 Mwneud i gyd. Welcome to the 27th meeting of the Public Audit and Post Legislative Scrutiny Committee in 2018. Can everyone please turn off or to silent their electronic devices so they don't affect the committee's work this morning? Item 1 is decision on taking business in private. Do members agree to take items 4, 5 and 6 in private this morning? Item 2 is the section 22 report, the 2017-18 audit of the Scottish Government Consolidated Accounts. I'd like to welcome our witnesses to the meeting this morning, Leslie Evans, permanent secretary, Gordon Wales, chief financial officer, Alison Stafford, director general, Scottish Exchequer and David Rogers, director, constitution and cabinet at the Scottish Government. Can I ask please the permanent secretary to make a brief opening statement? Thank you, convener, and thank you for the opportunity to provide evidence today on the Scottish Government's consolidated accounts for 2017-18. I'm pleased that the Auditor General's opinion is for the 13th year unqualified, especially given the significant additional complexity in the Government's finances brought about by the Scotland Act 2016. I'm encouraged that the Scottish Government is recognised for its good record of financial management and reporting. Borrowing, the Scottish Reserve and significant tax-raising powers and their associated block grant adjustments for the devolved and assigned taxes are just some of the new features of public spending in Scotland and are unique within the United Kingdom devolved landscape. The journey is not yet complete. Work continues on areas such as the assignment of value-added tax and devolution of air passenger duty. More powers impacting more directly on more people. So we can all expect the picture to grow ever more complex in the years ahead. Given this, it is even more important that the Parliament and indeed the public understand how money is raised, how it is spent and the resulting assets and liabilities. Transparency is critical to that understanding and the budget process review group has been helpful in determining the approach to scrutiny and defining a new range of publications. These include the first medium-term financial strategy, fiscal framework, out-turn report and publications aimed at accessibility such as Scotland's finances, key facts and figures which was published alongside the budget. The annual accounts themselves and other existing publications such as the Scottish Consolidated Fund account have also been expanded to include additional levels of disclosure on areas such as borrowing and investments. These changes have increased transparency on existing and new powers, but there is more to do. By March next year, we intend to publish a tailored for Scotland consolidated public account. This is challenging, not least because of the large number of bodies that it embraces. We have been gathering data from financial year 2016-17 to help shape and inform our approach. The new publication will significantly expand the information available on Scotland's devolved public finances. We look forward to engaging with the committee, Audit Scotland and other interested parties as we consult on the form and content early in the new year. The publication of a new national performance framework during the course of this year has also resulted in us reviewing how we report performance and, in particular, the link between spending and outcomes. We will continue to engage with Audit Scotland as this work develops. We have made progress, but in her report, the Auditor General has also made recommendations for further improvements in transparency, particularly around capital borrowing and the Government's intervention in private companies. As outlined in my letter to the committee of 23 November, we accept those recommendations and will act on them. I welcome external scrutiny, but internal scrutiny is important too. The changes to the tax and spend landscape demands appropriate governance arrangements to challenge our work within the Scottish Government. As the Auditor General acknowledges, I changed arrangements during 2017 in order to meet those additional demands, including the creation of and appointment to new roles such as the Director General, Scottish Exchequer and a chief financial officer. I am also strengthening that internal scrutiny further. Interviews are currently taking place to appoint additional non-executive directors with a particular focus on areas including tax, accounting and digital. I shall monitor the effectiveness of those arrangements and look forward to hearing Audit Scotland's views in their report on the 2018-19 accounts. I am sure that I do not need to tell you or the committee that these are challenging times, not least for the Scottish Government and the civil service, in responding to current events while maintaining competence in day-to-day delivery of outcomes for the people of Scotland. That includes a need to be open, capable and responsive in our transparency agenda, so I welcome the profile that the consolidated accounts on our other publications are being afforded. I am happy to answer questions that you and other members of the committee might have. Thank you very much indeed, permanent secretary. I am going to ask Bill Bowman to open questioning for the committee. Thank you, convener. Good morning, permanent secretary. You wrote a letter to the committee and in that you said that you do not believe that the accounts are the best place for an extensive review of the Government's achievements and suggest that instead you might signpost readers to more detailed sources of information. First, can I just confirm that you still agree that the consolidated account should be extended to include all those assets, liabilities and operations that you have responsibility for or stewardship over, as you were discussing in your opening statement? We are intending—we can talk a little bit more, myself and colleagues—about our plans to produce a consolidated account. That will be for devolved public spend in Scotland. You are suggesting that there may be more detailed information placed elsewhere than in the many pages of the financial statements. Do you think that it is helpful to direct individuals to multiple sources of information rather than having one? In short, no, I do not. The idea of having our performance reporting becoming more transparent and more accessible requires us to look at the amount of information that we produce but also where we locate that. There are two proposals that we are working on at the moment. One of those is to look at, yes, where the accounts might be able to give us a little bit more opportunity to provide information but more likely to look at current places and current websites and consolidate information in websites that we are using at the moment. You talked earlier on about performance particularly. We need to differentiate between the Scottish Government's performance as an organisation, which will always probably be in the Scottish Government's website for that kind of information, as opposed to progress on outcomes and the national performance framework. We are differentiating between those two, particularly because the Scottish Government's performance is its own responsibility and the website is the right place for us to go into detail about how we are doing there. The national performance framework, and as I mentioned in my opening comments, is now refreshed. We have responsibility for that, but so do large numbers of other public authorities in Scotland, not least since the legislation, which places a duty on them. We need to have a website that takes account of multiple inputs from a number of authorities. We have curatorial responsibility for the national performance framework, but the important thing is for people to be able to look at one place to look at our progress as Scotland owns the national performance framework. That is the work that we are undertaking at the moment. I could say a little bit more about that and who we are involving in that process, as committee requires. Can I just then ask for your assurance or confirmation? If you put information in the consolidated accounts at the moment, they are subject to some form of scrutiny by Audit Scotland because they are associated with the financial statements. If you then spread information around other sources and other websites, will you require the same scrutiny from Audit Scotland on that information? We are working with Audit Scotland on the scrutiny that is available to the national performance framework and where the website lends information for that purpose. However, I think that what I am saying is that we are looking at two quite distinctive but linked websites, which will both be referenced and have a relationship with our accounts, of course. One of them will be about progress against the national performance framework, which covers all of Scotland and a number of public authorities. The other is, as you would expect, bread-and-butter performance by the Scottish Government in its own website. The two need to link and connect to each other. I just think that my point is that if you reference something from the financial statements, I would expect that that is given scrutiny by the auditors. Yes, and the auditors will be holding us to account on the national performance framework as well. You mentioned, in your opening statement, the recommendations about loans to private companies and the relationship with private companies. I welcome your comments that you will accept and fool all of the Auditor General's recommendations on those loans. That is an issue around transparency in the Parliament about how decisions are made, but also transparency with the public about how decisions are made, and what the level of any investment, and what the potential return of any investment is. Can you detail what framework or plans you have to put in place a framework on the first and foremost about how decisions will be made if any money goes to private companies and what that looks like, and what plans you have in place to do some transparency around some of the investments that the Scottish Government has already made? If I can take the first part of your question. We have quite an extensive framework already in place, which includes UK and other legislation, our own economic policies and supporting documentation, the economic strategy, for example, and a whole realm of guidance, procedures, expertise and oversight and scrutiny, which are all brought into play in any discussions and any supporting of sound Scottish Government decision making on investment in private companies. Of course, all of this is subject to the Scottish Public Finance manual, as you would expect. What we need to look at is two elements to this. We need to be clear about why and where the Scottish Government might invest, which we would go to an economic strategy or a manufacturing action plan, and then how the Scottish Government might invest, which is guided by the Scottish Government's medium-term finance strategy. That asks pretty searching questions of us, as it should, in terms of business case, due diligence, benefits, affordability risks and so on. We need to be able to bring all of that together to ensure that people are aware of the considerable evaluation, testing and due diligence that takes place. One of the places that we might want to locate that, because it is all there, but your point is bringing it together in a framework, is possibly to look about the best vehicle that currently exists that could accommodate and make clear to people the kinds of decisions that we are taking and the granular activity that takes place before we take any decisions on investment in private companies. That is something that Gordon might want to say something a little bit more about. He has been very involved in those processes, but it is possible that we might want to look at the Scottish Public Finance manual as a place where we lay out for everybody to see and understand what the processes are that need to take place, the hoops that need to be covered very coherently before we take those decisions. Your second point was about publicly available information and the role of Parliament. One of the things that we do is that we make numerous loans and investments, as you will know, through a whole range of tools and processes. We ensure that those are reported through schemes approved by the Parliament as part of our budget, so you will be aware of some of those that are too many to mention here. However, there are, as you have said, a very small number of investments that have a higher profile and are likely to be in the public interest to disclose, including levels of financial risk. I am very mindful, as are others, of the important role that the Scottish Parliament plays in that. That is one of the reasons why the Cabinet Secretary informed the Finance Committee of both the investments and loan processes that were under way earlier on in 2017-18. No concerns were raised at that process, but I am confident that we need to make sure that we are clear about when those circumstances would require us to make sure that the Parliament and through that, the public was aware. Those are going to be a small number, but they will have the criteria of maintaining