the market. If, in some way, the period in which the power could be exercised was limited, that would be helpful, and we'd suggested initially until the end of the current Parliament. Given how quickly the ONS was acted down south, it may even be that the power is not necessary, but that is clearly an issue for consideration. Anyone else have any thoughts on that? It really just does feel like a just-in-case clause, and I agree with John that we have a lot of reason to be confident that the ONS will be satisfied with the bill's measures, but it just feels like it needs to—we're certainly relaxed about it being there. The way the clauses have been worked up has been very—the Scottish Government's acted in a very consultative manner, and I think it would carry on doing that if, in the unlikely event, it had to use this sunset clause as you refer to it, but we're certainly—we don't see it as a threat. Any additional comments? The Delegated Powers and Law Reform Committee has made some recommendations, and one relates to section 8, so if we can just read it out to you and invite your comments. It says, as the scope of the powers extends to permitting any modification of the functions of the regulator that relates to social landlords, the power is therefore drawn more broadly than is required to achieve the policy objective. The committee considers that, in principle, the power could be framed more narrowly in accordance with the policy objective and recommends that the Scottish Government considers this further. Any thoughts on that? This might be the first opportunity that witnesses have had to hear that recommendation within the report, so I'm hoping that we can catch any cold a little bit on this, Mr Marr. I think that that's a welcome progression to narrowing the scope within which the power could be used. It still, I think, leaves the timeframe element open, which was one of our more significant concerns. Narrowing the scope, yes, timeframe still seems to be quite open. Any other reflections on understanding that report just came out yesterday, so it's hot off the press? Generally content with the power if it is required, but it's a good thing to narrow the scope of it a little bit. Mr Marr has already spoken about possibly a sunset clause. I think that it's a theoretical argument that, on the face of it, it looks very broad power. I don't think that any of the housing association sector believes that that will be misused. If it is prudent to look at some narrowings of it, then so be it, but I think it's important that it's still retained as I referred to earlier, just in case clause. Moving on to section 9 of the bill, which plans to restrict local authority power of nomination to an RSL board to a maximum of 24 per cent of board members. Inverclyde council says that they're concerned that plans are unduly restrictive and won't allow for the exercise of local discretion for local circumstances. Does anyone agree or disagree with that? In other words, they're saying that restricting it to 24 per cent is too restrictive. The forum has any member. This generally is something as a committee will know applies to stock transfer. Probably the largest stock transfer associations where having a proportion of local authority elected members was part of the transfer arrangements. It may be for others to comment. It's not as if we're going from something that's saying that you must come down from your 51 per cent lower. We're talking about nuances here between a third and a quarter. I would have thought that, even under the proposed new arrangements, there's still influence there from local authority members as there would be under the current 33 per cent arrangements. It's clutching at straws to say that this will make a big difference, especially as if we believe that the ONS needs this change to happen. It's Ali Thomas, yes. We'll be looking for the good relationships between local authorities and housing associations to pick this up. While it might appear to be a loss in some senses, we would hope as an organisation that the relationships between local authorities and housing associations is sufficiently good to be able to work that out between them in conversation and discussion. If it is felt helpful from both parties to have representation on boards of local authorities, then so be it. It's up to the individual housing association and local authority to work that out. I think that that's just what it should be. Okay, thank you. Any additional comments on that? Will you want to ask a question on this specific matter, Elaine? Yeah, but I don't want to stop. I don't want to stop. The unit was on this specific point. You want to speak on this one a bit further? I just wonder whether any of you think that it's appropriate that ministers should have the power to set this limit in the first place. The ones who are grabbing at that one, maybe about the clarity, do you mean that it should be open-ended? How many? Yeah, should they be able to set this limit of 24 per cent, whatever the figure should be, is that right? Sorry for all these tough questions. Can I just clarify, just so we get an answer back that fits in with the policy intent of the bill? My understanding, and it's always dangerous to try to understand something that's convenient over this committee, is that the reason for the restrictions was to better conform with ONS requirements for RSLs that we've seen as private bodies and reduce the influence of other public bodies on it. Does that mean that there has to be a cap somewhere down the line? And then Mr Simpson's question about why should that be specified at all by government? There still might be no takers for this, Mr Simpson, I don't know. I think ideally we would not want ministers to be dictating how our boards are structured. I think in this case we think it's probably a proportionate response to the requirement, as the convener has said, for ONS to see this happen, to see the perceived reduction in public influence or control happen. No other comment. Questions in advance, convener, I think. No further. Thank you very much. Having served in the Parliament since 1999, I was actually in the Parliament when the stop-transfer legislation was going through and concerns were raised at that time by myself and actually my then colleague John McHallion about the fact that stop-transfer could just be seen as privatising a public asset, which clearly was previously council housing owned in the public sector by all of us as the public. I suppose that we come to a situation where we are taking that even a step further, and at that time that would have been why there was concerns about how local authorities influence on boards to try and back off that accusation of privatisation of a public asset. My concern now would be that if local authority influence is reduced, how does that tie in with the fact that the local authority in those areas of wholesale stop transfer has the statutory duty towards homeless persons? What would be the implications for that, and that would be specifically to David Buckbinder and Sally Thomas, but if the regulator wished to comment on that, I would be happy to hear any comment that the regulator has as well. The sector regarded it as really important, especially in the light of stop transfer and six local authorities in Scotland that do not have any stock at all, that there were robust statutory measures for housing associations to support the local authority in housing households, so that section 5 of the 2001 act has been really important. In practice, a lot of local authorities do not resort to using that because the more informal nominations and referral arrangements in most parts of Scotland appear to work very well, but they were critical and remain critical in ensuring that all associations, but particularly those in areas with no council housing, can make a proper contribution to housing homeless households. My question is, will that still continue to work well if the local authority nomination to boards is reduced? I have to say that the forum does not associate the success of housing homeless people locally to the constitution of the board. I do not see a correlation there at all. I think the point that I would make, and it is an important issue because, again, the influence and extent to which housing associations have influence, which represents democratic processes, the taxpayer, the public good is important. For me, there is a difference between local authority influence possibly being reduced in statute in policy terms, as we have here, and reality. Who can second guess this? What I would hope, and I think what I would anticipate, is that, while there might be this provision, which looks ostensibly as if the impact could be to reduce local authority control and influence, the reality of it might not be that at all, might well be that it stays as it is, it has increased possibly, and that the joint intentions and collaborative aspects of the way that local authorities and housing associations work together and the relationships that they have built up since stock transfer, which are mostly good—I would not want to say that they are wholly good, that would be too much to profess—would mean that that level of influence would be retained and increased where necessary for the provisions that you have been talking about in terms of achieving reductions in homelessness and housing people who need it. I will ask the question. Given that our percentages are being specified and that there is direction of travel here, does anyone really think that there will be any difference in the good governance of the RSL's board or that the partnership relationship that it does or does not have with the local authority, based on whether a local authority can appoint 33 per cent of board members or 24 per cent? Is that maybe missing the concept of engagement partnership completely perhaps? Yes. Following on from the point that I have just made, I would not want to discount it completely. That would be naive and