 Welcome everyone to this, the 10th meeting of the Public Audit Committee in 2022. Before we begin, I remind members, witnesses and staff present that the Parliament's social distancing rules apply. If you are walking around the room or entering or leaving the room, if you could wear face coverings please, you don't have to wear face coverings while you are seated and given evidence. The first item on the agenda is for the committee to agree or not to take items 3 and 4 in private. Is that agreed? Yes, that's agreed. Thank you. The next item is our consideration of a section 22 report, which was published earlier this year by the Auditor General into Scottish Canals. Can I welcome our witnesses to the committee this morning? I am pleased to welcome Catherine Topley, who is the chief executive of Scottish Canals. Andrew Thin, who is the chair of the board of Scottish Canals. Sarah Jane Hanna, who is the director of finance and business services at Scottish Canals. We have also got a team in from Transport Scotland, led by Hugh Gillis, who is the interim chief executive of Transport Scotland. We are also joined by Fran Pachiti, who is the director of aviation maritime freight for the purpose of this morning and canals in your job title. We have also got Lee Sheddon, who is the financial controller at Transport Scotland. I want to begin, Catherine, by inviting you to make a short opening statement to the committee and then we will have a series of questions from members of the committee. Over to you, Catherine. Thank you very much, convener. In July 2012, Scottish Canals became a stand-alone public body in Scotland, marking the end of a 50-year cross-border public corporation. In accordance with the Transport Act 1968, waterways, reservoirs and towpaths were written off in a capital reconstruction and have never been disclosed in the Scottish Canals annual accounts nor valued for audit purposes since the state. No asset valuation was conducted at the time of the transition and the framework of statutory reporting saw the canal infrastructure being left off Scottish Canals books. No external audit concerns were raised on the transition figures by Grant Thornton at the time and our 2012-13 accounts were approved by Audit Scotland. The assets, liabilities and operations in Scotland began reporting to the Scottish Government under the management of the Scottish Canals, the operating name of the British Waterways Board, which was sponsored through Transport Scotland. In October 2012, Audit Scotland presented an audit plan at the Scottish Canals board meeting, identifying NDPB reclassification as a key risk in the future and stating that the value of the canals would have to be considered if that reclassification occurred. However, it was decided that Scottish Canals would remain a public corporation at that time, at least until 2015-16, for counting purposes, with an ONS review to be conducted. In 2017, Scottish Canals performed a high-level valuation of the canal infrastructure in line with the ONS review, and in May 2018 published our 2018-30 asset management strategy, setting out risk-based approaches to managing the complex range of our 4,100 assets in our care. We also published an overall canal replacement value of an estimated £1.78 billion. We are not asked to include the replacement value in our books and records, and this assessment was not a technical accounting valuation. In September 2019, we were advised by ONS that they had analysed our accounts on our website and concluded that we did not meet the quantitative market test to remain a public corporation. That was confirmed to us in writing in November 2019, and we were being asked to reclassify four months later in April 2020. The board sought assurance on the budgetary impact of not being able to retain reserves across accounting years, and we began preparing our 1920 annual accounts in the usual format. Grant Thornton paper that was sent to the board in January 2021 stated that operational freehold land buildings and structures would need to be held at the current value, and that Scottish Canals would have to review the way that we value vehicles, plant, equipment and public artworks. Scottish Canals followed up in March 2021 with a proposal on how that would be achieved. However, the structures were not part of the valuation plan at the time, and that proposal was accepted by Grant Thornton. In July 2021, Grant Thornton raised the issue of £51 million of additions that were structures to the canal's infrastructure since 2012. That included reservoirs and canal improvements, such as the Helix park in Falkirk, Bowling harbour and north Glasgow, to name a view. Previous audit reports had not raised any concerns about those projects or the fixed asset register, but a hot review in June 2021 led by Grant Thornton advising additional audit testing on capitalisations of those assets was required. At this point, we were some time into our external audit. Once Scottish Canals completed assessment of those additions and the audit work was finalised by Grant Thornton, Scottish Canals sought specialist value for those additions. Grant Thornton assessed the valuers qualifications as suitable because existing RICs-qualified valuers were unable to value such varied assets. Grant Thornton approved a sample of the methodology used for the valuations, and the Scottish Government confirmed that the use of such a specialist was an appropriate interpretation of Frem. Valuations of £45 million of the £51 million additions were conducted, which represented 88 per cent of the valuation. However, on reflection, Grant Thornton felt unable to conclude on the judgments and estimates without the underlying valuation of the canal infrastructure being incorporated. That is the main tenant of Grant Thornton's concerns and has resulted in a disclaimer opinion on the annual accounts. In the evidence to the committee on 24 February, the Auditor General said that he had not identified any core financial sustainability issues with Scottish Canals. While Audit Scotland's senior manager said that it was not uncommon for ONS to recommend a change in status and not to look at the implication for the organisation. Since the disclaimer was placed in our accounts on 2020-21, we have worked collaboratively with all parties and now have a robust plan in place with an ambitious delivery date of December 2022 in order to meet the statutory reporting timetable, subject to no unforeseen issues with procurement availability resources or delivery. That is an ambitious plan. Grant Thornton, Transport Scotland and HM Treasury have reviewed our critical path for the action plan and have supported the approach that we are planning to take. In the final external audit report to the board from Grant Thornton dated December 2021, Grant Thornton considered management processes appropriate, key assumptions neither optimistic nor cautious, and only the valuation of specialist operational assets was raised as a significant issue, demonstrating that the other man areas associated with our accounts were all appropriate. No issues in relation to fraud or irregularity were identified and that all accounting policies had been updated in accordance with FREM. That is the exception of the valuation of specialist operational assets, which remained at historic cost in the annual reporting accounts due to