commercial confidentiality, which is something that we may want to talk a bit further about. Secondly, there are legal obligations, but, most importantly, the need to consider the risks to the value and the intended impact of the investment itself. As I said, Gordon May wishes to talk particularly about the two that were probably in your mind at the time. I was going to raise two specific examples, obviously, around Ferguson Marine Engineering Ltd and burnt island fabrications Ltd. Are you able to give any details today about the extent of those investments, what our equity stake is, what our expected return is, whether we have any plans to take any further investment, any further loans, or when we plan to sell those assets off, or if we plan to sell them off? You will appreciate that there is a level of commercial confidentiality still at operating here, and that is one of the reasons why we were talking to the Finance Committee earlier on about that. They are quite early on, both of those investments and decisions, but Gordon May wishes to say a little bit more about what our process would be as and when we took decisions and how Parliament would be involved in that. There are no plans at the moment to either sell off or to accelerate, in any way, the repayment procedures that are already in place for both of those investments. You will be aware that, in the accounts themselves, there was a fair amount of disclosure about the extent of both of the loan arrangements that were put in place. The question here is not really about if information about those investments goes into the public domain, but the question is really about when is the most appropriate time to do that. That goes to the two specific points that the permanent secretary mentioned. One is about commercial confidentiality and any specific agreements, legal agreements that might have been entered into, but more specifically, in situations such as this, which can often be fairly—if you look at the two examples, in particular BiFab, which was obviously significantly in the public domain—there is a question about just exactly when that information goes into the public domain and whether or not, by putting that information in the public domain at an earlier point, it places that risk even more the investment that the Government has actually made. It is always difficult knowing when to do that, but quite often it is dictated by things like the ability to be able to win contracts. Both organisations are in processes at the moment where they are looking to actually be awarded contracts. We feel that once those processes are over, that would be a more appropriate time to then put more information into the public domain. Would you accept that there is an issue around transparency, particularly the public money that we are talking about, taxpayers' money that we are talking about and the public having a right to know what companies they are investing in, how much they are investing in and when and if they are likely to get a return on their investment? Isn't there also an issue, and I am not meaning what the particulars are discussing today, but more broadly in terms of a principle, that there is a risk with a lack of full transparency and a lack of a publicly available framework, that there is a risk that it might appear at least that decisions are being made for perhaps political reasons, for other reasons and not purely financial or economic reasons? I can see why you might say that. One of the key issues to understand here is that when the Government acts in intervening in private companies, it has to do so in the same way that a commercial investor would. We are required under the market economy investor principle set out in the EU's state aid framework to act in the way that a private investor would. This is not a case of the Government being able to inject whatever funds it feels is appropriate. It has to do so in the same way that a commercial investor would. That relates to things like the amount of investment, the expected return and the duration over which that lending takes place. It is entirely done on a commercial basis. The accounts themselves are the appropriate vehicle normally to disclose those accounts and, as you will have seen from the 2017 and 2018 accounts, there is a fair amount of information that has already gone into the public domain through those accounts. That is normally the primary vehicle unless there is an appropriate parliamentary statement that is required, but that would normally be the vehicle through which we would disclose information on loans. As the permanent secretary also said, the Government makes a significant number of loans every year. I accept that there has been quite a amount of an emphasis on those two particular loans, but we normally do not disclose the detail of every single loan that goes to every individual or indeed company, but we believe that the public interest was best served by singling out those two examples. That is why the disclosures in the accounts are the way that they are. Further to that, do you accept that there is at least the risk of political interference in terms of making decisions about which companies get loans and which ones don't? We have talked briefly about a framework. The Government has already said that it is required to act in the same way as our commercial investor would in this space. The other thing that is important to bear in mind is that there are regularity, propriety and value for money considerations that are incumbent on the accountable officer who is making the advice and, indeed, for the permanent secretary as the principal accountable officer in that space. Those all require the senior civil servant who is making the recommendation to the minister to do so in that framework of regularity. Is it legal, and does this Government have powers to do this? Is this the type of thing that Parliament would expect funding to be utilised on? Does this demonstrate value for money for the public purse? There are comprehensive assessments on all three of those things before the advice goes to the relevant minister. Just on that, I can understand the hesitancy in publishing all that information whilst it is still commercially sensitive. Once it no longer is commercially sensitive, either because we have a return on our investment and we moved on or there is no further investment planned, would you be happy to publish all that information, all that communication, all those analysis? I think that that is something that we want to discuss with ministers, but the other thing that we want to be clear on is whether or not there were any legal requirements that meant that we could not put that information in the public domain. One point about that. I absolutely take your point about transparency and public interest in this. That is one of the reasons why the pretty onerous sets of responsibilities and tests that we have to pass, bringing those together into one place so that people can see and understand what needs to be gone through before any of those decisions are taken is an important part of increasing that transparency. You are talking, I know, about specific instances, but bringing that into the public domain may assure people that there is limited opportunity to take anything other than very well-informed and pretty well-tested decisions on those investments. I have one final quick question about the two sisters plant, which is obviously relevant to my own region. Obviously, there was financial support in terms of a timeline for how long the company would still be in existence and operational that has not been delivered. What is the process in terms of recovering money that has been given to companies who haven't then gone on to fulfil their promises? If there are loan arrangements in place, then those loan arrangements are legal undertakings that are entered into by the companies, and so the Government would be expected to recoup those investments at a later point. Obviously, if there were circumstances that then meant that the company was in administration or some other factor that meant that it was not able to, then it would fall into line in the same way as any other creditor. Thank you, convener. Good morning. Just very briefly to follow on from Mr Sauer's question, Mr Wells, how does the Scottish Government decide when it will inform the Scottish Parliament about provision of particular loan facilities? It is important to recognise that there is no specific point in the process, so there is not a specific point from the point at which a minister will make a decision. It is generally dictated by the circumstances associated with the individual case. For example, if we look at the timing of when the information entered the public domain on BiFab, then that surrounded what was clearly a very public campaign, and the cabinet secretary at the time decided to make a parliamentary statement on it associated with what was happening in the company at that time. However, as I said earlier on, the normal vehicle in which this type of information would enter the public domain would be through the consolidated accounts and the disclosures associated with those accounts, unless ministers feel that it is appropriate to do so at an earlier point. Just to be clear, is entirely the minister's decision at an early stage whether or not Parliament ever gets to hear about this? Obviously ministers will take advice from civil servants about whether or not it is important to put information into the public domain at an earlier point in time. It is difficult to be precise about every single case because the circumstances in every case are obviously very different. It is important to reflect back on the point that I made earlier on about the commercial sensitivity associated with where a company is at as far as its cash flow at a particular point in time. One of the things we have to consider very carefully is whether or not putting something into the public domain at a particular point in time may have adverse implications for the company's finances. It is always a fine balancing act. I would like to turn to capital borrowing, if I may. The Scottish Government borrowed £450 million worth of capital funds this year, which I think is its annual limit. How does the Scottish Government decide on that level of borrowing and the type of borrowing it is going to do in relation to capital borrowing and for what purposes has it been used this year? Gordon may want to say something about the specific infrastructure projects that have been funded or have been initiated with the £450 million. The borrowing is agreed in advance with Her Majesty's Treasury, including a clear articulation of the infrastructure investment that it will encapsulate and reflect, and its associated amounts, so what it is going to be spent on and how much it is going to cost. Those projects have to meet a threshold test for being assets for the period of 25 years. It is done over a particular period of time, and it has to be demonstrated that those assets will be assets for the 25-year duration of at least 25 years, possibly more. That supports our request for the £450 million over a period of 25 years. There are some very specific tests that we have to go through with Her Majesty's Treasury on the amounts of money that we are funding. Clearly, we are also looking at infrastructure plans, economic plans and a whole range of other policy areas about where and when we are spending that particular investment, but Gordon might want to talk a little bit more about the background to some of the projects that were invested or Alison likewise. I can do that if it would be helpful. There were nine specific projects. Would it be helpful for me to tell you what they are just now? Quite briefly, that would help me, Mr Wells. Okay, so fourth replacement crossing was £75 million. The trunk road programme of A9A90, A96 and A737 was £116 million. The Northern Isles ferry service vessels was £36 million. Fourth Valley College was £10 million. NHS hospital buildings for Balfour hospital was £47 million. Forgartnavel hospital was £10 million. Dumfries and Galloway Royal Infirmary and Edinburgh Sick Kids was £71 million. Rigmaw theatres was £11 million. NHS Scotland estate enhancements was £74 million. That is the total of £450 million. If I might just add as well, in terms of the planned level of capital borrowing, that is actually set by Scottish ministers at the time of setting the 2017-18 budget. As you will know because you received the reports on the major capital projects, there is a whole range of different financing tools that are used for the overall investment programme. Capital borrowing is one and that is very much dictated and constrained by the fiscal framework in terms of that maximum limit that you have already mentioned of £450 million a year. But there is other revenue financed investment. There is the block grant on capital as well. There is a mix of funding arrangements that cover the whole infrastructure programme. Obviously, the ministers chose in 2017-18 to use the maximum borrowing amount so that they could continue that investment in Scotland's infrastructure. The other thing I would say is that the decision then about what is used and how it is used then obviously the borrowing in any one year