ridiculous to do so, but knowing what I know, knowing how the sector behaves, knowing what we intend to do going forward collectively and in terms of the sector, that the relationships in place now and the historic development of those relationships over time since SOC transfer will mean that we are in a much better place than we ever were then and that the partnerships going forward will reflect that and the impact of those partnerships and those relationships going forward on the housing needs and demands that we know that we are out there will reflect that. I think that the final question from Andy Wightman. Thank you. I just wanted to pick up a number of points that Gordon Graham Simpson made on the Delegated Powers and Law Reform Committee, which is the convener. As indicated, I think that the convener indicated that this just came out I think yesterday and it reveals a disagreement between the Delegated Powers and Law Reform Committee between them and the Government as to section 8 and section 9 order making powers with a committee feeling that they're too broadly cast and the Government saying, no, we're very content with that, we may need to mop up unanticipated feedback from O&S. So not looking for a response now, but if anyone wishes to come back and comment on the nature of that disagreement and where they feel the balance might be most appropriately set, I think we'd find that very useful. I just want to clarify with the convener of that committee there, obviously the Scottish Government is still to respond to the report that was published yesterday and look at the evidence within that, so that's the context. We should view that disagreement and I suppose anyone want to take up the cudgels on that one? No great thirst. Sorry, for me, I think the point that the members just made about having time to reflect and come back on it I think is probably the most sensible way forward for myself and SFHA. Okay. Do you read the report from the committee? It's all quite technical stuff obviously, but maybe you want to read it and come back to us. That's very helpful, Mr Simpson, because our committee will have to take a view on this, so we want to be informed not just by the report that Mr Simpson's committee has produced, but by your views in relation to that as well. The minister, of course, will be before us. Any additional questions from members? Okay. I thank everyone for coming along this morning, a very useful structured evidence session that will reform our deliberations at stage 1. As the offer was just made there, please get back in contact with the committee on additional information that you want to give, not just in that specific matter, but anything at all. I thank you once more for your time here this morning, and we'll now move briefly to suspend ahead of agenda item 2. Good morning, everyone, and welcome back. We now move to agenda item 2, which is draft budget scrutiny 2018-19. The committee will take evidence to the Scottish Government's draft budget 2018-19, and I therefore welcome Ronnie Hines, deputy chair and Fraser McKinley, controller of audit accounts commission, and Tim Bridal, manager of local government technical audit support. Can I invite Ronnie Hines to make an open statement before we move to questions? Thank you, convener, and I won't take up much time with that. The report, I hope, is self-explanatory. There's a summary at the beginning with the key points in each of the sections as well. Really, the only point that I wanted to make by way of introduction is that this is the second time that we've separated out the financial from the other aspects of local government resources and performance in two reports at different times of the year. The reason for doing that is that we think that it's most helpful to have this information in the public domain at this point in time when the budget cycles in full flow. It's intended to be informative and helpful, and it's in that spirit that we're here today to try to answer questions around the report. As I think we did last year, if there's anything because of the quite complex nature of some of the matters to do with local government finance, if there's anything that we're unable to satisfactorily answer today, we'll come back with further information after the meeting. That's as much as I wanted to say by way of introduction, give me enough. Very helpful. I will move straight to opening questions then. Andy Wightman. Thank you very much, convener. Thanks for coming along today. Thanks for another excellent report. I mean, these reports and their presentation and their clarity in the language, I think, is extremely helpful to us to try and make sense of what's quite a complex landscape. I think some of us were discussing earlier Exhibit 4, an attempt to put in some diagrammatic, simple to understand funding formula, which I think some of us are still struggling to get a grip of. The top line here is that you issued some stark warnings about the financial state of local government, notwithstanding that you have no unqualified audits on them. How would you view the financial state of local government now in the historical context, as far back as you've been working in this area? Over the past five, ten, seventeen years of devolution, where are we now in regard to the financial state of local government? The point that you made about the absence of any qualifications on any accounts is not something to take loss over. It's quite a significant achievement. Although it happens every year, we shouldn't take it for granted. It's an indication of the good stewardship of public funds that we continue to see in local government, so I just want to say that, because I think it's important. Notwithstanding that, and the fact that, by and large, councils are able to live within their means taking one year with another, what we see this year is an enhancement of the pattern that we've seen in the last few years, which is increasing challenges and difficulties on the part of councils to do that. It's not uniform across the country, the 32 councils, each of their own story to tell. Nevertheless, as a general trend, I think, of increasing difficulty, and probably the way that we've highlighted that in this report and was picked up in some of the media coverage yesterday, is that, for the first time, we've seen a majority of councils dipping into their reserves in order to balance their budget in year. There's nothing untoward about that. You're perfectly entitled to do that. The thing that we thought was potentially significant is the fact that a majority did that in budgetary and in actual terms in the course of the year that the audit is concerned with. That doesn't necessarily mean that we're at some kind of tipping point. We don't believe that to be the case. It would be far too early to be that kind of judgment, but it does indicate, probably, that, faced with the choice between doing that in the one hand and looking further into the service budget to make the reductions that were necessary there, they've chosen to use their reserves. As I say, a majority of them now did take that view for the year that we're looking at, so that seems to us to be potentially quite significant. Thank you very much for that. I just want to ask a question that I've asked you before. Obviously, part of the issue here is about the quantum of the resources that are granted by this Parliament through the vote on the budget for local government. That is obviously a matter that is going to be for us imminently. However, in terms of the challenges that you see for local government finance, what role could be played by structural change in the way in which local government is financed? I'm thinking more of fiscal autonomy, multi-year budgeting, fiscal frameworks, the kind of processes that could be put in place—there are others—to create more financial resilience in local government. Part, as I understand what you're saying, is caused by the fact that local government has very little means of its own disposal to raise revenue and is very much dependent on another sphere of government, and that in itself creates tensions. A lot of that would go beyond the scope of this report. Indeed, the work that the commission does, because there will be policy issues concerning that, so I'll let myself do the aspects that I can safely comment on. One would be that the multi-year budgeting, the forward planning, is a recommendation that we make repeatedly. As you see in the report, it remains the case that roughly half of councils don't routinely every year roll forward a three-year planning horizon for their revenue budgets, and they don't all do it for capital either. We recognise the difficulties with that, particularly when there's a one-year financial settlement for the largest part of their funding that comes from the Scottish Government. It's not impossible, otherwise none of them could do it, so we continue to press for all of them to do that and to put their planning on a secure basis as they can. That's one thing that could be done even within the current arrangements. On the broader picture, we've just seen the removal in the current financial year of the council tax freeze, and the report touches on that in the way that different councils responded to that. That does restore a degree of local flexibility that has been largely missing for a decade. It's not for us to say whether that's a good or a bad thing, but we do comment on the use that's made of it. The other point that we make is, and I think that that touches on part of your question, that even with that in play and a 3 per cent ceiling currently imposed on it, the council tax freedom doesn't actually make that much of a difference to the overall amount of money that local government spends. I think we compare it in the report to the cost of a 1 per cent pay award for staff, so it would be wrong to get hung up on the idea that, by itself, council tax, even if the 3 per cent ceiling were removed, it would necessarily be the magic solution