the disagreement of the valuation techniques undertaken. We are bolstering our in-house expertise on FREM with external consultancy and specialist valuation support, developing a methodology for categorising different components of canal investments, reviewing our capital policies and procedures and undertaking a valuation of all canal infrastructure and related assets, as noted in the Auditor General's and Grant Thornton's recommendations. We will then create a prior rear adjustment to restate our accounts from 1920 onwards. That is a substantial piece of work, but it will allow Scottish Canal to continue to deliver significant public value for the people of Scotland in areas of tourism, net zero, place making and tackling health inequalities. Thank you very much indeed for that comprehensive opening statement. I think that that was useful. I'm sure that it provoked lots of questions. I'm going to turn first of all to Craig Hoy, who's got an opening question to put to you. Thank you, convener. Good morning, Mr Stopley. The Auditor General's report explains that, in 2012, the network was transferred to Scottish Canal as a heritage asset, with no value attributed to it in financial statements. The report goes on to state that the canal network has never been valued in its entirety or disclosed in Scottish Canal's financial statements since that transfer took place. Can you tell us why no value has ever been attributed to the canal network? Did somebody drop the ball at the beginning of the process? What I would say is that, when the canal was transferred in 2012, I'm advised, bearing in mind that I wasn't there at the time, that there was no requirement to do so. However, we have engaged with the HMR Treasury throughout the process, who were surprised that a value hadn't been undertaken at the time. However, if I could ask SGA, our finance director, to elaborate on that further, given the technical nature of the question. The original report by Audit Scotland, our first 12-13 set of accounts, stated that we should perhaps be considering some valuation if we transferred to an NDPB. Clearly Audit Scotland didn't think at the time that it was necessary to do a valuation in 2012. There was certainly no requirement under IFRS, the international financial reporting standards, and the type of accounting was more under the company's house rather than the NDPB at the time. It is only the specialised operational assets that are affected by the change in the frame. We did value all of our assets appropriately at the time in 2012 onwards, so it's only those that have fallen into this category that are posing a problem. The original heritage asset description in 2012 is not the same as in the frame, so it makes a difference. That is quite technical and accounting terms. For those who watch the committee, could you perhaps say what the impact of the present situation is, both on the day-to-day operation of the organisation and the integrity of your financial statements? I will address the day-to-day impact. In terms of the elements around undertaking those valuations, I cannot underestimate the volume of work that has to be done to do that. I think that it is really simplifying the situation here, which is unfair to the technical nature that has to be undertaken, is that we do not have the canals on the books and, consequently, every time you build something or you add an asset to that, you are creating a bigger asset as you progress forward and you project forward 10, 20, 30 years. A decision has to be made around whether you value the assets or, as Grant Thornton auditor said when she gave her evidence, or whether you consciously make a decision that you will build an asset over a period of time. The accounts allow you to do that, but you have to do it consciously rather than unconsciously. In terms of the day-to-day impact, Mr Hoy, we are having to identify a team to be able to address that. We are having to undertake the substantial piece of work on a day-to-day basis, while running an organisation that has gone through a substantial change to become an NDPB, while not an excuse to deal with the aftermath of Covid. I have to say that we have an ambitious plan to try and meet the December deadline around the accounts, but that is with a fair wind and everything going well. Estee, do you want to refer to the implications of the accounting on our books? With regard to the accounting, the issue that Grant Thornton had was, although it is an asset valuation, so the assets are within our books at the moment. All those additions are in our books and records at £51 million, but they are at a historic cost, not a revaluation amount. We do not actually know until we do the work what the actual monetary value will be, but the issue that Grant Thornton had was that it was not just a case of one item on a balance sheet that may be £51 million and may change value by £10 million or whatever. It will also affect our statement of comprehensive income and expenditure. It related to so many different figures across the accounts that that is why they determined that it was so pervasive. The determination was made quite late in the day. It was made in December because, at that point, we believed that there would be a limitation of scope and that it would be a ring-fenced issue. However, having laced with her technical team in Grant Thornton, it was clear that, because of the pervasive nature, it would affect a number of figures that they had to put a disclaimer on the accounts. Interestingly, HM Treasury does sympathise with the technicality of this. They are the ones responsible for the Government financial reporting manual. We have laced with HM Treasury on this point. Forgive me, I will read slightly what they have said. They have recognised the burden on reporting entities across public sectors of this requirement. The previous technical requirement was historical cost and now it is a revaluation requirement. HM Treasury is beginning a thematic review of the valuation methodology on the Government financial reporting manual that we have to adhere to for assets that are non-investment assets, which is exactly what we are talking about. It is planned to start next month, the thematic review, and it will assess the additional effort and burden on the public bodies of requiring these complex valuations. It is also going to assess the overall cost-benefit analysis of having this burden. While HM Treasury is not willing to say whether that may change the accounting practice for 2022-23 disclosures, I think that it might be a bit early for that to take place, any kind of recommendations. It will be interesting to see what the journey is from HM Treasury's point of view. Catherine Choplay, can I take you back to your opening statement? It was not entirely clear to me whether you accept the analysis and the recommendations that the Auditor General for Scotland has made. We do. We recognise the recommendations that have now been placed upon a Scottish canal. Of course, we will seek to comply with that. That is why we have worked together to create an action plan that will meet the requirements of reporting in-frame at the current value. I must reiterate that that is not an easy task, if it were. We would have concluded it last year during the process. It is going to be complex to undertake that. We will return to some of those things. I