because this is all about managing the cash flow of grants that go out to these bodies as Gordon has mentioned. These bodies receive these as grants. They do not need to repay it. It is all part of the overall management of Scotland's finances that the Scottish Government will repay on those loans. The timing of that borrowing in that year is left as late as possible for managing cash flow. As you would appreciate if you are thinking of your own personal loans or mortgages, the later you leave it in a year then that reduces the amount of interest that has to be paid on that borrowing in the particular year. The borrowing in 2017-18 used the national loans fund and on the terms that were secured was actually the best value terms available to us under the constraints of the fiscal framework for 2017-18. That is just giving that rounder picture on it. Following on from that and certainly permanent secretary, in your opening statement when you talked about the policies, you accepted the recommendations that were in the report. One of the recommendations is that the Scottish Government needs to finalise the policies and principles within which it manages its borrowing powers. Do you have any indication of when the Scottish Government will finalise those policies and principles? Yes, I think our view would be that we do have those policy and principles at our fingertips. I think bringing them together so that they are clearly going back to the point that was made early on, clearly understood and recognised by a wider audience is part of our endeavour. Alison might like to talk a little bit about that and what would make up that framework. The key thing is actually about where they sit all brought together. One of the recommendations from the Government's and the Parliament's work on the budget process and the budget process review group of Parliament was actually around the medium-term financial strategy. The publication in May this year was Scotland's fiscal outlook, the Scottish Government's five-year financial strategy, this particular publication. This will be refreshed again next spring, in spring 2019. That will be the main place where all our policies are brought together and that is where the capital borrowing policies will also be placed. That will be the time to do that. Obviously, in bringing that together will take full account of the auditor general's recommendations. He was asking particularly about finalising. All fiscal policies, including the policies on the use of borrowing, have to be kept under review to ensure that they continue to be fit for purpose and in the light of our experience and changing economic circumstances. The intention is that the approach set out in this document, the medium-term financial strategy in spring 2019, would be maintained for some time. However, it is fair to say, to call it final, because we have to keep those things as live and active, but that will be the main place where it is all brought together. Alex Neil Can I first of all ask where does Gordon fit into the organisation chart because he is missing in this one? He does not answer to Alison, though there is, as you can see, a clearly very effective working relationship between them, but he is responsible to another director general who looks after the whole corporate responsibilities and functions of the Government. Right, okay, right, okay. Can I first of all follow up in a sense in what Anas was saying in relation to housing? Down the years, for many years now, under successive administrations, we have supported individuals through shared equity schemes to be able to buy their own home, and the cumulative value of the Government's equity in housing now must actually be into billions rather than hundreds of millions. What is now the cumulative outstanding value of that investment? Secondly, are we sure that every time somebody sells a house with shared equity, we recover the money? Thirdly, I know that we did not use it, but do we charge any interest on that shared equity, which is relevant for other purposes? Leslie Evans So I do not have that information on myself to hand, and I think that we might need to write to you with a bit more of that information, but it may be that colleagues and Gordon may want to say something in some comments on it. I do not have the immediate sum with me at the moment, but I am very happy to write to you on that. The Government does recover the sums where it is entirely possible. There are conditions, as you know, set out for the recovery of those loans, so the Government does take action to recover them. You may remember that when the original help to buy schemes were announced, in England and Wales, the UK Government decided that it would charge fees after five years for effectively the benefit of being able to take part in those shared equity schemes. Ministers here decided not to charge such fees, so there are no fees or interests associated with those schemes. John Swinney As well as the bit of assurance of cashing in when the house is sold or when the person dies, can you put in your reply to us some indication of what processes are used to make sure that you capture that, because it is not always going to be the case, especially now some of them will have been in the house for 15 or 20 years possibly. Do they always tell you when the house is sold or when somebody dies? Yes, so I would be very happy to write as part of telling you what the latest outstanding figures are, and I would be happy to do that as of now rather than at the first of March date, as far as the accounts are concerned, and I will set out the procedures associated with it as well. OK. Can I ask a wider question? Two of the Government's key strategic objectives are improving the level of economic growth and creating a fairer Scotland. Can I ask if there is any systematic analysis done particularly prior to policy changes in budgets on the impact of both revenue and expenditure in Scotland, including council tax and business rates, on growth and the impact on the fairer distribution of income and wealth? I think that relates to the national performance framework and the refreshed outcomes that we are now operating to, and Alison may want to say a couple of words about that. Yes, so obviously in terms of the national performance framework, there is a range of indicators that are being collected. Some of those with the new framework actually are new indicators, so we will actually be able to report on a range of them, but there will be a small number, so out of the 81 indicators, there are 16, just because there is new data that needs to be collected and to get a time series. Some of those data sets will be available in 2019 and 2020, so that will stretch over that particular period of time. But certainly in terms of taking into account, you were saying particularly about revenues, so obviously in terms of the economic fortunes and the economic impact of revenues, the forecasts of revenues are now generated, as you know, by the Scottish Fiscal Commission, and they will take into account a range of factors in generating what those amounts are going to be that the Government uses in its budget. The statute says that the Government needs to use those figures or, if it chooses not to, has to explain why. So that independent body that generates those figures actually will take into account a range of economic circumstances and a degree of behavioural effects so that that is reflected in our revenues. Similarly, in terms of the block grant, the block grant that we then use as well towards expenditure will take into account some economic and tax receipt factors as generated by the OBR and their assessment. So there are some very high-level, but there are very specific circumstances now that are in place, again, driven by the fiscal framework agreement between the UK Government and the Scottish Government. If we take a couple of examples, the proposal to reduce air passenger duty at some point, I realise that it is not possible at the moment until there is resolution to other issues. Council tax, because clearly one of the things that we saw last year was that every one of the 32 councils increased council tax, usually to the maximum of 3 per cent. Before the decision is taken on local government funding for the budget for next year, is there an analysis undertaken of the impact of potential reductions or increases in local government funding, the potential impact of that funding and the potential impact on council tax policy and particularly if council tax rises, does that further make Scotland fairer or more unfair? The main focus of analysis, not surprisingly, is about that particular interface between business and local and central government around the non-domestic rate income. That is particularly the focus, because that is the area where there is a direct relationship between government policy and ultimately what is part of a funding package that councils adopt and use in their own local areas. What I am getting at is spending a lot of money trying to create a fairer Scotland on the expenditure side. In the meantime, on the revenue side, particularly in relation to council tax, we are making Scotland more unfair. It seems to be a contradiction. My question is, do we look at the impact of, for example, council tax or air passenger duty? Has there been any work done, not so much a realisable work done, on the growth impact of reducing air passenger duty? Has there been any work done on the fairness of reducing air passenger duty? In terms of air passenger duty, the main work has been on the economic growth of reducing it. No work has been done on the fairness of it? All of our policies are tested against fairness issues. The points that you are pointing out particularly are the technical elements of air passenger duty, of course, but council tax as well. We are under responsibility to check and test and advise on the basis of not just the revenue incurred but any fairness issues that might be incurred as part of a decision on a fiscal basis. Alison is quite correct. She is talking about a particular aspect, and a particular aspect in terms of raising taxes, but all our policies are also tested against the issue of fairness. Indeed, it is not least because we have a huge commitment that you will be very well aware of in terms of reducing poverty and some very clear reducing poverty targets, so that they need to be tested against those circumstances as well. We are not hitting those targets. In fact, child poverty is going through the roof. Targets that we have set out for ourselves as a Scottish Government in the future, yes, which are still to be met and are going to be very challenging? Absolutely. If you are doing that, could you send us an example of where say with air passenger duty what analysis has been done on the fairness impact and what the conclusions were and the same with the potential impact on council tax? Increases. That would be very helpful. Thank you. Just a couple of questions from me. Please one on the underspend that is reported in the accounts, and the other one on internal audit that was raised by the auditor general. Firstly, in the underspend it is reported that it is a £339 million underspend this year, which is a good bit higher than previous years underspend. First, to ask for an explanation of why there is such a difference. Just to confirm that the underspend amount ultimately is used, carried forward and deployed effectively in so forth to future spend, so I wonder if you could clarify a wee bit around that, please, Leslie. Surely. The £339 million headline, as you might imagine, judging by your question, covers a multitude of different decisions, and some of these decisions are intentional and deliberate. Scottish ministers plan to make use of what is now the new Scottish reserve effective from April 2017 to carry forward £235 million of that chunk of money to support additional expenditure, including the 2018-19 budget. That was approved by the Scottish Parliament, so a significant amount of that is already being used and carried over to 2018-19. We have also got within that a significant sum of money that is accounting underspend, which is due to technical shifts, so AME, as we would call it, money that cannot be used for services. Some of the quite a large proportion of the education underspend, for example, is to do with that, which could not be used because of the nature of the cash, where it is not able to be used for cash purposes. We have some small elements of that as well, particularly in education, where we have had money that we have ring-fenced because it has not been spent this year, so Gordon was talking about Fourth Valley College earlier on, which has some capital investments. It has not actually managed to trigger all the spend during that year, and so it was carried forward. The vast majority of the money has been, as you said rightly, carried forward intentionally, in fact, in the case of one significant chunk of it, for spend during 2018-19. If we look at the overall fiscal underspend, I think that I am right in saying that, but Gordon will keep me right on this, that it is actually 0.2 per cent of our spending power, which was underspent overall. I think that that is the correct figure. That is correct. Just a couple of additional