to all of this. Now, it's then for others, I think, to conclude whether some continuation of the status quo, as it now is, or something else in the wider funding of local government needs to be brought into play, but all we can do is comment on the situation that exists. Okay, that's the final question for me at the moment, and it's picking up on the point that you just made about council tax. I was interested in paragraph 68 and exhibit 19 looking at council tax in 2017-18 and the impact that the banding reform has made and the increase in rates has allowed and also the additional income from discounts on second homes. You say in paragraph 78, and I quote, additional income arising from council tax reforms to banding multipliers, so those are the statutory reforms for the top three or four bands, are also shown, but you're going to say that councils do not benefit from these increases as the Scottish Government funding mechanism has been adjusted accordingly. So if I can just put to you a figure here, let us assume for the sake of argument that the general revenue grant is £100 and the increase arising as a consequence of the banding is £10. Are you therefore saying that where the banding not to have changed, the general revenue grant would be £110? In other words, there's no net impact on the receipts to local government of the banding change. I just want some clarity around that, because obviously this issue is partly related to a bigger question about transparency of figures and numbers, which we talked about last year. Okay, we're not saying that, but Tim can explain better than I can what we actually are saying. I think we're talking about individual council level as an equalisation there. So what we're trying to say in relation to the Exhibit 19 is that those councils that have a high incidence of the higher banded properties don't benefit from that. It's equalised through the mechanism, but I don't think we're saying that the overall level of settlement has been reduced equally, if that makes sense. So we're talking more about individual council level, I guess. Basically, when you say that councils do not benefit from those increases, as the Scottish Government funding mechanism has been adjusted accordingly, what you really mean is that they don't necessarily benefit on an individual council basis for all of the increase. So for the sake of argument, if, and it's probably correct, the city of Edinburgh has the highest yield from those top bands, it doesn't get all the additional revenue, and the equalisation means that some of that flows to other councils. Yes, exactly. Okay, that's extremely helpful. Question, Mr William, because as it happens, we were talking about this paragraph just this morning before we came in, and I think what might be helpful convener is if we can to write to the committee just to clarify that, because I think what we've recognised is that the way paragraph 6.8 is worded could be a little bit clearer on that specific point, so we're happy for the record to write to the committee and just to clarify that. But what you've just described is the situation, Mr Wightman. That's granted, just very briefly. If it's possible to create a beautiful graph like you do in Exibit 19 to illustrate that redistribution, that would be helpful. If not, it doesn't actually matter. Okay, thanks. Clarify something, because I thought I understood until Mr Wightman started asking his questions, and now I'm not sure if I understand it. So it says, additional income from council tax banding reform £110 million, that is the real money that exists. Right, so and how that goes to councils and how much each council gets, that's the discussion that we're having around here, but councils are getting £110 million because of this. The other complexity is that we don't know exactly how much it will be, of course, because it depends on the collection and everything else at the end of the year, but let's work with that figure for the moment, because that's what's anticipated. So that is new money in the system at the top line. So the point we're trying to make here, as we've just been talking about, is how that then works through into individual councils. Everything else muddies the waters, it's new money, and then we'll be interested to see the details of how that money, that's very helpful. With councils increasing their council tax by up to 3 per cent, that's £53 million new money as well, is that correct? Yes, so that Exhibit 19, the light blue bar represents what represents the decisions that those councils have made on their council tax, and that equates to about £53 million. We can look at the proportion of overall spend, but in theory, it's roughly £106 million new money because of council tax reforms going to local government. That's what that shows. The question that I wanted to ask was a really short one, but I just wanted to clarify that because of the questions that Mr Whiteman was asking. That is, the councils that decided to raise the council tax were they any more financial distressed than the ones that decided not to raise their council tax? Were they any less likely to manage their finances well than the ones that did not raise their council tax? If we're looking at the ability and the policy decision to raise council tax, what I'm trying to gather is whether the reason for raising or not raising council tax was to do with the financial management, good, bad or indifferent, or otherwise. Was there a correlation there? Did you look to see if there was a correlation there? No, we didn't. That's because the question that the other part of the correlation there is something very difficult to exercise their judgment on. We do, obviously, in auditing individual councils, make judgments, as I said earlier, about the financial stewardship and so on, but there's a slightly more qualitative element to the judgment about how well I badly demise their finances, and it's a very complex judgment to make. I don't think that we would be able to make the correlation or demonstrate that it doesn't exist. In any event, as you'll know, and the reasons why councils will choose to raise council tax or not raise it are many and wonderful, and some of them have to do with service pressures, but they have to do with other things as well, including some political considerations. I wouldn't expect prima faciei to see a correlation between how well or badly a council was managed. We would tend to look at it the other way and make a starting assumption, perhaps, which is that if you didn't have to raise your council tax, then all other things being equal, the pressure on your budget shouldn't have been so acute, because otherwise you would have taken the option of raising the council tax. I wouldn't expect to see that councils in most difficulty were the very ones who chose not to raise their council tax, but we haven't made that correlation to find out. That's helpful. Final question. I'll move to Mr Gibson in a second. Just in terms of trying to find out if there's a consistency of reason why council tax was, there wasn't an increase in it's relation to financial distress, and it's hard to take the kind of politics and political choices out of that, but I want to know if you've been able to do that, clearly you can. Key message 4. You see councils expenditure and use of reserves often differed noticeably from what was originally planned, indicating lead for a better budget setting to become more robust and reliable. Does that mean that where there was that big differentiation that just got their numbers wrong or had local authorities made in-year policy changes and choices that weren't factored into the initial budget set? There wouldn't be any need if councils had decided a suite of closures of some facility or a restructuring of another organisation and the political climate was such localities, let's not do that, they don't accrue the savings, that would show that differential from the original budget set, so what I'm trying to tease out is whether this was councils changing halfway through a financial year, what its policy intent was, or whether it was local authorities just doing poor planning to begin with. It is an excellent question, convener, and I don't think that we have the exact answer for it, because again, it varies enormously, but you're absolutely right to highlight, and the details in Exhibit 9 on page 22 are striking that the vast majority of councils don't use their reserves as planned, some use more, some use less, and we think that that is an issue. In some cases, we think that it's about the budgets that are set at the start of the year. We had one report at the commission recently where a council routinely underspent its budget, which has done for the last five years or so, and so had increased its reserves in an unplanned way year on year. You could argue that that's prudent. Our view is that it would have been prudent if that's what your plans had said. There will be occasions where something has happened in year that has affected that, but equally as likely it is that either their budget setting isn't robust enough, or that their financial monitoring isn't robust enough through the year. So that's a long way round, convener, of saying that it's difficult to tell, but all the things that you've just described will be in the mix there. I had looked at Exhibit 9, but I got a bit of brain freeze looking at it, Mr McKinley, to be honest. That was one of the reasons for asking the question. All of those things add none of the above at the same time, so it's a real mixed picture. It's really hard to tease that out. You would never do a breakdown for each local authority to say that the variation for regional plans was mainly because of policy changes or mainly because of weakness and initial numbers. Where we would report on that is that the commission has asked me to report to the Accounts Commission on all councils in terms of their duty of best value over the next five-year period. When we get into those more in-depth