will go now to Colin Beattie, who has some questions to put. ONS advised Scottish Canals in September 2019 of the intended change of status to become an NDPB. In December 2020, the external auditor shared a paper with Scottish Canals management that set out the various accounting requirements. That was due to the change of status, of course. He pointed out where management needed to pay particular attention in undertaking and drafting the financial statements for the year ahead. How did Scottish Canals plan to take account of the change of status? Does it consider that it has successfully transitioned to becoming an NDPB? Once we were notified, we prepared our team to address the key changes, such as the finances and operations. In terms of the types of changes, there was significant change on how we prepare our accounts and the presentation of them, as well as the content contained within them. We had very little time to respond to that, so we sought to address that immediately. We discussed that at the board, and I will ask Mr Thin to comment on that in a moment. We agreed an approach that we were going to take. In addition to that, we discussed our approach with Grant Thornton, as I said in my opening statement, and we had agreed that we had written to them and discussed an overall action plan to address some of the more substantial changes that Grant Thornton provided us with a summary of the areas that we should investigate, which is exactly what we did. The fundamental issue is that, when we were last to look at our fixed assets and make sure that they were revalued—which we did—the key issue is that the Canals are not on the fixed asset register in the first place. They are on an engineering register, notwithstanding the fact that we have 51 million assets in this historic cost that have not been valued on hindsight, that is something that we should have identified. Given the timeline, at what point did Transport Scotland as a sponsored body become involved? I have worked with us collaboratively since I have come in as the chief executive, so we were notified in September about becoming an ONS. They were engaged in the process right through that process. We met other colleagues in the Scottish Government, and they were engaged in that process. Therefore, they were also engaged in the transition and understanding what the consequences were of transitioning, such as, for example, not being able to hold reserves. We had to talk about working capital reserves and how we would change our operational delivery. We were no longer able to do multi-year projects and how we were going to do that within a 12-month window, budget planning and discussions. They have been alongside us the whole way through this. I do not know if you want to comment on that point specifically at this point. I echo those comments. Thank you very much, Catherine. We have been on a journey with Scottish Canals through their transition. We have supported them in terms of understanding what those requirements will mean, what it will mean for their expenditure and what it will mean in terms of compliance with FREM going forward in the accounts direction that was issued in 2020. It is a good collaborative relationship, and we have also supported that with access to expertise within Transport Scotland and Scottish Government's own sponsorship departments and financial departments. We have gone through that step by step. That has been said. I asked about the successful transition that is becoming an NDPB. It all seems to be financial. Is there anything that is outside financial that you had to do to comply with that? There is a change in culture and behaviours. What I mean by that is that, as a public corporation, Scottish Canals is renowned for delivering things such as the clay pits or helix and other fabulous regenerative assets across the communities. Those do not happen in one financial year. Therefore, they had committed to aspects of plans and regeneration in community assets over several years. We had to re-identify how to do those within one-year envelopes and work closely with the Scottish Government and Transport Scotland in doing that. Again, I would have to echo, since I have come into the role, that our capital has increased substantially. We are now at £12.2 million and we were baselining sector 3 when I came into the role. Our revenue has also increased from about £8.5 million up to £10.2 million. Transport Scotland absolutely understands the challenges of running the Scottish Canals. Have we been successful? Even in a financial element, Mr Beattie, the rest of the accounts were concluded as per the transition to meet the needs. It was one area around the £51 million. I do not want to undervalue or underestimate that area, because it is an important piece of work. However, I think that it has been. I would ask my chair to comment on that, potentially. As a question has been on, has it been a success? Clearly, if I say that it has been a success, you will say that it clearly has not been because of why we are here. But I think we just need to be clear. There were operational consequences that had to be addressed. There were cultural organisations, if you like, human consequences, and there were technical financial consequences of that transition. The board was very clear that we had to get all of that right. The board was very clear on the technical financial thing that we had inherited a financial team that was designed to operate under the old regime, so we had to shift that. I think the transition has been successful, actually, in organisational terms, in operational terms. We have continued to deliver more and more public value from the canals. I think culturally, culture is difficult to shift, but I think culturally it has shifted. We are closer to government. We are much, I think, clearer about our relationship with the Scottish Government and with the Scottish people. In technical financial terms, I think that we were too slow. That has not been a bit about the bush. We did not have, at that time, the right skills. We needed to get those skills. We tried to recruit them. You will have seen all the documented evidence, but it took too long to get the right skills in place, and we ended up with a technical financial issue, which is why we are here. On the transition to NDPB, you worked for Transport Scotland before that, obviously. When the ONS decided that this change should take place, what steps did Transport Scotland take with yourselves in order to ensure that that went smoothly? They are the sponsor organisation. Therefore, I would expect them to be fully on board on that. When we were informed of the decision in writing in November, I was very unhappy with the timeline associated with the change and wished to pursue an extension that was not unusual. You can delay the implementation of that decision by a year. Transport Scotland supported me in advocating for that with the ONS. It supported me with internal discussions within the Scottish Government body corps to undertake those discussions. It attended all the meetings, and they were very supportive throughout those old meetings. When it became apparent that the extension, the move to the next financial year, was not going to be supported, it worked with us to ensure that we were ready for the delivery of our accounts. At least you have highlighted