points, if I may. It is important to understand that some areas of funding cannot be carried forward. The permanent secretary referred there to a couple of different things. One is that we use something called non-cash, which is effectively to deal with depreciation. It is money that cannot be spent on public goods or services. It is provided by the Treasury in order to deal with depreciation and impairment of assets. The other thing is that they annually manage the expenditure budget—the AME budget—that the permanent secretary referred to. It can only be used on a very small number of items, and two in particular, which are student loans and NHS and teachers pensions. Those budgets are ring-fenced by the Treasury, so they cannot be used for other purposes and cannot be carried forward. Everything else that is effectively in what is called departmental expenditure limits, Dell funding, has been carried forward through the Scotland reserve. Its spending power has been absolutely maintained and is deployed in this or future years. The transparency angle that was led by Bill just to the outset. How do the public see the movement through to the next year of a usable underspend from the previous year? For example, it is reported in the accounts that the underspend last year was £85 million. The usable element of that, how do the public get a sense of where that is being spent and earmarked? Is it demand-led spend at the time, or has it already earmarked and set aside spend? How does the public get a sense of where it is going? In terms of how the money is carried forward and what happens in and out the Scotland reserve, that is all produced in a new publication, the fiscal framework outturn report, which was published a couple of months ago. There is a fairly detailed set of tables there that explain what happened before 2017-18, the transfers in and out of the Scotland reserve and what the picture then looks like at the start of 2018-19. There is full transparency in what is happening there. The sums that were carried forward into this year, in particular the sums that were used and deployed in the budget process for this year, the Cabinet Secretary set that out when he set out plans for his budget back in January of this year. In particular, he set out the details associated with the sums that he was carrying forward and how they were being deployed as part of the overall budget for 2018-19. Do you want to just briefly repeat that? I am quite keen to hear from the witnesses on that as well. Of course. I think that it would be fair to say that the whole process of internal audit has been raised at this committee. The quality of internal audit right across the public sector landscape has been raised by a number of colleagues here over months, if not years. In the Auditor General's report, we see a comment here that although the internal audit director meets some of the public sector and internal audit standards, it does not comply with significant aspects of the standards. It was just to get your comment on that and what we are planning to do about it. I will take it in two parts. In terms of the public sector internal audit standards, the Scottish Government internal audit undergoes the test against those standards, as every other public sector internal audit does over a period of every five years. They will be tested against those. Their turn has come up, if you like, in the first part of 2019. They will be tested against all those 56 standards at that point. That is the normal rhythm of testing in which we should be ready and keen to see the result of that evaluation. The second part of what I would like to say is that there has been an enormous amount—I think Audit Scotland, to be fair, has creditors with this—an enormous amount of work and investment in the quality and nature of our internal audit service. At the time of the Audit Scotland review, there was already a back-to-basics review, as we called it at that time, which looked at the rewrite of the audit manual, looked at investment in staff training and additional quality assurance processes. We also brought in Grant Thornton for external testing and expertise to see what they could add to checking and challenging our internal audit services. In addition, as you will see from the Scottish Exchequer family tree that we circulated with my letter, we have a director level at the top of the internal audit structure now, with a remit to ensure that the internal audit is fit for purpose. She has also been given additional staff resources to ensure that the pretty hefty workload that internal audit in the Scottish Government undertakes is feasible and that she has the capability and skills to do so. She has brought in quality assurance processes—customer service surveys, implemented training and development strategies—a lot of investment and, quite rightly, investment in a very important part of our scrutiny and accountability services. That goes back to one of the things that I did when I first came in as Permanent Secretary, which is to look at the governance and assurance arrangements for the organisation as a whole. I do not know if Alison wants to say anything more about that, but that would be my response to you. As extensive work has been done, it is led by someone who is professionally qualified, not only as a chartered accountant but as an internal auditor—as specific qualifications—and has been leading a change programme to make sure that these functions and activities—the work of internal audit is there to make sure that our internal controls are not only for us as a Government but for the other bodies. They provide that independent objective assurance and advisory activity to ensure that value is added to our organisation's operations, so that the skills are there to be able to advise us on risk management, economic and efficient use of resources, compliance with policies and procedures, laws and regulations, to safeguard against losses and to ensure that the integrity and reliability of our information and data is there. That is part of what they cover. The other thing that is worth drawing out in the conclusions from Audit Scotland and the review that takes place by our internal Scottish Government Audit and Assurance Committee is that Audit Scotland did not identify any internal audit reports where the underlying evidence would suggest an incorrect audit opinion or conclusion. I can absolutely assure you that I met with the two myself on Monday this week. They are absolutely working through the back-to-basics project and making sure that all those important foundations in the 56 areas that Audit Scotland identified are actually corrected. On the internal audit point, we have looked at internal audits quite extensively in the committee and we find that problems start there and then escalate in governance and management of many of our public sector organisations. I find it really worrying as the Scottish Government has to do a project to go back to basics on its own internal audit procedures. I think that some of the problems that the Auditor General identified are really quite worrying. How did it get to that point? I think that the title back to basics was not intended to be one of alarm. It was more intended to show the comprehensive nature of a new internal audit director coming in fully qualified, as Alison said, to look at the top-to-bottom nature and see whether it was satisfactory for her purposes and the purpose of which she was appointed, which was to look at giving us a clean bill of health. I would not want anybody to be alarmed by the title alone. However, I think that it is important that we recognise the crucial nature of that service and indeed the stretch that has been placed on it as our powers and responsibilities have grown as an organisation. We are now operating in a completely different set of operational services as well as policy for Scotland in a way that could not have been envisaged a few years back. It is quite appropriate that we take the temperature of the supporting services—that is not just internal audit, it is just much to do with HR, finance and the way that we govern our business. It is very important that we take an opportunity to step back and check that we have what we need for what is a set of responsibilities and operational responsibilities, in particular, that we previously did not have. One final thing that I would say is that although it was stated that the internal audit director reports to Alison for pay and rations, that is correct, the internal audit director has a line of accountability to me as well, so he can come and talk to me at any time about the nature of what is going on in the organisation and simply to any of the other accountable officers as well and a direct line to a newly formed Scottish Government Audit and Assurance Committee, which is a big part of the internal audit process. Okay, but the title suggests that you needed to go back to the basic principles of audit. I asked how far back that goes. Are you saying that it went back to the first further devolution of power? Is that when problems started to emerge? I am not identifying problems. I think that Alison has already said that we don't have any reason to believe that the product and the quality of what internal audit has been doing within the Scottish Government has got anything other than full endorsement and our confidence. It doesn't comply with significant aspects of the standards. That's the public sector internal audit standards. At Audit Scotland, they also said that they recognised the amount of work and investment that had been placed into internal audit, predating the review and recognising the importance that we are placing on the investment in internal audit. I don't think that we can do anything more than continue to invest in support and ensure that internal audit's voice is heard strongly within the organisation. I go back to the lines of reporting to the most senior board of the Scottish Government on assurance and audit. I know that you might take issue with the term problems, but when did issues start to emerge and what caused that? Was it the further devolution of power? I can't say, and I wouldn't identify problems starting at any time. I think that what we have tried to do is ensure that we take a fresh look at the demands on the internal audit service at a time when we are being stretched and being asked to accommodate and grow to take on further powers. I think that this will be a gardening process. We will constantly and rightly be checking that what we have in the way of internal audit facilities and challenge is strong, effective and well resourced. What is the timescale for this project to complete? You just said that you will continually monitor it, but this back-to-basics piece of work. My understanding—Alison will keep me right on this—is that all of the processes that I have talked about are either in train or complete, but Alison may want to talk a bit more detail about that. The review has done, Grant's Ordinance has completed their work, the new manual is in place, the training has taken place. The next particular milestone will be the spring, where there is that third party separate assessment in addition to Audit Scotland continuing to review internal audit and the Scottish Government Audit and Assurance Committee keeping track on the progress that is being made. It is now about just this continued reflection to make sure that what has been trained and put in place and the reviews that are happening confirm that the good work is still there. Ms Stafford, how long do you think it will take to comply, to fully comply with the public sector internal audit standards? Do you have a timescale for that? The work that is in place is to ensure that that is happening. My understanding is that we will be tested against that in the spring, as I said earlier on, so we will be coming up to the end of our five-year cycle on that. Can I turn to outcomes, because this is mentioned in the Auditor General's report as well. We know, and there have been several pieces in the media recently, about the huge amount of spend particularly on NHS and health and social care integration, which we are just about to scrutinise with the Auditor General after your session, that amounts to nearly half of the Scottish budget now. How can we, as politicians, assure the public about this level of expenditure when there is really kind of scant evidence on the outcomes that that spending leads to? That is a good example of a wider point that the Auditor General made about how the budget and outcomes correlate. That is some of the work that we are already undertaking, and Alison may want to say a little bit more about this in a minute, where we look at how we can make sure that the national performance framework, which was refreshed this year as you know, includes outcomes on health and others as well. That framework is the one that we use for our budget decisions to inform our budget decisions and to inform the way in which we present performance information to the Parliament but to the public as well. Of course, health produces a huge amount of information, a huge amount on targets and on other materials and reports, and indeed Audit Scotland reports on how the health service is performing weekly and monthly, as