best value reviews of each individual council, that's where we would get to a more qualitative assessment of exactly what's going on in there. It's quite a big bit of work to get under the skin of why it is as it is, and it would be those best value reviews that we would get under the skin of some of that. I'll add to that by saying that we comment in the report on the deficiency in some cases of the management commentaries that councils are obliged to make under the public reporting duties. That, in the first instance, is where I would expect to see the detail that you're asking about. The primary responsibility to give a clear and coherent count of why things have panned out the way they have, as opposed to the way they were planned, lies with councils and they have a duty to do that. We criticise councils in the report for not paying sufficient attention to that, so we will continue to exercise sinew over that and try to get councils to report that better in the first instance. We may have an interest, as Fraser is saying, looking at the best value aspect of this to see what that tells us and how we can therefore try to interpret and explain it, but the information has to come from the councils. They are the ones who will make the decisions as the year pans out. Panel, an excellent, fascinating report, as always. I'd like to take you to Exhibit 21, where we have budget use and remaining levels of general fund reserves. It's quite interesting, we touched on this last year, the huge variance in terms of reserve levels across local authorities. We see, for example, Inverclyde with about 26 per cent of its income, we see Dundee with about 3 per cent, but what you've said under Exhibit 21 is that councils are using more general fund reserves relative to the amount remaining face greater challenges, and you've specifically pointed to three local authorities, Murray, Clarke-Manninshire and North Ayrshire—I am an MSP in North Ayrshire—and you've said basically that using general fund reserves at a current rate is not an option for some councils. Clarke-Manninshire, Murray and North Ayrshire would run out of general fund reserves when two or three years ago they continued to use them at the level plan for 2017-18. Assuming that the Scottish Government distributes resources to local government according to the current formula, what will that mean effectively, given those constraints for those local authorities in terms of their ability to deliver services relative to other local authorities? You mean the ones who are closest if you like to running out reserves? Given that they can't dip in any more. I think that the first thing that I would say about that is that, clearly in the situation of those councils, I would expect them to be setting budgets for next year and the years ahead, reflecting the fact that they've got less, if you like, buffer room in those reserves. They may well budget to replenish their reserves for all I know, so that might be one possibility. It's not a static situation, really, that's what I'm saying. While we make a comment like what would happen if they continued to run down their reserves at that rate, it's not because we expect that that is what will happen that we recognise other circumstances we're coming to play. The second point is that, and this has already been touched on in the discussion, what actually happens in the course of the financial year won't be, in every instance, what has been planned. Those councils, for example, may plan to restore their balances and find that their financial situation is somewhat better than they'd expected. They're able to make savings at a faster rate than they'd anticipated, so they might therefore be able to further restore those balances. We simply don't know, so the only point that we can make with safety here is that, if nothing else changes, they might find themselves hitting a difficult position sooner than some others. I think that, more than that, it's really difficult to talk about. I wouldn't be taking the view that, because they are getting close to the level where their reserves are near some kind of a deemed minimum, they're necessarily going to run out reserves in two or three years. I think that those are choices that they can make. The other point that I was making was what would impact being services if they are to ensure that they continue to have reserves and to do some more rebalancing. Is that going to have to reduce service provision in those areas deeper than other local authorities might? Potentially, that's one case. Again, we haven't looked at the circumstances of each of the councils that you've referred to in any detail there, so I'll extrapolate from the specific and make a general point. Again, all other things being equal. If a council has taken longer to come to some of the harder decisions that some other councils may already have made, then that means that those hard decisions still lie ahead of them unless the financial situation overall changes for the better. There's no indication that we can see that that will happen, so it may well be that difficult decisions about services in some of those councils will still have to be made, and they could be compounded by the possibility that they may feel that they have to increase their reserves to give themselves that greater degree of security for the longer term, but all those are hypothetical comments that I simply don't know until we look at the individual circumstances. The level of reserves that a council holds will be a function of a number of factors. There are some councils that we would regard as relatively well-run who don't have very high levels of reserves, but they are very comfortable in that situation because they have confidence in their ability to manage their budgets, so that's another factor. Switching to paragraph 28, you've said that councils delegated £2.4 billion of social care expenditure to integrated joint board budgets for 2016-17 and NHS boards contributed £5.6 billion, but you then talk about the establishment and development of IGBs as being a complex exercise that will take time to mature. They are operational with the focus of further performance on what we have planned in 2018. How can the work of those integrated joint boards be made more transparent, given the huge amount of money that we are talking about? As you said, Mr Gibson, we are on behalf of the commission and the order general doing our second report on integration next year, probably publishing about this time next year. We did one just at the outset of IGBs and we are doing a second one to monitor progress, but there is no doubt that it has taken the past couple of years to get the basic governance arrangements in place, so things like how the board operates and budgeting continues to be challenging. There are differences in terms of the timing of budget cycles in NHS and councils, which makes it difficult. We are very clear that the IGBs need to progress with those nuts and bolts of how they are operating so that they can really begin to focus on integrating services on the ground, which, after all, is what the integration exercise is all about, to improve outcomes for local communities. We are doing an update report on that over the next two months or so, and we will be in a position to say more about progress and exactly the kinds of things that need to happen in the future. My sense at the moment is that they are still struggling to get beyond some of those things about how those new organisations work, and not enough time and energy and focus yet going into integrating the services on the ground. In terms of the end of paragraph 22, the heading before 23, the council has been seeking to maximise the income available to them from charging for services, but that does not seem an actual fact to be the case. From the SPICE report that we have been given on local government finance fees and charges 2011 to 2015-16, the actual fact is that there has been a four and a half percent reduction in charges from £569.7 million to £44.2 million. What is interesting about this report is that it goes through all the local authorities. For some, it seems to be a bit of a roller coaster, because charges seem to go up and down and round about for year-to-year. West Lothian, for example, in the last year, increased charges from more than £4 million to about £11 million. Falkirk, five years in a row, has increased them every year. Perthengan Ross, from 17 million to 20 million real terms, whereas Perthengan Ross has steadily reduced them from £14 million to less than £7 million over the same time period. What is actually going on there? To take that one. That report, as I understand it, is an analysis of information that is submitted to the Scottish Government. It is not subject to audit, it is the first thing I would say. We have not got a full picture, because that is submitted by councils. Quite often councils provide services through arms length bodies, leisure services trusts and care trusts and the like. I think that some of those ups and downs, if you like, are maybe just because there is a new alio, and that income is no longer shown on the council's return to the Scottish Government. I think that there is also a little bit of data quality issue around transfers between councils, featuring as income in some cases, which is clearly not what we want to analyse in terms of charges to service users. I know that the Scottish Government is looking to address that and clean up the data for 16-17, which will be available in the new year. It will be interesting to see in terms of the movement. The comment that we make is really off the back of what we see in budget setting reports. We do see that councils are looking to maximise their income. That is not to say that they would necessarily increase their fees and charges by more than inflation, but ordinarily they would be increasing their fees and charges. There is an exhibit towards the back of the report where we look at some of the budget initiatives for 