changes to the financials and culture. What are the key differences that that change of status has made to your operation? As with all the NDPBs, when you operate under a framework, there are restrictions to comply within a framework. That is what we do now. What that means for us in terms of what we used to do previously is that it is much more difficult to engage on larger projects. There are some projects that we used to engage with that would not necessarily meet the standards or the requirements of the SPFM or FREM, which make it more challenging for our Scottish canals to be innovative, creative and deliver public value in the way that they used to. Notwithstanding that, as Andrew has stated, that does not mean that we still do not add public value to Scotland since 2012 under being a public corporation. We had an economic analysis of the work that has been done. We have created £1.53 billion worth of economic value to Scotland from regenerating the canals. That is not to be sniffed at. What we want to do is make sure that there is still a way to do that in a creative way. We can maximise revenue and income to Scottish canals by lowering the burden on the grant and aid, while recognising the public value of the canals across Scotland. We are indicating that there is a constraint on what we can achieve compared with what we could before. Is there a way around that? Have you now got a cap on your activities? As I mentioned, if you are an NDPB, those constraints are restrictive for all NDPBs. The cap is as re-identifying and re-engaging with Transport Scotland to understand what we can do now and what we can't do and what our plans were and how we can move in that space. Fran, do you want to comment on what we have discussed? Thank you very much, Catherine. The transition to NDPB has not altered minister's strategic objectives for Scottish canals. We still want to maximise the value of Scottish canals for the people of Scotland as a whole. What it has done is introduced some practical changes to how we do that. It means that Scottish canals have lost the ability to spend their reserves without impacting on expenditure charged to the core Scottish Government budget. What that means is that Scottish canals have lost the flexibility to carry funds over for multi-year projects. They are moving towards a more annualised budget. As Catherine has mentioned, that brings different challenges. It changes how you approach multi-year projects. Those challenges are inherent to all NDPBs. They are not unique to Scottish canals. What it means from a sponsorship function is that when we look for the assurance around Scottish canals performance or as we support Scottish canals, we have changed the way in which we engage for that financial support. There is much closer scrutiny and alignment to our budget allocation processes, but that is not unique to this organisation. That is common to all NDPBs. To be clear, it is not a question that Scottish canals can no longer do the grander projects that it used to. They can still do that. They just have to justify it in maybe a more bureaucratic way. I think that you can choose the line more bureaucratic, but it does mean that we need to plan for that differently and treat that differently from an accounting perspective. We still have the same aspiration. We still have the same level of ambition, but we just need to manage that through the budget process in a different manner. Are those ambitions still achievable? They are practically more difficult to deliver, but, yes, they are still capable of being achieved. I am not sure how to take that, but I will accept that at face value. The one thing that I would come back on is that, as an NDPB, you do not have the ability to carry forward year on year. However, you said that the capital had gone from £3 million when you took over to £9.3 million, was that what you said? It was close to £12.3 million. How does that happen? Through engagement. One of the early discussions that I had with Transport Scotland was to look at the asset management strategy that we had published and to identify how we could secure appropriate funding to ensure that the maintenance and the asset was well looked after. Through those discussions with Transport Scotland being able to evidence-based what the asset required, we were able to demonstrate the need for that funding and bid for it and secure it. That has worked really well so far. I know that Willie Coffey has a question in this area, so I will invite Willie to put his question. Thank you very much, convener, and good morning to the panel. I wonder if I could just ask a wee question on the latest change that occurred. Were you taken by surprise at the ONS's decision to change into an NDPB? The only information that we have in front of us is that the explanation was that, because you carried out administrative, commercial, executive or regulatory functions that had more of the characteristics of an NDPB, you have been doing that for years. Why did the change suddenly occur, do you think? Were you taken by surprise with that? Why didn't they grant you an extension that you requested to prepare the organisation for that NDPB status? I can say wholeheartedly not only was I taken by surprise but so was our board and so was Transport Scotland. As I have mentioned in my open statement, ONS undertook the review from our website accounts and engaged with us after they had concluded that and notified us in September. That is what they had done with a date of literally five months later, which is why, with Transport Scotland support, we engage with ONS and the Scottish Government Court to say that that just feels unrealistic. It is a bit of a surprise. The historic nature of it is that, in 2012, going back to what SGA had mentioned earlier, when they transitioned from to be British waterways trading in Scottish canals, there was an expectation that Scottish canals would grow its investments, it would grow its income and its revenue returns and it would demonstrate its ability to operate with over 50 per cent of its income, consistently being over and above that of what Grantonade provided. Essentially, you are proving that Scottish canals is a financially sustainable organisation over and above Grantonade. There were two previous assessments undertaken by ONS at the three-year points, so what happens is that ONS will give you three bites of the cherry essentially. They had already undertaken two previous assessments and Scottish canals had failed those assessments to be able to demonstrate that they had met those requirements. The third assessment was, in their timeline, very visible. It was not visible online. The explanation to you about not granting the extension? Sadly, it is very simple for them, which is that we were a small organisation and we should not need it. Our external auditor, Grant Thornton, advocated for the extension also, but Scottish canals may be small, but we are complex. We deal with third-party funding, we have businesses, joint ventures, retail income, and we have different contracts that are let. It has been extremely complex. We did advocate for that. I will support Transport Scotland to say that we did that together and that our voice was not heard loud enough. Before we leave this point, Catherine Toplay was asked by Colin Beattie about the support that it had from Transport