you will be aware. The important element is for us to also ensure that that information and other indicators of the kind that Alison was talking about is brought to bear in terms of the long-term outcomes for Scotland. Many of those outcomes are dependent on health or, indeed, prevention before it even gets into the health service. We are looking at how not just we report on the national performance framework for Scotland in its website, as I said earlier on, how it connects to the budget and how it connects to our information that we share with the public. One of the things that we have been doing is to look at our open government commitments and the report, our second report on open government will come out later on in this year, I think, in December. We have also been working with the Blavatnik School of Government in the University of Oxford, where I am a fellow and have had a year's worth of their academic challenge. I think that it is fair to say as well as assessment on how we connect our work on outcomes to performance and to our budget responsibilities. That work is very much at the core of our performance and national performance framework agenda. In your opening statement, you may be said that you accept all the recommendations of the Auditor General's report. Is that correct? They are all being addressed as we speak. Do members have any further questions for our witnesses on this this morning? I have a quick clarification from Mr Wales. You mentioned when you were talking about investing in private companies that it was done on commercial terms on market terms. Can you tell me how you determine what is a commercial term for such an investment? Because of the complexities associated with those types of investments, we will almost always employ external advisers. The external advisers will give us advice based on market conditions and the types of deals that are done in particular sectors and with particular companies to tell us whether or not the type of arrangement that we are looking to put in place is actually within the general ambit of other deals done in that type of sector. We also make reference to the European Union and the state aid regulations that set out, for example, the associated interest rates in terms that should be associated with particular loans. Are those advisers appointed on a per deal basis or do you have a panel? No, we usually appoint them on a per deal basis. Public who you consult? It probably is, but I do not think that there is any particular reason why I would be very happy to tell you who those particular advisers are. I would be fine to find that out. I can certainly do that just now. Ferguson is with Price What I Have Coopers and BiFab with Grant Thornton. I thank you all very much indeed for your evidence this morning. I now suspend the committee for five minutes to allow a changeover of witnesses. Item 3 is our section 23 report on health and social care integration. I would like to welcome our witnesses for this agenda item. Caroline Gardner, Auditor General for Scotland, Claire Swinney, Audit Director, Performance and Best Value and Lee Johnson, Senior Manager, Performance and Best Value, all from Audit Scotland. I invite the Auditor General to make a brief opening statement. Today's joint report focuses on health and social care integration and provides an update on progress. It looks at what impact the integration of health and social care is having and the barriers and enablers to change. As the committee knows, health and social care are facing increasing pressures and a very challenging financial position. Integration has got the potential to bring about the service transformation that is needed to address these pressures and to bring real benefits to the people who use services and the wider public. We did find evidence that integration can work within the current legislative framework. There is evidence that integration is enabling joined up and collaborative working in some places, and this is leading to improvements in performance, such as reduction in unplanned hospital activity and delays in hospital discharges, but there's much more to be done and a number of significant barriers that need to be overcome. Integration authorities oversee almost £9 billion of health and care spending, but longer term integrated financial planning is needed to deliver sustainable service reform. The publication of the Government's medium term health and social care financial framework is a welcome step, but the detail that underpins it will be important. Importantly, the set-aside aspect of the act is not yet being implemented, and this needs to be resolved urgently in order to shift the balance of care towards community-based preventative care in future. Strategic planning also needs to improve, focusing on how integration authorities and their partners will achieve better outcomes for people who need support and ensuring that new ways of working will be sustainable over the longer term. Integration authorities, councils and NHS boards need to establish a clear governance structure where all partners agree responsibility and accountability and put in place the right leaders. We found some examples of small-scale changes in the balance of care, but integration authorities need to achieve wider impact. This means addressing challenges related to data and information sharing and sharing learning from successful approaches right across Scotland. Change cannot happen without meaningful and sustained engagement with people, staff and politicians right across the country. No one organisation can do this alone. We need to see the Scottish Government, COSLA, councils, NHS boards and integration authorities work together with their staff and communities to scale up the pace of change. Convener will do our best to answer the committee's questions. Thank you very much, Auditor General. I will ask Alex Neil to open questioning for the committee. Auditor General, the set-aside provisions in the act are absolutely crucial to the success of integration. As you say in sections 19, 20 and 21 of your report, this is one part of the act. Despite the fact that the act has been in place now for four years and the official start date for integration was getting on for three years ago, that has not happened and you explain why. You also say quite rightly in my view, in your introduction, that this is now urgent. What action do you think now needs to be taken by whom to get this sorted? You are absolutely right that unless the unplanned hospital care element of the resources that were meant to be managed by the integration authorities, it actually devolved in practice. There are real limits to the amount of change that can happen. We identify some problems with people, first of all, genuinely knowing how much money is affected, but beyond that we say that we do not think that that is a fundamental problem. We think it is about people's willingness and confidence to really share that information, to think about adjoining our health and care budget in their area and to manage it on that basis. We have set out a number of things in part two of our report that we think need to happen, and we are happy to talk about that in more detail. More generally, though, we have reached the stage where the Government and COSLA themselves really need to be pushing and requiring the local leaders in each part of Scotland to overcome the differences, the challenges that they are facing and to put that part of the legislation into place. As you say, the legislation has been in place for four years now. The integration authorities had to be in place by 1 April 2016, which is many three years ago, and we are not seeing the change that we need to. Can I ask the wider financial situation? As I said before, if you look at the history books and look at when we were closing down the Victorian mental health so-called asylums—a terrible name for them—that was done over a five-year period with bridge funding, because you have to fund both services during that transition. Do you think that the time has come, as well as dealing with the set-aside issue, on the need to look at using some of the additional funding that we are supposed to be getting as a result of the Barnett consequentials from the increase in health spending south of the border? That should be focused now on making integration work and providing that kind of bridge funding or a similar type of arrangement. When reading your report, even if you sought out the set-aside issue, it seems to me that we are not going to make the progress that we could and should be making until we recognise that both sets the acute service that cannot handle a reduction because of the increased demand and the community side both need to be kept running until we make the transition. I think that that should be a real focus of the longer-term integrated financial planning that we are talking about. If I can refer the committee to page 31 of the report where we are talking about the need for that, we highlight there at the bottom of the page that many of the changes that have been made so far have been done with additional funding that has been available from different sources. That certainly makes it easier and it is very important the challenges that we do not yet have those plans where people, either nationally or locally, can say to get from here to there, we need to spend what we have currently got, and for those two years we need an investment of this much, either to pump prime or to double run or to invest in new facilities. That planning is important for the IJBs themselves and it is a level of detail that I refer to that needs to underpin the Government's health and care financial framework with exactly those questions of how the additional money could be used to make that change happen if that is what is needed before we start committing it to other parts of the health and care. Presumably, the emphasis has to be in the investment in the community side, primary care, social care, etc. I asked Paul Gray a few months ago, is the time not come now instead of channelling the money to the IJBs via the health boards and the councils for the Scottish Government itself simply to allocate budgets directly for the core statutory functions to the 31 integrated boards. Her reply was because of the variation, because some boards have taken on children's services, for example. That was a reason for not doing it, but it seems to me that you could do that for the core statutory functions. If the health board and the councils agreed that additional services will be provided by the IJB, let them argue about that, but at least let's get the core statutory functions moving. It seems to me that channelling the money and a lot of the frustration and friction in the system is because we are giving it to two bodies who then have to negotiate and then after negotiating the amount, they then have to delegate the budgets back again. Could we not simplify this whole thing by directly funding the 31 IJBs? I will start by saying that you were asking exactly the right person whether that funding is possible. I do not think that we are in a position to answer it for you. Clearly, the legislation sets out the way that IJBs work, and about a third of the £9 billion comes from councils, not from Government, so that would need to be resolved. If we look at Exhibit 2, it shows you the way in which the money is coming from health boards and from councils into them. I think that the spirit of the legislation is about getting the system to work as a whole. That has been the driver so far. I think that if it is not possible to get the system to work as a whole, the report is very much highlighting that it is happening slowly. The Government probably needs to look with COSLA at more radical solutions, but we have found some signs that it is starting to work. My focus would be on speeding that up at this point. My final question is that we have now got 31 IJBs. We have still got 22 health boards. We now have three regional structures in the health service, so that alone is a total of 56 different organisations with all the relevant overhead and so on. Given the financial pressures and the need to streamline the management structure, it is now not the time to start looking at this huge overhead. You are saying that there is a question about leadership and the quality of management and the availability of quality management. There are so many organisations in a small country that are looking for leadership. Is it time not come to have a fundamental look at the whole management structure of both health and social care and the relationship between the two? As the committee knows, I have raised concerns before in this report and in my recent report on the NHS in Scotland about the complexity of the management arrangements and the scope for confusion among the people involved in it. That is an issue raised in this report as well. It clearly is a matter for Parliament, which is legislated for the creation of the integration authorities as an additional layer through there. I think that our focus is on making sure that that works as well as it can and highlighting the pressures that it does throw up. You referred there specifically to the challenge of getting enough leaders of the right calibre able