17-18. There are some examples in there of the sorts of things that they are doing to increase charges and introduce new charges in some cases. For example, arts and culture, for example, income from fees and charges across Scotland have fallen from £42.6 million to £30.5 million. It does say that 10 councils did not consistently report income in every year, suggesting that they will be recording the income within different categories of where income has not been recorded. New arrangements may have been introduced. There is an element about allios, but North Ayrshire, for example, Aberdeen Angus, more than 80 per cent of the budget is received in charges. You have got other local authorities, for example, East Renfrewshire, where it is zero contribution fees and charges towards the arts and culture budget. Taking into account the things such as allios, it seems to me from this report that there is significant inconsistencies. I do not really see any great evidence that local authorities are maximising income available to charging for services, particularly at this challenging time. In a sense, Mr Gibson, the reason that we have worked with Spice to produce this report, which I think is enormously helpful, is that we recognise the need to better answer your question, which is what is going on here. It was a subject that came up last year when we were with you, and that is why we have progressed this piece of work. I think that what the Spice briefing does is ask lots more questions about the consistency question, about how individual councils go about it. The point that we make in our report about seeking to maximise, as Tim said, is a more recent thing that we have seen in the last budget setting. You are absolutely right to say that the trend over the time period from 11.12 onwards has been coming down. I think that what we are beginning to see, given budget pressures in other areas, is councils beginning to look to increase that again, so that will be something that we will want to track carefully as we head into the future. However, the basic point is that we need to better understand what is going on here. The commission did a report a couple of years back, which set out some principles about how to go about setting fees and charges and the kinds of things that we would expect to see to make sure that it is not a kind of finger in the air exercise, that it is actually planned and in line with priorities and those kinds of things. That is an area that we want to keep a close eye on, and the Spice briefing is a really good starting point for that. Thank you. Okay. Only if it is specifically on this, Mr Whiteman, because I have got Alexander Shooter and Jenna Gowruth waiting to come in specifically on this. It is indeed. It is very brief, full up, on the fees and charges on this question. The fact that the Spice notes that the income is falling, do you have any sense on whether that is because they are charging less or because a lot of people are choosing not to use the services because they cannot afford them any more? I do not think that we are in a position to say that. I think that that is the kind of analysis that we might want to get into in the future, Mr Whiteman, but at the moment, at least we have got a better picture of the current situation. Thank you. Okay, Mr Gibson. Yes, sure. Alexander Shooter. Thank you, convener. Good morning, panel. Many councils see themselves in a financial crisis, in some respects, and your report indicates and gives us highlights of councils that find themselves in a more difficult situation. Each council has a short, medium and long-term financial plan, and it has to look at that on the round and tell them if they have a stronger or not strong financial planning and financial management in that council. Going forward, many councils deal with their borrowing strategy to try and manage some situations too. I would like to ask you some reference to that. At the moment, we have quite low interest rates, and many councils use that to ensure that that gives them some kind of buffer when they are borrowing. As we go forward, that is going to potentially change, and that buffer is going to be removed, along with others, as you have indicated, if the reserve strategy is not being managed effectively. Can I ask you to explain what your view would be on that? If the reserve strategy is not going to progress and if the borrowing strategy is not going to progress, where do we really find ourselves and local government with this process? Across the board, I would probably dispute that we are looking at reserves or borrowing strategy not progressing or not working. The point that we make for the 32 councils as a whole is that it continues to be the case that there is a significant amount of money held in reserves, not by all of them but across the piece. That continues to represent some kind of buffer, as you put it, against the vagaries of what funding and other matters might hold for them. Comparably with the borrowing, although there has been a move recently with interest rates going up, and it is anybody's guess and mine is no better than anybody else's, what that might mean in the longer term and whether that turns out to be a step on a journey or just a one-off in something that could be reversed. We do not know, but what we do know is that councils have by and large pretty good treasury management strategies, including the amount that they borrow. You can see in the report the extent to which they make use of the various devices at their disposal not to be exposed unduly to fluctuations in things like interest rates. While it might be the case for you or I if we are sitting with a mortgage at an increase of half a percent or whatever turns out to be a real impact in your pocket the day after tomorrow, that will not necessarily be the case for well managed councils because they have got fixed interest rates that they have put in place. They also have other strings to their bow. They can decide when to borrow, so if their crystal ball is a little clearer than mine, they might think that they do have a better idea and they will get good advice on this about what might happen to interest rates in, say, 12 months time, so they could decide to borrow now against a possible rise and therefore have a further cushion. Our view of that would always be a holistic one. We would always look at how well they manage their finances in that particular context across the piece rather than how exposed they might be to one of changes in interest rates and so on. We do not have overwhelming concerns about that. What we do say in the report is clearly that there has been a significant shift in the year that we have just audited in the overall amount of debt that local government has. The key even to that is what does that mean in terms of affordability? Broadly speaking, it is something like 10 per cent of general fund income or expenditure that is committed to the repayment of those debts and the interest that goes with it. I think that time can keep me right. Although that 10 per cent is clearly not an insubstantial figure, it is actually a reduction on the figure the year before. Those things do move around a little bit. Just because there has been an increase in interest rates in the last few months does not necessarily mean that we are going to see local government budgets next year having 12 or 13 or 14 per cent committed to that. It is a long-term issue that we have to keep a long-term eye on. We work with councils to make sure that they have good strategies behind what they do. I would not be concerned in terms of the spirit of the question that the trends in borrowing that we reported here for last year or the movements in reserves necessarily exposed them in a more perilous way than previously. In reality, they may find themselves less exposed in that context because they have that strong financial management process that they can tap into and that gives them an advantage against other organisations out in the field. However, when we are thinking of how that is interpreted going forward and how every local council can then plan to manage its finances over the next three to five years, that becomes a very important process for them. Within the report, as I said, you have identified councils that may not have a strong view of doing that and a strong process to ensure that they do not find themselves at the end of the day in a more perilous situation. I think that the idea of trying to co-ordinate and manage that financial is important. However, my next question would be that, in the long-term situation that they find themselves looking to and with the new difficulties with the demographics that they have and the IGBs and all of that coming into the mix, the way that they are spending their money is changing depending on what they are trying to manage within that process. They do not have the flexibility on some of that because it is statutory and because it is left to them and they must spend the money on that before they can then deal with other things that they might have to reduce or that they might have to increase charges on. What is your view and feeling of that going forward for many of the councils? What you are referring to is the comment in the report about the differential impact of the savings that have had to be made across the range of services that councils provide. We feel that that is an increasingly important point and that is why we have made it again in this report and will make it again in a different fashion. We will look at the services themselves in the overview report in the early part of the new year. Clearly, it is the case that it is not just because there is statutory protection. There are other degrees of, if you like, preference or priority attach for perfectly understandable and justifiable reasons to some services compared to others. Our view about that is that that is perfectly justifiable and it is up to councils to set their own priorities, sometimes in conjunction with