Scotland. However, I would like to ask Hugh Gillis about the degree to which he feels any responsibility for that. If we look at the Audit Scotland report, it is fairly strong. If you look at paragraph 4, it talks about some fundamental problems about the qualifications of the person carrying out the valuation. If you look at paragraph 18, it talks about the classification of capital spend that was actually revenue spend. Those sound technical, but they are fairly fundamental failings in the approach to the accounts that was made to such an extent that Audit Scotland issued that rare thing, which is a disclaimer. We have heard from the Scottish Environmental Protection Agency recently who had a disclaimer because they had a cyber attack and all of their data was virtually wiped out. However, here you have had a disclaimer. I would really like to know from Hugh Gillis how you reflect on the situation that has occurred here and what lessons you are learning as a result of this. I will bring Fran and Leanne here. From my point of view, coming into the role that I have as Accountable Officer for Transport Scotland in the middle of November last year and picking up the background to all of this, clearly this is to be regretted. I think that we can say that. There are technical accounts issues here and I am not an expert in that and that is why I have asked Leanne and Fran to support me because they have the background to this as well. So this is to be regretted. Lessons need to be learned out of this. We will endeavour to learn those lessons along with Scottish Canals and we will reflect on that as well in terms of other NDP chief execs and there is a forum for them and we will reflect on those learnings. In terms of what I have seen in my role and to reflect what Catherine has seen is that we, Transport Scotland and Scottish Canals in their journey to change of status have tried to work collaboratively together and when issues have been raised in terms of technical accounting, accounts issues raised towards the back end of the year by Scottish Canals to us and even prior to that going back to September 19 and some of the issues that we have heard around the financial capability that Andrews described. We have tried to go towards that and recognise that but obviously the fact that we are having to sit here today is to be regretted and we need to learn lessons out of that. I would absolutely say that to the committee. Thanks very much. What are our reflections on Transport Scotland's role? I would like to answer that first in the generality of around how we obtain assurance for the activities of Scottish Government, sorry Scottish Canals, in our capacity sponsor and then in the answer on the specifics of this example. Plainly, the two organisations have distinct accountable officer accountabilities and there are legitimate professional judgments that are exercised by the executive team at Scottish Canals. It is not our function to superimpose our judgment on those legitimate judgments that are made but we do obtain assurance on those through a number of means. First, we know that the executive team has access to appropriate professional support and advice. We supplement that with access to professional support and advice from within Transport Scotland and broader Scottish Government finance teams. There is a robust internal audit and ARC function within Scottish Canals and of course the board itself brings extensive scrutiny to bear so all of that provides us with a reasonable degree of assurance in terms of how Scottish Canals do manage its finances and do manage its business. On the specific question that we are facing today and that led to the section 22 report, it is a fairly narrow point and not to diminish the significance of it but it is a narrow point around the valuation of assets where I think it is regrettable that we collectively didn't pick up on that but I think that that wasn't done through any negligence or a failure to address the question. It was that a judgment was made informed by professional advice which turns out to have been their own judgment albeit it was reasonably made and reasonably supportive and we accept that and we accept the auditor's recommendations in the report to move that forward. I think that what we have done to obtain assurance around the approach to date and going forward is to work very closely with Scottish Canals. The issue was identified relatively late in the year even in discussions through October and November where we were working closely with Scottish Canals and Grant Thornton. The nature of the issue hadn't yet quite crystallised but we will work closely with Scottish Canals to move that forward. We are aware of the critical path on the action plan that they've identified. We take assurance from that and as Hugh has mentioned we are thinking about what that means more broadly for other NDPBs both within Transport Scotland's portfolio or more broadly across Scottish Canals. I'm sorry, Scottish Government. I think that that's helpful because I mean I don't read this report as being simply a narrow technical issue that's led to a snag. I mean for example one of the critiques in the report is that the people that were appointed to carry out the asset valuation didn't appear to be qualified to carry out the asset valuation. I mean how on earth could that happen? I think that's an interesting statement. In terms of the valuations, and I will ask Esgie and Lee to comment on this. We did work with Grant Thornton to identify the scope of the valuation that was required. We agreed the scope, we agreed the methodology and we also agreed the individual who was going to undertake the valuation. It wasn't until after the valuation was concluded that Grant Thornton reviewed it and came to the conclusion that they felt that it wasn't sufficient. I will ask Esgie to expand on that further and I know that Lee will also have a comment around this, around the timing, because that ultimately has led us to this position. To be clear for valuing investment properties, we use the appropriate risk qualifications and valuers. That is a very different set of assets that we are talking about. Just to run through the example of the £51 million, which I think brings it a little bit more to life, £25 million worth of the additions were in 2013-14. They have been on our books and records for quite a long time. Some have been reservoir improvements, some have been gates associated with the Helix park. Around £17 million was associated with the Helix park. £2 million were on the Pinkstone Paddle Sports in Glasgow and up to about £6 million were in the Bowling harbour regeneration. The Ardricic pier of £1.6 million and the North Glasgow clay pits. Those were not assets that Ardric's qualified specialist felt comfortable valuing. They are very wide-ranging, which I think comes to the core of the issue. Although those assets were absolutely on our fixed-asset register appropriately, they were capitalised on a project basis. They were not componentised as an accounting term, but they were not split into what elements of land, what elements of engineering construction, all the various elements that go into landscaping, embankment improvements, wears and all that. We could not use Arricks value. We asked Transport, Scotland and the Scottish Government colleagues and HM Treasury whether