to do this. It is definitely a challenge for the integration authorities themselves. We highlighted the number who have shared posts or have very high levels of turnover. There is no doubt that that is making doing this harder. The committee might be interested in the plans that Government and COSLA through their joint working group have for addressing some of those challenges and speeding up the limited progress that we have seen so far. My final question is, and we have heard this recently in Lanarkshire, where one of the chief executives has been encouraged to leave. That is not the official version, but my understanding is that there may be another huge payoff here. There are a lot of chief executives left posts in the three years that the integration authorities have been up and running. Are you keeping an eye on what pay-offs there are? I think that there is a lot of public money again getting wasted on massive pay-outs that are not a statutory requirement. Yes, as part of the annual audit of all the bodies that come under my responsibility and that of the Accounts Commission, the IJB's local government bodies, the auditor is required to look at the remuneration report and at significant transactions, significant events, such as the departure of a chief officer. We look at that, and for the ones that sit within my responsibility, I will report them to the committee as appropriate. I think that Mr Neill has got to the heart of the three big issues. I just want to follow up on them, which are on budgets, on consistency and on structure. Just firstly, on budgets, you quite rightly said that there needs to be an increase in investment, a subprime, as you said, in terms of some of the integrated authorities. How much of a challenge is the fact that health boards are having to make savings and local authorities are having to make savings and are therefore passing on the need to make those savings to integrated authorities and therefore undermining the plan to have that subprime, investment and integration? I will ask Leanne a moment to come in and answer your specific question. I will kick off by clarifying that I said that we do not know what additional funding may be required, but we have identified that the significant changes that we have seen so far have often relied on additional funding. That is why the longer-term financial planning matters are important. Leanne, can you talk about the financial pressures that are facing the bodies involved? We have set out in terms of the level of savings that the integration authorities will need to make. In our recent report on the NHS, we also talked about the levels of savings that the NHS boards are having to make. We see changing the models of care as a way of trying to make the system more sustainable, because the current way of delivering health and care is not sustainable because of the financial pressures and the rising demand. We see that some of the new ways of delivering care that we are starting to see emerge are a way to try to ensure sustainability going forward. Speaking to local authority individuals and people who sit on the integrated authorities, you get a sense that, at times, they feel as if the health boards and the local authorities are passing on some of the hard decisions or the savings and the cuts that they would have to make to the IJB because, in some ways, it is easier to pass the cut and the bad press to them. How much have you seen that from your interaction with the integrated authorities? Each integration authority has an integration scheme, if you like, where they agree how the finances will work. In setting that up, they have already agreed how the savings will be made and the proportion that will be submitted. If the integration authorities are struggling to break even at the end of the year, how will that be divided up between the partners? I think that we outlined that in our report. There is an agreement there, but there are tough decisions to be made around service provision going forward. Would it be a fair assessment to say that the budgetary pressures on local authorities and the NHS make it harder to achieve the integration that we all want to achieve? Yes, and I think that we say that in our report that the financial pressures are making it more difficult to achieve the scale and pace of change that we would like to see. Just on the consistency, again, there seems to be a challenge with the 31 local authorities that there is not even an agreed model of what the responsibilities and the areas for each IJB is. There seems to be an inconsistency across the 31 integrated authorities. How much consistency, or how much need for consistency do you think we need, or how much should we leave it to the flexibility of individual integrated authorities? That is a really good question. The legislation was deliberately designed to give people flexibility at a local level, and we all recognise that there can be good reasons for that. Glasgow looks very different from Highland, looks very different from the island health boards and councils. Our concern is that that flexibility is not leading to a consistent pace of change that is tailored to the local circumstances, but instead is leading to confusion and disagreement about what the arrangements ought to be. That is why we have reached the stage of saying that a stronger steer is needed from Government and that the Government-Cosler working group task force is looking at this as an important vehicle for making that happen. What do you propose? That looks like order of general. Do you think that there should be a set framework of the basics of what an integrated authority should do and the options of what the add-ons can be? What do you think the solution might be? In terms of the outcomes for people, it is probably important to be clearer which services ought to be involved in the integration authority and what the outcomes are that the integration authorities are working towards. One of the things that we highlight in the report is the very wide range of outcomes and indicators that apply to them, which make it hard to see what the priorities are. Beyond that, we think that there are ways of working that can improve their effectiveness. I think that I will want to say a little bit more about that. I am just reflecting on our recent children and young people's mental health report, for example. I think that we do not understand enough yet. We do not have enough evidence yet about which services should be delegated and which should not. There is a minimum that the integration authorities are responsible for, but in the children and young people's mental health audit, for example, we tried to look at whether children's services being delegated was more effective or whether the outcomes were better, but we could not find evidence of that. Of course, the argument that some authorities would have is that the children's services should stay in the local authority because it is near our education, although others would argue that, particularly in children and young people's mental health, it should sit within the IGB to be closer to the health services that children and young people might need. I think that we need to understand more and understand the outcomes that are being achieved by different services being delegated. We have already heard and outlined in the report about the challenges around the budgets and the impact that that is having on integration, the challenges around consistency, given that there are many integrated authorities working in partnership with local authorities and NHS boards. That brings us on to the structure. Surely, we are management and bureaucracy heavy in terms of value for money, in terms of the high salary roles that we have around the 22 health boards, the 31 integrated authorities and the 32 local authorities. How much around integrating, perhaps, the posts if not aligning the structures is one area to look at around trying to reduce some of the bureaucracy costs? Is there a time now to try and look at reducing the number of different bodies that there are to try and get greater consistency, greater value for money and drive the money and investment towards actual service delivery rather than salaries and management posts? I think that there is a bit of a paradox in here. I think that it is easy to castigate management as being something that is different from providing health and care services. I do not think that it is. I think that good management is essential to being able to plan, deliver and transform services in the way that we need. I have said in this report and in previous reports that not only do we have more bodies now involved in this particular area as well as others, it is not always clear to us or more importantly to the people involved what the different roles and responsibilities are. We say in this report that some people who sit on IJBs do not understand, for example, what the new regional responsibilities for workforce planning look like. We are seeing increasing responsibilities for planning acute care and for delivering some specialist acute care at a regional level. It is not clear to everyone involved how all of that joins up, and that means that we are ought to be an investment in senior managers and leaders who can work with staff and people to change things, end up being spent on negotiating and disagreeing about what they are actually there to do. That is the problem. I will find a question. In the report, you also made clear about governance and leadership. Surely a more streamlined governance and leadership structure can help to provide stronger management and provide a better consistency across the country. Is that an area that Audit Scotland will be looking at on how we can streamline our leadership and governance structures in order to deliver that? There is no doubt that that is something that came through in this piece of work very strongly when we spoke to everybody involved in the system that they had struggled with the accountability and governance arrangements, which still are struggling in many areas. We have got some examples in the report of Aberdeen City, particularly, who got support from the Good Governance Institute to help to think through things like risk management and how that would apply across all of the bodies involved. It is incredibly complicated. That said, the change that they are trying to affect is complicated. That will take time. There is also something about bringing together the two cultures of local authorities and health. People need them to understand how each other works in a broad sense, but also in some of the technical issues around things like the finances. That work is happening, but there is something that we highlighted as a risk in our report back in 2015. You will see in appendix 3 some of the issues that we identified in that initial report, while there have been some examples of progress. There still are some of those risks that are reflected in this report today. Can I add a tiny supplementary? Given that we now have 31 local integrated authorities, do we need 22 health boards? That is a question for Government rather than for us. What we have set out in this report is the difficulty in bringing together those various roles and responsibilities. There is no doubt that the environment that the IJBs are operating in is incredibly complicated in terms of some of those financial challenges. We have absolutely asked questions about the clarity and understanding of that regional, national and local model. It is clear that that still is not fitting together very clearly. People are struggling to understand their way through that. It came through loud and clear for this report. Annas's line is very interesting, so I will develop that if I may. Before I do, I will put a very blunt question to Lee Johnson. You talked about effectiveness. Looking through the report, there are some statistics on effectiveness, but the statistics do not seem to show marked improvement, if I may put it that way. My question to you is simply this. Couldn't those statistics, the improvements, be down to chance or be down to something that the health board is doing, something that the council is doing, rather than directly attributable to the new set-up? If that is possible, then are we not diverting £400 million a year from the health budget into something that is not markedly making an improvement? There is no suggestion of causation there, but later in the report layout, we are starting to see improvements at a local level. Yes, the improvements are not marked, and that is what we say, that we need better data. As we have said several times recently at the committee around the NHS, we need better data and monitoring and more openness and transparency about the difference that is happening and the impact that integration is having. I do not think that at a national level, we have a clear enough picture of that yet, but having reviewed all of the local performance reports, we are starting to see improvements at a local level that are directly attributable to integrated initiatives and projects and different ways of delivering services. The panel talked about leadership and governance and things to Mr Sarwar. The report certainly talks concerningly about some aspects of that. I see