the Scottish Government. That has to be done with your eyes wide open. You have to be very conscious of the impact that that has on other services. We try to set that out here in financial terms. We are not saying that the 12 per cent reduction that we looked at over a three-year period in culture and leisure services is unsustainable. That is not our view. Our view is that it is quite clearly different to the level of savings that have had to be made for, say, the education service. While councils are entitled to say that we want to protect education and the Scottish Government is entitled to come to understandings with them on that, the consequences of that for the other services have to be noted. We think that it is a part of the council's best value duty to make sure that they are doing that. We are pushing very hard to make sure that the impact that that has on those services is something that councils understand. We will say more about that in the report that we published in the new year. It needs to be quite brief, because there are other members who want to know. Mr Gilmour, it is just on the debt issue. You talked about local authorities being able to manage debt by borrowing when interest rates are low, but at the bottom of Pagina 53, PPP, PFI and index-linked bonds include charges that increase with inflation, so surely that means that local authorities, such as North Ayrshire, have high payments in terms of PFI and are more exposed? All other things have been equal. I agree with that. We are going to do a last-raiser to say more about that in a moment, but we are going to do a bespoke piece of work on the various forms of funding for capital projects, including PFI, PPP and the New Year. Not just driven by that, but you are right. The reality is that there is a degree of lack of flexibility around some of those that might not apply to other aspects of even capital funding. We have to make sure that that is being looked at in the context of the bigger picture that we are trying to paint here, which is how much of your budget is given over one way or another to maintaining the costs of capital investment decisions that you have made in the past. That is not because we think that those decisions have been badly made, but because the context in which some of those earlier decisions may have been made, the overall financial context, would be very different to the context now. Of course, as room for manoeuvre one way or another is decreased, the impact of that is greater on the council budgets, but Fraser may want to say a wee bit more about the piece of work that we intend to do in that particular area. Not much, convener, other than to say that we have on the plan to look at not just PPP-PFI but the whole alternative means of financing and funding capital projects, and we will get into some of those issues there. I think that the only other point that I would make is that it comes back to the same central point, which is the importance of good medium and long-term financial planning. The councils should absolutely be aware of the exposure that they have, and we would expect them to be doing good sensitivity analysis that would understand what would happen if an interest rate rose or did not. Indeed, as many councils do, they look to actively managing and reprofile their debt as they go. All of those things are why we keep buying the drum for better medium and longer-term financial planning. I have a specific question with regards to paragraph 20, which is about universal credit. As you say, it has been rolled out across five different council areas in Scotland. You say that rent arrears across those councils increased in 2016-17 by an average of 14 per cent, compared with an average of only 4 per cent across the remaining councils. Within your own housing benefit performance audit report, you highlight that councils are finding that the roll-out of universal credit is having a detrimental effect on their collection of housing rental income. Is universal credit specifically creating increased financial pressure on local councils? I think that that is fair to say for housing authorities, and there are pressures on rents within the HRA. We normally try to differentiate between general fund and general services, which are funded via general revenue grant and taxation, and housing revenue accounts, which are funded via rents. It is fair to say that the pressures so far have been largely housing revenue account pressures for those councils' rent collection type issues. There is some sense that there may potentially be some general fund pressures associated with universal credit, but it is a bit early for me to be able to comment on that. The only thing that I would add to that is that, obviously, in a report like this, we touch on a number of issues that we cannot really develop, and this is one of them, but it would be remiss not to make any mention of this just because the primary focus of this work happens to be the councils general fund. Again, we are planning a specific piece of work on housing. We did the report on housing maybe three years ago, and we feel with a number of situations that this is one of them. It is time for another look, then. I would expect that that will be the opportunity to get into the depth of this, and by then we will know more at the moment that we know what we can report here, which is not much, but we will be beyond the pilot stage, I presume, with a number of councils by the time that we produce that report, and we will be able to look in greater depth at what impact of any it is having on rent areas. At the moment, we can simply see a pattern of correlation emerging there, but we need to get under the skin of that and find out what is actually happening and whether it is something that is sustainable or maybe just a blip because of the difficulty in introducing quite a new system of benefits that we do not know at this stage. You may, again, not know the answer to this next question, but I am going to ask it anyway. The report itself talks about risk and uncertainty. There are a number of groups in my constituency in Fife who have been supported directly by EU structural funds, so those projects are often administered via the council, and I know that Fife council works closely with them. I would like to ask, then, if you have a view on how Brexit is going to impact on local government finance. I am very tempted to pull up the drawbridge and say that we do not cover that in this report. I cannot comment on that. Again, I can say with a degree of security that the picture becomes clearer. We have already identified Brexit, as you would be surprised if I said anything other than that, as one of the bigger landscape risks that we have to operate within. Our view is clearly local government. Brexit pervades the economy as a whole and other factors, too. However, as we do our risk planning going forward and come to decisions about which pieces of work we might most usefully do, and I have referred to a couple of them already, then Brexit is one of the risks that is already in our planning and getting bigger at the moment. I guess that the best thing that I could say is that, when it becomes a little clearer what it might mean in terms of EU funding as it impacts local communities and via councils in particular, the sharper our thinking will be about whether a particular piece of work around that might be useful at the moment. I think that it would be too speculative for us to do anything that would add value. I am sorry to be a kind. I will very briefly add to that that we have this year, as we begin planning for the coming audit year, which kicks off about now. We have asked auditors specifically to do some work to look at how the bodies that we audit—across the public sectors on behalf of the Commission and the Order of General—are preparing for Brexit. We are doing some work to check the extent to which individual public bodies are understanding the impact of it. My sense in councils is that they are quite alert to it, that they understand the money that comes via Europe and, of course, they will be doing what they can to prepare for that. As we know, the challenge with this particular topic is that there is so much uncertainty that it is very difficult to plan in any detail, but I think that our sense is that they are alert to it. Last year, when we were looking at this, there was—it was not a very clear picture—whether council funding was going down or up or the same. It was all very confused, and we made reference to this in our report. I think that one of the factors around that was integrated joint boards. Are we any clearer now? I noticed in your report paragraph 11 that you seem to include money from integrated joint boards. You say that there is a revenue cut in 2016-17 of 5.2 per cent in real terms. We struggled last year to get to a definitive figure. Are you any clearer on things this year? Well, I am looking for the reference as a table somewhere that demonstrates the movements. Are you asking about the movements over time in the funding for local government? Is that the point of the question of my misunderstanding? Last year, when we were looking at the whole budget issue, it was fair to say that we struggled to get to an actual figure. Was money to councils going down or not? One of the confusing bits around that was the IJBs. There were other factors, but I am merely asking you, do you think that we are any closer to getting clarity? I hope so. Part of that might be the result of the decisions that you came to on the consideration of our report, as well as evidence from other sources. I have seen the correspondence around that and some of the undertakings that have been given by the Government on that. We await with interest what that will mean when the budget figures are produced in a few weeks' time. In relation to the specific point about IJBs, what we have done here, which I hope is helpful, is to try to separate out the effect of the additional resource given to IJBs in 