an alternative type of valuer was needed. It was determined that a specialist engineer should be doing these valuations. Clearly, Grant Thornton announced that some of the land assets could be done by Arricks and some of the elements of them could be done by Arricks qualified person instead. That is part of the journey that we are planning on, to break down those assets into components. It is a technical issue to break down those assets so that we can determine the valuers and use appropriate valuers and a range of valuers in the future. I do not want to put the blame on Fran Petitie's shoulders at all, but I observe that your job title is director of aviation, maritime, freight and canals, which is a flavour of the scope that Transport Scotland is involved in. Presumably, in those sectors, there are engineering-related assets, as well as land and natural assets. Did you not have expertise that you could bring to bear to give advice to Scottish canals in carrying that work out? Yes, and we did. We have experience in valuing assets, not just through our non-departmental public bodies but also through, for example, the trunk road network and, of course, through other NDPBs in our portfolio, which includes Thailand and Ireland Airports Ltd, SEMAL, where we have experience in valuing assets. The assets in the Scottish canals portfolio are unique in nature, so despite the engagement and attempts to seek common ground on how we should do this and, despite best efforts to achieve that, the valuations that were undertaken did not find favour with the auditors at the end of the day. I will move things on and invite Sharon Dowey to ask some questions. The Auditor General's report outlines that the auditor issued a disclaimer on the audit opinion of Scottish canals financial statements for 2020-21, because insufficient audit evidence was available to conclude on the overall valuation of Scottish canal infrastructure in inland waterways. That is largely because Scottish canals did not obtain an appropriate valuation using depreciated replacement cost DRC for around £51 million of specialist operational assets, which have been capitalised between 2012 and 2021, if I can touch on some of those. Could you tell us why Scottish canals did not identify the need to undertake a DRC valuation of its specialist operational assets as part of preparing its 2020-21 accounts? Two parts to that. As I will draw you back to my opening statement, we had prepared and written to Grant Thornton in March and advised him of the approach that we were going to take. That did not include the assessment of those assets, and at that point we had not received feedback to say otherwise. Notwithstanding that, hindsight is a wonderful thing, and we should have. In terms of the DRC, we did undertake the valuation, and that is the discussion that has just been held there. The issue is that, when we did undertake the valuation, after some period of time we were Grant Thornton crystallising the issue with Scottish canals, the valuations that were returned by the specialist engineer, Grant Thornton concluded that it was not sufficient for what they needed. At that point in time, we were in November, and we were very close to coming to the statutory deadline for reporting. Therefore, we were very limited in our ability to be able to challenge the auditor's opinion on that and to be able to work with them to identify how best to move that into a space of delivery beyond it. I know that you were involved in the trunk roads valuations, and you provided specialist advice around the valuations for Scottish canals. Do you want to comment on that? Yes, Catherine. I think that the complexity of the exercise in undertaking such a valuation is really what is at the nub of all of this. I think that SGA mentioned it when she was talking about the components that make up the canal network. I think that there was a figure earlier quoted of some 4,000-odd assets. The critical thing about that is the information that is required in order to generate valuation. It does not necessarily require an RICS-qualified value to do all of it. Some of it, yes, it may be appropriate, but this is a very complex and unmarketable asset, so you need the information and you need to be able to apply a process to that information in order to generate quite a complex valuation. That is essentially what we do for the trunk road network. It is not undertaken specifically by an RICS-value, it is undertaken by a technical company, which does the valuations for all of the road authorities in the United Kingdom. That gives you an indication of how complex that will be. I think that Catherine has recognised the challenge of the December deadline, and I would certainly support that as well. Thank you. It does sound very complicated and complex, so could you tell us a bit about the progress in updating the fixed asset register so that all assets will be appropriately recorded and categorised? Asset SJD, do you want to comment on the fixed asset register? Yes, it is going to be complicated. I am not going to underestimate it. Although we have quite clearly said that our aim is for the December 2022 deadline, because that is our statutory deadline for annual report and accounts, it will be challenging. At every part of the action plan, we have a detailed action plan that has been agreed by Transport Scotland and Scottish Government colleagues. It has the support of HM Treasury, which will advise us on our methodologies on the way, and it has also been agreed with Grant Thornton, which is more important. We are changing auditors during the course of the year, so our new auditorium is just to add some fun. Our new auditors that Audit Scotland appoint, they will be involved in the process as well. We do not know quite who they are as yet. We will be engaging with consultancy, which we will have to go through a procurement process. That will take time. At the moment, we are doing some pre-market engagement with some key accounts firms that have a huge amount of knowledge in the NDPB area of public sector in general, but particularly with regard to the Government financial reporting manual, which is the key issue. We are working closely with them to understand the specification of what we can then go out to market with. We will have to appoint an array of valuers as well, but the first few months will be having a look at all the methodologies of all the different component parts of our assets. As Catherine mentioned, it is not that we do not have the canal infrastructure noted anywhere. We have a very complex engineering system, an engineering asset management system that does detail our canal infrastructure in its entirety. It is just not tied up to any financial asset register. I do not want anybody to think that we do not know what our assets are. We absolutely know what our assets are. It is just that they have not been appropriately valued under the frame. We are working with the engineers, working with a consultancy firm, and we will be looking at componentising all of those assets with regard to a financial valuation relative to what Grant Thornton is expecting. We will be supported in our judgments and estimates, so I am hoping that there will be a path, a critical path, to get Grant Thornton to agree our methodologies as we develop them and agree our capital policies as we develop them so