that you talk about part-time chief financial officers and some of the financial officers having dual roles in particular or can't be recruited. The whole idea of corporate infrastructure was something that, looking through, I was not quite convinced of. You also talk about a lack of support services, such as HR. Is that something where, for example, the Scottish Government needs to be stepping in and giving a much clearer steer about what the model needs to look like? Those are the sorts of staff that you should have, and that is how it is supposed to run. My sense is probably less that there is a template for what staffing model you need to have and how the support services work. Instead, there is a clearer focus by Government and COSLA, given that this is a joint initiative with local Government, to be clearer about what progress it should be making and a willingness to step in where that progress is not happening for whatever reason, whether it is a lack of capacity or lack of people doing the key jobs, whether it is a disagreement about the set-aside budget and whether it is a need to find some pump-priming money to invest to get from the current service model to a new one. We all recognise the importance of respecting local difference. There is no question that matters. For a policy that is this big and important, where the progress is as slow as it has been so far, it is not feasible any more to maintain that hands-off approach and not be willing to step in and make changes, require changes, where progress is not happening and people are stuck. A brief point that arises from that, which I am not clear on my own mind, we have looked as a committee several times at the difficulties in recruiting at the top level, just because finding talent will always be difficult, finding experience. Are those the same people that are looking after the IGBs, who are doing these dual roles, as, for example, in the health boards? They have almost all come from within a health board or a council, and it varies in different parts of Scotland. I am just looking to see if I declare all that you want to add to that. Not so much. I think that I am absolutely right that the dual role issue is within the system as a whole, so that is the pool that is being drawn from. I think that what we have tried to do in this report is set out quite clearly the different leadership ask, if you like, within what that integration brings. What it is looking for are leaders that are working in a much more collaborative way. When we think about the role of the chief officer, often that is flexing to a degree in terms of negotiation around change, trying to get consensus across a range of partners. You have seen a very different leadership style, you could argue, than traditionally has been the case across the health system, for example, for a while. I think that there is a message in here as well that the current system is not working as general consensus of the need for change. I think that we are very interested from an audit perspective about issues to do with power and how that was being reflected in the role of those chief officers. That can only work if all parties are signed up to it and engaged with it, so there are big implications for everybody involved. Thinking about leadership is absolutely key in that. That is really interesting, Clare Sweeney, because you talked earlier about the Aberdeen example. The report seems favourably predisposed to what is happening in Aberdeen. What is it about Aberdeen? You have talked in there about cultural differences. Do those have somehow managed to get rid of those cultural differences? Or are they working around them? In any event, how is that knowledge going to be shared? It is fair to say that not one area in Scotland has got all of this right. That is why there are such a range of examples within the report, particularly thinking about things like the scenario planning example on page 28 from Shetland. That is about getting to the heart of having the difficult discussions. We were warned quite early on to be very cautious about partnerships that seemed very quiet, where there was not a lot of disagreement, because that suggested that things were not being tackled. One area has not got it cracked. There is absolutely something interesting in Aberdeen City around their focus on governance, getting support from people who are well informed around governance to help to facilitate that conversation. What are the tricky issues and how do we need to resolve this locally? There is something quite interesting in that model. I would also say that there is that change in leadership message. We highlight in the report the changes at that senior level that there have been since integration was introduced. It brings a degree of fragility to some of those examples in the report. Where we see things working well in some areas, and I am very thoughtful about the examples of the third sector starting to make improvements, it can quite quickly change. That has been our experience over a number of years where we see pockets of small examples of things working well that can change very quickly if leaders change or if funding is not there or if the pressures increase. Lots of good examples in the report tend to be very small scale. What is your general? Mr Kerr, I was just going to add that one of the things that the Scottish Government COSLA group is focusing on is training and developing leaders to do this. We have highlighted in our report the things that leaders involved in this need to do. That is not just the leaders of the integration authorities but also those in the health board and the council and getting that development will take time. You asked at the end of your question about sharing good practice and that seems to us the other critical thing that needs a real boost now. We found some examples of things working well, some of those are fragile and we need to use things like the approach that the NHS has taken to the patient safety programme to really learn from those and spread that experience much more widely in a way that respects the fact that different places are different but is also very clear about what is expected of people in terms of the change that they are making. On that point, you referred to a group that is co-chaired by COSLA and the Scottish Government. I think that this is the one that you talked about in paragraph 35. My understanding is that that is looking at how to overcome barriers to integration. Have they produced anything substantive, if not or indeed if so, but when will that be out? When can all of those bodies start looking at something substantive to say that this is how we need to change? What they have produced, which is positive, is a statement that acknowledges that change needs to happen much more quickly, that the pace of change is not sufficient and we have highlighted some areas that they are working on. Clare may be able to tell you more about the process that they are going through to do that. The group will conclude its work in January 2019, so we are following that quite closely. We want to keep in regular contact with the group. In essence, what that has been has been drawn together all leaders across health local authorities and the integration authorities to start to think through what are the difficult questions that we need to tackle at this point and start to see if there is a need for things like more guidance, more direction and also facilitating that training and support that the Auditor General mentioned to make sure that the leaders are in the state that they need to be in to tackle this agenda as much as thinking about the capacity that is around them to support them. Bill Bowman You have already mentioned Appendix 3 and that there has perhaps been not so much progress, in fact that the heading progress is perhaps not the correct term for that column, but without going through the specifics, you have the Scottish Government and integration authorities. I remember when Paul Gray was here at one point, he told us that, in respect of the NHS, the buck stopped with him or his role. In terms of the headings to your Scottish Government and integration authorities, where does the buck stop for those two organisations, shall we say? The integration authorities themselves or the integration joint boards are local government bodies and are established as such in the legislation that Parliament passed. That means that they are formally accountable to their electorates in the same way that councils are. Government is obviously accountable for the success of the policy overall of integrating and meeting the needs of people right across Scotland. One of the things that we have heard a lot in doing this work is that the accountability arrangements are not clear. I think that that is not true. If you keep it simple and high level, they are clear. What gets in the way is people's agreement about their individual integration schemes and the ways in which the health boards, councils and integration authorities work together. I think that there is a real need for Government and COSLA to make sure that all of those are clarified and that people are living up to them in providing the services that they are responsible for. In terms of when you go through your procedures to finalise the report, you get the fact checking. Who do you give it to then? This report, most of the fact checking, the factual accuracy confirmation is with Government itself. Where there are mentions of individual integration authorities, we pass that section to them for their comments. Government itself, there is a particular person responsible. The director general for health and social care is the accountable officer. For the Scottish Government, but in terms of the integration authority, there is a single person responsible as not for local government as a whole. Willie Coffey Thank you very much. I will continue the theme of the discussion. If you look at Appendix 4, the auditor general, you see a picture there. It is about financial performance, but if he were to choose a word to describe that, it would not be integration. It is a really mixed picture right across all the authorities that are part of the IJBs and so on and so forth. Members have raised this issue about how well they are or are not integrating. Has COSLA itself responded to your report so far? What kind of message are we getting from there, firstly? I think that COSLA has responded to the report welcoming the overall findings and the push for further change. I think that we know that COSLA are committed to the policy from their involvement in the group that they co-chair with Government to push this forward, which has issued a statement acknowledging that the pace of change needs to increase. I think that, in some ways, they are facing the mirror of the challenge that the Government does—that there are 32 councils out there and 31 integration authorities and a lot of people and services that need to change. My view is that getting a grip on that for both COSLA and Government is now the priority. Does the IJBs report on their own performance? Is it an IJB authority or do they report the separate performance of the council components of that? The IJBs produce their own report, and I think that Lee can tell you a bit more about it. Is it compounded in terms of, for example, taking Ayrshire Land? There are three councils in there. If the IJB is reporting on its performance, does it report by authority within that? It would each IJB produce its own performance report. There is a range of core indicators that every integration authority will report against within their performance reports. Yes, each individual authority would have a performance report. In themselves, we are the greatest area for work that has to be carried out. What I am trying to get at is that I am not picking out any of the authorities in particular, but I am saying that one of them is a weedet behind the curve. Are they aware of that and are they doing anything about that collectively to tackle that? I think that there are, as I said, core indicators that they will be working towards, reflected in things such as admissions to hospital, delayed discharge along the lines of some of the national indicators. They will have an idea of whether they are reducing some of those numbers, if you like, but what we say in the report is that we do not have a good national picture of performance and impact from the different areas. By pointing you towards Exhibit 4 in the report, there is a double-page spread that sets out the national performance framework, nine national health and wellbeing outcomes, 12 principles in the act, six national indicators and then a range of local priorities, performance indicators and outcomes. Integration authorities are reporting against those, which makes it quite difficult to get either a clear picture of an individual integration authority's performance or to make the sorts of comparisons that you are trying to get at. It is not that there is a dearth of information or data, it is that there is a lack of that clear picture of where they are and whether they are planning to get to. The discussion that we are having, you could almost have heard this in another area at another time in this committee when we talk about issues