2016-17, and later we do it for 2017-18. We stand by what we said at the time about whether it is right or otherwise to include IJB funding in an account of what is happening in Scottish Government funding as a whole to local government, which is that the money to the IJBs goes into the accounts of the health boards. As a consequence, we do not think that that should be included in that total. However, we recognise that different people can take a different view about that, and what we are trying to do here is to separate it out so that you can see for yourself. It is a matter of choice which line in that particular analysis is the right one to look at. That is as clear as we can be on it. It is clearly money that goes into the accounts of the health board. What happens after that is part of the bigger picture that we touched on earlier to do with IJBs. We will be interested, among other things, in clarity about whether all that money finds its way into the budgets of the IJBs. However, at the moment, all that we can say is that that money is something that does not go to local government in that, in our view, would not be part of local government funding from the Scottish Government. When we are looking at it, do you think that we should be discounting the IJB money that goes to health boards and just looking at the money that goes direct to councils? It depends what point you are trying to make. We are trying to make a comparison over a period of years and say what is the position for local government funding from the Scottish Government compared to the Scottish Government's own funding. If you are trying to make that kind of comparison, you use the statistics one way. If you are trying to make another point, you use the statistics another way. It depends what point you are trying to make. I am not trying to make a point. I think that the point last year is that we just needed to know the position. You have illustrated the problem. From my point, I think that we get to a point where it is always going to be difficult to get everyone to sign up to a single figure that can answer the question, is it going up or down or not, which is why we have tried to separate it out in the way that we have this time round. As the Deputy Chair said earlier, this is the second time that we have done this report. I am sure that there is more that we will be able to do next year to bring even more clarity and transparency. Our experience of doing this kind of thing on things like reserves, for example, when the commission started reporting on reserves now some years ago, that has shown a spotlight on an area of local government finance that was very opaque. Now, the fact that we are able to have a conversation about what is happening in reserves and individual councils is a sign, I think, of how the debate can move on a bit. I would anticipate this being similar. As the Deputy Chair said, we will watch with interest in a couple of weeks' time how the Cabinet Secretary presents this. I think that what we are trying to do is, rather than come up with a single figure, be as clear as we can as the different elements of that figure, Mr Simpson. As you say, beyond that, people will make their own judgments. I might just follow up with a couple of bits of that, because that is obviously a question that I have been pursuing for some time as well. You made the point, Mr Hines, I suppose that it is what point you are trying to make. For my part, it is a bit of a question that I would want to ask. If the question that I wanted to ask is, can we focus on what has happened specifically to the revenue grant of Scottish Government to local authorities over the years, that gives you one set of statistics? Or you could ask the question, because we are doing budget scrutiny as part of this evidence session as well. What additional revenues from Scottish Government, be it direct or indirect, goes to local authorities to support the delivery of services? That is why I think it is very helpful that the exhibit shows the quite significant difference that you get in the numbers, if you include IGB funds. In terms of the spending power, or in terms of the liabilities that local authorities have anyway, would you not recognise that you would have to include IGB funds, given the fact that I understand that £125 million of those funds in the last year was for living wage pressures in the social care sector, and had those monies not came through the NHS, that money would not have been found from elsewhere? I will rephrase it. It depends on your interest in the subject, so the way that you put it is very helpful. If your interest is to see how much purchasing or spending power there is out there to provide a range of local services, then in terms of exhibit 2, for example, I would be drawn to the bottom line that says that the £250 million in this case for 1617 that went into IGBs is clearly meant to be buying local health and care services, so that would draw you to that conclusion. If your interest is something different about which particular bits of the funding formula for the local government are properly attributable to local government, i.e. councils as entities, then you would be looking at something different, so it is not the point that you are trying to make it as interesting as you have in the matter. Can I ask the money that comes through the general revenue grants? Does that include, and I forget the number now, the £110 million that would come from the changing to the council tax bandings, the multipliers on that? Would that be included within that? That is very much local income that councils collect. The reason that I am asking that is because Mr Wightman has set the scene very well at the opening of this evidence session. If we are having a debate when we do budget scrutiny over the spending power of local authorities and the flexibility of local authorities in which to raise revenue, there has been a belief over the years that they became far too reliant on the revenue grant from Scottish Government. As other levers of revenue become available to local authorities, I would find it helpful for that to be set aside in the same table. I would have found it helpful, for example, to include those monies in terms of the council tax multipliers that go to local authorities, because that was a Scottish Government decision made, and it is the real money that they get. I would have found it helpful to have the projected 3 per cent council tax increase as well to get the actual position of local government. My frustration is that we had us with COSLA the other week. I totally accept that it is the Scottish Government's job. The Scottish Government does each year try to make the financial position of councils look as good as it possibly can, and COSLA tries to make it look as weak as it possibly can, and they are in-between lies of the truth somewhere down the line. I wonder whether I will await with interest the information that we get from Mr Mackay when the budgets produce. We have been pretty clear what this committee expects from Mr Mackay, but whether that does or doesn't appear, we will have to wait and see. I wonder if you would consider, in future revisions of this report, to include those other monies as part of something that Exhibit 2 to give us a better feel for the actual position of local government? Well, what we do in the report is show elsewhere, and you have obviously identified it, the figure, the £110 million that you are referring to in a different context, so we are not disputing for a second that that is additional resource that local government has at its disposal. The question that has been posed now is whether it sits properly within the analysis on the pays that we are looking at underneath Exhibit 1 and Exhibit 2. We can take the point on board, but what I undertake to do now is, as I said at the beginning, we are happy to provide further information to the committee as a result of discussion this morning if you think that it would be helpful. We are more than happy to put these pieces of the jigsaw together if you like in a response to you and set out as best we can where we think that these relative sums of money sit. I will say, even in advance of doing that, what I said before is that it depends on what interest you have in the matter. This part is looking at something called Scottish Government revenue funding to councils. It would be a significant interpretation of that to say that council tax, even a part of it, was Scottish Government revenue funding to councils. It might be funding that councils have at their disposal, but I do not think that it would sit happily under that heading, so we need to think about how best to present that in a way that is clear and helpful. I fully accept all that I accept. I do not think that it is the responsibility of yourselves to do that. I think that it is the responsibility of the Scottish Government to set out their figures clearly and for that to be scrutinised by ourselves and by us and others. While we have found it helpful, I do not think that the onus sits with your organisation. I have a couple of brief questions to better understand. I do not want to understand looking at it again now. I thought I understood it until I was in a tangent there, Mr Hines. In terms of potential funding gaps for local authorities in the coming financial year, because we will find out what that settlement is very shortly, the figure of a potential funding shortfall of £343 million, is that looking at the overall money that is going to local authorities or just the revenue grant? That is based on the overall income from the general revenue grant and tax compensation, so it includes council tax. Does it include the integrity joint board funds? That is a good question. Is one causal, I could say? No, I do not think that that does. That does not feature at that level. I think that that comes into their accounts at a higher level. That is what we would call the net revenue expenditure to be funded from general revenue