that by September or October, we are in a position to finalise all those valuations so that they can complete their audit. We are running two different programmes, so we are getting a project manager who has NTPP experience and huge experience in-frame accounting, whereas our internal team will be concentrating on producing the annual report and accounts as well. I know that it is just one adjustment. It will be slightly more complicated than just one adjustment, but I just wanted to reassure the committee that we have a fixed asset register, so we are not starting from scratch in any way, shape or form, but there is quite a journey. The completion date will be December 22, and you look as if you are on target? So far, we are on target. It is an ambitious target for December. What we will be doing on a monthly basis is not just us, but Grant Thornton will be committing to reporting to board on the progress and any issues that arise will be flagged very fast. You said earlier that you accepted the recommendations and analysis that is contained in the Auditor General's report. That includes, does it not, on paragraph 5, an undertaking that a new valuation process of the canal infrastructure estate in its entirety will be completed during 2022? So you are committed to that, presumably. The audit report goes on to explain why that is important. Again, this is not just about a technical exercise and ticking a box to comply with ONS requirements or HM treasure requirements or Scottish Government requirements. This is all about medium-term financial planning and strategy for Scottish canals. It is an important and quite central part of how you are going to look to the future, what your plans are going to be. Again, you accept that deadline. What happens if you do not meet that deadline? I would have to be honest as the kind of officer sitting here today. I have my concerns that we will be unable to meet the deadline. There is a recognition that the market forces are really challenging at the moment, that the availability of staff and specialists are really challenging at the moment, and we need those individuals to be able to support us to deliver this project and to meet this deadline. Notwithstanding that, the complexity of agreeing the methodology, then the evidence to support the delivery of the valuations has to meet the standards that the auditor has set out. We do not know what the standards are yet, and the issue that we are dealing with is that we are dealing with, retrospectively, creating a value for something, some of which is 250 years old, some of which is 10 and 20 years old, all of which we are putting our books in a very different way in which the auditor is asking us to present them now. In very simple terms, we do not have the evidence in the way that the auditor might like it to be presented in a nice tidy binder that would allow us to do that, so we have to create it. We have to create that evidence trail with the methodology, with the valuations, with the auditor. We tried to do that, of course, between July and August last year when we did the valuations and when the auditor looked at them, she felt that that was not sufficient. My concern is more fundamental around resources, timing and making sure that the valuations can be done at an appropriate standard that the auditor can sign them off. At this point in time, it is not just the £51 million that we are talking about any more. What the auditor was able to crystallise and articulate in December, which ultimately led to the disclaimer, was that fundamentally, those assets, it is not just the £51 million that we have been asked to look at, it is the canal infrastructure. We have been asked to look at if the canal should be on Scottish Canals' books, and if it is, you are talking about the £2.5 billion that you are adding to Scottish Government's accounts. Lee went through the process of identifying how to put the roads on Scottish Government's books. As he has already mentioned, there is a comparator. There is the UK roads. There is another comparator around how the books are on another Government's set of accounts. We do not have one for Canals. England's canals are held as a charity, so they do not sit on Scottish Government or on Government books. I do not want to labour the point. We have been very ambitious because we have a statutory reporting deadline. We will aim with everything that we have to meet that deadline. I am confident that my team understands now the need. It is whether all those other moving parts come into play at the right time, and those will be the challenges for us that we have to manage. I am now going to ask Willie Coffey to come in with a number of questions. Willie, over to you. Thanks again. I want to start. I am looking at financial sustainability and going forward. Did you say in your opening remarks that the Auditor General said that you had no core financial sustainability issues with Scottish Canals? Did I pick you up correctly there? Did you say that at the outset of the meeting? I will quote from the minutes. Auditor General said that he had not identified any core financial sustainability issues with Scottish Canals, while Audit Scotland's senior manager said that it was not uncommon for O&S to recommend a change in status and not look at the implications of the organisation. That is a quote from the meeting on 24 February. Right. Thanks for that, Catherine, but I could not see that in the Auditor General's report that we have got in front of us. What I could see is a comment on the financial statements from 2020-21 that show your income at £18.8 million and your expenditure at £22.7 million. That is a deficit of £3.9 million. How can we square that comment with better facts in the financial statements? We also know that there is a maintenance backlog of £70 million. How do we square those comments about financial sustainability and no concerns with the figures that have just been raised? The first thing that I would say is that, as a countable officer, I am sure that Andrew would agree with me, as a chairman, is that we would not say that there are no concerns. We are a public sector organisation and therefore we have the same challenges and burdens placed upon us as other public sectors. With that in mind, we work to balance the books. The last two or three years have obviously been impacted by Covid. We have not been able to trade that has substantially affected our income. As a consequence of that, we have had those deficits and we have recognised them in our accounts. If I take you to the years before, you will see that it was kind of breakeven in terms of the accounts. We have been working with Transport Scotland for them to understand the revenue challenges in Scottish Canals. Our biggest cost in Scottish Canals is staffing. Beyond that, in terms of medium and long-term financial sustainability, we are looking at how we adapt the operating model to be more efficient, including things such as ensuring that the efficiencies come from operating models that are user-dependent through to systems that can take away the need for more manual interventions. We are very aware of the opportunities that are presented there to us. In addition, in terms of income, we have opportunities to trade. As we were talking about earlier, in terms of being a 90pb versus a public corporation, we need to work