about leadership, financial planning, strategic planning, governance, sharing good practice. We have heard those messages in a number of areas and we kind of all agreed that we need to do something about them and the participants to deliver that. They all agree, but how on earth do we move at that next stage forward and get it done? Who are the leaders that must get this done? Should the Government dictate to set new guidelines and requirements? Should COSLA be a bit more firm? What is the key to succeeding with this? Again, if we are sitting here in a year's time with the follow-up report, how on earth are we going to get any comfort that we are going to get closer towards that? I share the committee's frustration on that. It is obviously both a very important area of policy and, as you say, some common features. What we have tried to do in the report is to be as clear as we can that Government and COSLA now need to build on the foundations that are in place. They are just foundations, but they do provide a basis for going forward. We set out in Exhibit 7 the features that we have identified that support integration, where things that I think are quite simple, although that does not mean that they are easy, around collaborative leadership, integrating your financial planning, having a real focus on what are the outcomes that you want to achieve, being able to monitor that, involving people in the process. Now it is about using the consistent and rigorous approach that the Government has used to things such as the patient safety programme to get behind that and making sure that the efforts and the efforts across the health and care system are really pushing in the same direction towards that. One of your predecessors in this committee, George Fuchs, used to say, what next? This is a really, really good report, and it gives everybody a clear information about what the direction of travel should be. However, how will we assess and see that progress is being made rather than waiting for your report to come next year and give us some indication that there has been slow progress? How do we monitor it as we go to make sure that the things that need to be done are being done as we go along? How does that process happen? Sweeney mentioned a moment ago that the Government cost of the group is due to report by the end of January. At that stage, the committee might want to look at the report that they produce and perhaps take evidence on it from them to see how they are planning to address some of the barriers here and deal with the things that we think would make a difference. I think that we all agree that this report is a really messy landscape across Scotland. I remember the start of the last Parliament, the cabinet secretary at the time, saying that he had to leave sufficient room in the legislation for local bodies, NHS boards and local authorities to make their own plans. However, that seems like a really messy picture now where you have got areas of strength in some places. Having a close look at the report, there are some examples here of, I think that Clare Sweeney said, small examples of good practice. Some of that actually predates the legislation. I might be wrong in that, but the small example from Dundee on social prescribing predates the legislation on integration. Is it possible to give—how much progress has actually been made since the act itself? We know that integration was happening on an informal basis before we voted on it in Parliament. This is a question that we have considered amongst ourselves and the wider team a lot. Is the legislation integration making a difference? I think that the conclusion that we have come to after a lot of grappling with the evidence is that it can make a difference. It is in some places, on some aspects of what is needed, really starting to unpick some of the barriers that have been getting in the way of change for a long time. However, it is not enough to say, let a thousand flowers bloom and people will magically work together at a local level and make the change that is required. We know that there are good reasons why this is tough. People are very focused on delivering what started off as their day jobs. I think that in future this is the day job, but running hospitals and running social care and primary care is where most people started. The budget still comes through the separate organisations. It needs a real push to move away from the momentum and the inertia of the way things have been in the past to doing this differently. I think that we are encouraged by some of the good practice that we have seen, and it is not all in the report. We think that more is needed now to really move that forward. It is not going to happen just as a natural process of rolling out. The Government and the COSLA group is an important step forward, but it is a really important opportunity that cannot be missed to take that commitment and good will and move on from here to release some of the pressures that we are seeing on the separate running of the NHS and of social care. You are saying that it is three years now. Do you think that there would be a case to be made that, if we do not see progress at a local level, we need to make the legislation more detailed and be more specific about how those bodies should run? In a sense, I think that there would be no alternative but for parliaments, I have another look at the legislation if it does not start to change clearly within the next 18 months or so, simply because the pressures on the NHS and on social care are increasing so fast. We have looked at governance around several health boards around Scotland. Clearly, the financial officers have a key role to play here, but I note from your report at paragraph 36 that only half of IJBs have a full-time chief financial officer and there have been difficulties in filling those posts in some areas. As I understand it, some will have full time, some will have part time that they are doing a job either in the council or in the health board. Is it better practice that they have a full-time CFO considering that they are responsible for so much money? It speaks to the broader point about the capacity around the IJBs to make a difference. Given the challenge facing them, we have raised here that there are a number of them that do not have that full-time capacity in place. We have a question as to the ability to make progress on a significant area like that, unless there is really good finance, HR, data support around the IAs. They are very small, so it is key that all players are supportive of that agenda. That is one example of an area that we think needs to be looked at. It would be better if the integration boards had a full-time chief officer and a full-time chief financial officer. That would be enough work for the integration authorities to be doing if they are going to fulfil their responsibilities. We say in paragraph 37 that one of the challenges is that, if they do not have that capacity, they are very reliant on the information that is provided by the health board and the council. That makes it harder for them, for example, to really come to an understanding of what the set-aside budget ought to be and to take on responsibility for managing it, which in turn makes it more difficult to avoid emergency admissions to hospital or to get people out of hospital more quickly. It is that ability to really make sense of the services that are responsible for and to start to move away from the way that we have always done things to something that is about where we want to get to. How about the chief officers themselves? Are they all full-time? They are. I note that your report says that, in 1718, we spent £3 million on chief officers' pay, but there is not a lot of progress to show for it. Would that be a fair summary? The areas that are making more progress are those that are demonstrating that they have moved forward on those areas where we identified at the start of part 2 of the report. There are some areas that are making more progress than others. One of the issues that came through quite strongly to us very early in looking at this whole policy area was the sense that some areas thought that this was not going to happen, that the existing systems could continue as they are, and that there would be a small pocket of integration at some point where the services intersected. We have seen over the past year a stepping up of the commitment to integration happening. You could argue that some areas that are not addressing those issues that we have set out in part 2 and where they did not think that this was a real change that was going to happen at a system-wide level, they are playing catch-up on their further behind. I think that there are a whole range of issues captured there. We are not seeing it working ideally in any one area across Scotland, but there are some lessons to be learned, and hopefully that comes through quite strongly particularly in part 2 of the report. Exhibit 5 gives national performance against six areas such as bed days. Is it possible that the committee can have this information broken down by local authority? We tried to include local variation where we could, so that we can supply the committee with the information that we were able to get for this. I would say that those six indicators are those that the ministerial steering group used to keep a focus on whether integration is delivering or not. We found it very difficult to get agreement around some of the data for this particular exhibit, so we can share a more full picture, but we were not able to break that down to local areas for all those indicators. Lee Johnson, you are laughing. You obviously had difficulty getting local information. Why was that? I think that it is a difference in the way that they collate and the methodology that they use compared to what some of the localities recognise. It is a reflection of the difficulty of understanding at a national level the impact and progress, because there is such a number of indicators. However, yes, it was challenging. Perhaps that is something that would need to be addressed in the legislation if Parliament was minded to look at this again. Can you explain something to me for my own understanding? How does the council funding piece work? The council has put in £2.4 billion last year. That comes out of the council budget. There are constrained times for council budgets, so is that fully funded by Government, or are they instructed to carve it out from your current budget and put £2.4 billion over the piece into the IJBs? In any event, is there a danger that councils by virtue of having to fund this area are going to have to cut services elsewhere, which perhaps have been mirrored? Lots in that question. That is all right. We will do our best to answer it, and the team will keep me straight. The intention is that, for both councils and for the NHS, that they will, together with the integration authority, identify how much is spent on community health services, primary health services, unplanned hospital services and social care services for the older people in all places, children and some who are included in the integration scheme, and they will then pull their budgets to do that. It is coming from their core budgets. There has been some additional funding from Government, which is £250 million in 2016-17, plus an addition in 2017-18, which went to NHS boards and then had to be passed on to the integration authorities to fund some of the services that are involved here. Both the councils and the health boards are required to make efficiency savings in different ways, reflecting the overall pressure on public finances and the intention that they should be improving the way that they use money. It is coming from their core budgets, with savings coming out of that and some additional funding. That complexity is part of the reason why a number of integration authorities have found it difficult to agree their budgets. There are timing differences as well. As you say, if that money is coming into the integration authority, the pressures that we recognise are affecting other council services and other parts of the NHS budget become harder to manage. All of that is why this is complicated. I am sure that there was more in your question as well, so I will pause there and let the team come in. Just to add that, we have tried to set out in the report that it is quite complicated to get a very clear picture of IJB finances. We set out at Appendix 12 that a number of them needed to call on additional resources that were initially planned from the council and from the NHS board. The way that the legislation set up the IJBs specifically was that locally they could agree who would carry the risk. We have tried to explain that in the report. That is very different in different local areas. If there is an overspensate on the social work services that the IJBs are directing, the way that that resource comes from the partner bodies when there is an issue is very different locally. Some of that has been worked through. Again, we have tried to set that out on page 12 of the report. Any further points or questions from members? Can I thank the Auditor General or team very much indeed for your evidence this morning and now close the public session of this meeting?