grant and taxation, so that the IJV money would come in at a higher level. I think that what would be helpful is when it says that in absence of further savings, councils would use around £343 million in 18, 19 expenditure were to increase by 0.5 per cent in terms of expenditure and income decrease by 1.5 per cent, whether or not that funding gap assumes that £250 million has been already given to local authorities via IGBs, or whether or not the funding gap is £343 minus £250 million or whatever the current figure is. That would be quite helpful for us to know. We will clarify that in the letter that I referred to earlier. I think that would be another part of what I called the jigsaw that would be useful to set out for you. That would be very good. The 343 is based on a revenue cut of 1.5 per cent, a predicated revenue cut of 1.5 per cent from the Scottish Government, would that be right? It is an overall reduction in their income, so it is a mix of the two. That would be the reduction in their income from council tax and general revenue grant and the IJV. It does predicate council tax funds this one, then. I do not ask any further questions on the table. I just wanted to better understand the table when we go to do our overall budget scrutiny, so thank you. I should say that we are not saying that 343 million figure has any specific significance. We are setting out a range of possibilities there. You will have heard from other parties where they think that it sits in all of this, and you will need to form a judgment yourself. However, we will set out more clearly the assumptions that underlie the reductions in their income and increases in expenditure that we have made in a supplementary letter to you. It was very helpful when COSLA gave evidence that they said that a funding gap was about £580 million, but that was predicated given every worker a 3 per cent pay increase, for example, feeding in towards that. What we are getting clarity on is whether they were including joint-bored moneys or not within that mix, and I think that when they contact us, just to confirm whether it does or does not. Mr Gibson, did you want to? The point of clarification is that COSLA figures included a 3 per cent pay rise in 2 per cent, 2.8 per cent increase, I think, in demand pressures as well. It is obviously not because of ageing population and whatever it happens to be, so that is how they came to the figures. Across the top, there are just changes in expenditure. We do not differentiate between inflation, increasing demand or anything. It is just to pick a number that looks sensible to you and ask what would that mean in terms of a funding gap? It does help the committee from as far as it gives us a baseline table by which to add on additional pressures or additional revenues and see how that all interacts with each other. Now that I think I understand it, because I am trying to see some value, thank you very much. On this specific question, because Elaine Smith has been very patient, Elaine Smith. On that specific question, I could just clarify, because I am not clear. The minus 343 that you have picked out and showed us as an example, is that just an example to show how the table works? It is not a real figure. Okay. Turn into paragraph 17 of your report. In paragraph 17, you basically say that the Scottish Government calls to assure themselves that the funding formula remains fit for purpose in a changing landscape for local government. I suppose the question is, do you have an opinion on whether it remains fit for purpose? Who should be looking at this to see if it remains fit for purpose? The reason that we have included this, and you will know that this is the first time that we have ventured into this territory, is because we do think that transparency and clarity around a very complex arrangement here would be beneficial. That is a view that the committee has expressed in the past. We are not doing this because we think that we are experts in the difficulties of local government funding, let alone the complexities of the distribution process that this is just a high-level representation of. We are not sitting here in front of you as experts on it, and therefore, even if we had an opinion, it probably would not be of any great value to you. However, what we do think, having looked at this and reported in the way that we have done, is that it has been sometimes, since it was a fundamental review of this, and we are trying to point out at the top of that diagram in Exhibit 4, the number of quite distinct elements that feed into the top part of the process, and somebody spreads sheet that eventually distills out a set of figures that represent real funding to the 32 councils. Those all are quite different to each other. There is a question, therefore, about how a mixture of things like that, how coherent that is. We are not saying that it is not coherent, we just think that it is a question worth posing, and that the changes over the 10 years or so, since it was last looked at in a fundamental way, are not just changes in the financial context for local government, but also changes in the policy and other contexts, not just of local government but Scottish Government as well. Against that background, when there is an aspiration to try to deliver better outcomes for the people of Scotland, whether any funding arrangement, let alone one as significant as this, is absolutely fit for purpose, seems to be a valid question to pose. We are not saying that because we think that it is not, we just think that after 10 years you should look at that. A lot has changed in 10 years, and you can see some of that spell out in that diagram. We do not have an opinion because we are not experts, but we are advocating at least the potential for a look at it, and certainly for the transparency that I think the user committee and other interested stakeholders have in how all this pans out in local government budgets. At the start of that paragraph, you are talking about funding. You used the example of it to expand early years childcare, and that has come as additional funding, but it is specifically directed at delivering particular national policies. Do you think that funding that is specifically for national policies should be looked at somehow differently, then? Is that what you are suggesting at all? The foundation of that remains what it has always been, which is a needs-based formula to distribute resources in a fashion that is equitable between 32 councils. If that remains the objective of the funding distribution, it is worth looking at it again to see whether the things that have been added to this over the 10-year period are genuinely needs-based in that fashion and whether they still represent the best outcome if you are trying to deliver resources to councils so that they can play their part in servicing their local communities and in delivering high-level policy priorities that councils and the Scottish Government have an interest in. If you looked at the answer, it might well turn out to be yes, but we think that the question is worth posing. Our core question is a simple one, which is if there is a growing sense that we need to be allocating money for particular purposes in different ways, whether it is to pupil equity fund, whether it is support for early years, then I think that that does raise a question as to the core funding formula. In a sense, if the core funding formula was designed to reduce inequality and improve outcomes in the way that the policy framework is now designed to do, you could argue that you might not need to have separate revenue streams in additional funding or nonspecific changes. The more you add on to those bits, the more it seems to us reasonable that you ask the question about the core formula in the process. I suppose that is our core point. Time is almost upon us. I apologise, Mr Whiteman, that you will have to be brief, but I am really hoping that we can get this session finished at quarter past, Mr Whiteman. Okay, thank you. It is a brief follow-up on that. I mean, I think that that is helpful. I have been engaging with this as a result of the proposed cuts to City of Edinburgh Music School, which were previously ring-fenced in 2009, and then Concordat said that they are all wrapped up now in the settlement. Where they are in the settlement is a little bit unclear, so exploring that in the future would be useful. I just want to ask a very brief question on Exhibit 5. You talk about budgetary pressures, single-state pension, living wage for care workers, annual increases in costs and so on. Is it your impression that those pressures now are significantly greater than they have ever been over the last decade or so? Just to get some relative impression of the scale of the pressures now being faced? Others might have a more coherent view than I have on that. I would not say that. I mean, financial pressures cost pressures to be more accurate of one sort or another and every day and every year factor of local government life, so we have not looked at this to see whether, in 2016-17, they were more or less severe than in previous years. But what I think I can say safely is that they are not out of line, they are not extraordinary pressures, so even if they were consistent with previous years, against a backdrop of reducing resources, they become harder to deal with. I think that is the core point that we are making here. That was very brief, Mr Wightman. I appreciate that. Any other questions from members? As always, it was very helpful, a really challenging report. It gives us better skills as MSPs on this committee to better scrutinise the budget when the numbers do come out as well, so we very much appreciate that. We look forward to working in partnership with you in the months and years ahead. That is the end of this particular evidence session, so thank you very much. However, when I will move to agenda item 3, which the committee has previously agreed to take in private, I will now move into private session.