through those. The aspirations from ministers have not disappeared. They still want us to be innovative and creative. They still want us to generate our own income. We have to balance the challenges and pressures of today's financial burden versus taking the burden off the revenue requirements in the future years by investing wisely today. We continue to do that. In terms of the maintenance backlog, Mr Coffey, it is something that we absolutely recognise in Scottish Canals. Even if the Scottish Government said to me today that there is £17 million going to fix it, I could not do that in one financial year. Sadly, I do not have the technical expertise and resources to do it. The asset manager sets out the strategy and the blueprint that we have taken, which essentially works on safety, risk and economic impact. Again, similar to other public bodies—Historic Environment Scotland, for example—you will not always have the money to bring those to the standard of today overnight. What you have to do is have an asset manager's management register that identifies where the higher risks are, where you need to deploy those funds more immediately and what the longer-term implications are of not spending money. That is where that backlog comes from. Has that figure of £70 million been factored into your financial planning going ahead? Has the £70 million been agreed with anyone? Where is the money coming from to carry out that maintenance backlog? We have not agreed that £70 million will come to Scottish Canals from Transport Scotland. What we have done is agreed the asset management strategy with them in 2019, and what we then did, as you have referred to, is that our capital went from £3 million to £12.2 million, which is absolutely wonderful. It allows us to start addressing the backlog at pace. What I must do is remind the committee that the canal is 250 years old, so as quickly as we are remedying, fixing and replacing assets on the canal, you have degradation on other elements of the canal, because you cannot be on the 140 miles at the same time at any given time. What we must not do is think of the canals as a burden. We all know what they looked like 20 years ago with the brown water, the shopping trolleys, the cars and the couches. More importantly, there are infestations and issues around public health. What we have now is a beautiful canal that contributes to the economic growth. As a result of the regeneration of canals, we have been able to offer 8,000 homes across the canal network, not personally, but because of the regeneration of the canals, the builders have said that it is a wonderful place to live to build. That has little ecosystems, as you know. Tourism is massive in Scotland and we have benefited from that during Covid, and we hope to leverage that going forward. Just to come back to the last point about the medium financial planning, SGI and I have commissioned an organisation to undertake that work for us. We have looked at our previous investments to see which ones have been more successful. We are looking to present to Transport Scotland in the coming months a business case that would represent the kind of activities that we would want to be engaged in, why we should be engaged in them and how they benefit Scotland as a whole, as well as the economic benefit for Scottish canals. You are meant to need some kind of allocation to assist you with the maintenance backlog. We cannot wait year on year on year for that. There has to be surely some kind of annual recognition of that and some kind of allocation of funding to support that good work that you have described there, Catherine. It is not clear to me that that money is coming, because you have said you need it for the work that you intend to do. It is not clear to me at all that that money is going to be forthcoming in the next year or the next year or the year after. Alas Fran, to comment, is our sponsor. Thanks very much, Catherine. Mr Coffey, again, this issue is not unique to Scottish canals and it brings us back to the discussion that we had at the outset of this session, where the change to NDPB status means that we are working within annualised budget cycles. In the £70 million, there is both an affordability and a capacity challenge in doing that. We have to look right across the portfolio of assets that we own and prioritise where we invest in that maintenance backlog on a risk-based approach. I think that we are successful in doing that, but we also have a capability and a capacity challenge. What Scottish Canals maintenance plan does is programme that investment over a number of years based on priority, based on ability to programme those works in a sustained fashion. As a sponsor body, we sit hand in glove with Scottish Canals and go through those budget processes so that we have a common understanding of what is available, what are the priority allocations and how we spend that going forward. There is a backlog. We are managing that backlog. It is not without risk, but we are aware of those risks. Those challenges are not common to Scottish Canals. It is replicated across a number of assets in the transport portfolio and across a number of NDPBs. Would we, as our committee, be able to see at some future point that if there has been any allocation towards that maintenance backlog so that we can see as a committee that progress has been made on it, it is great to be able to talk in terms like this at the committee, but real changes on the ground or at the Canals would be appreciated, I think, by the committee, so that we can see that moving forward. Because of the status change, it gives other opportunities to generate income. Could we also see some signs of that as you move forward as a committee that those kinds of changes have been embraced by Scottish Canals and how that might impact in your future financial statements? Yes, Mr Coffey. We would be happy to share that. I would reiterate, because I think that it is very important. When we published the asset management strategy, there was a £70 million backlog. I can demonstrate the funding that has been provided between then and now as to what that has done to the £70 million. That does not mean that that £70 million is the figure today, because as I reiterate, you have got what you have addressed historically versus what is coming up and what you now know about. That figure will always move, but from the baseline we have been able to track our investment from Transport Scotland and the additional budget. In terms of the additional opportunities, we would be happy to share that with the committee. That draws to an end the questions that we have this morning for you. We will reflect on the evidence that you have been able to give us. We may pursue some lines of inquiry with you after the meeting, but I thank you very much for coming along and being present in the committee room. It is good to have people sit in front of us so that we can properly inquire into what your response is to what is a very serious report that Audit Scotland published. I thank Catherine Toplay for leading on the evidence this morning. It is appreciated. Andrew Thin, Sarah Jane Hanna and the team from Transport Scotland, Hugh Gillis, Franpa Chitty and Lee Shedden. Thank you very much for giving evidence too. I am now going to close the public session of the committee and go into private session.