Detailed explanatory note on End Year Flexibility 2003-04

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Detailed explanatory note on End Year Flexibility 2003-04

Thursday June 24, 2004

1. When the Scottish and the UK Parliaments authorise the Executive's spending, they do so for only one financial year at a time. So, if the Executive seeks Parliament's agreement to spend, for example, £10m on a new road, the money must be spent in the same financial year. If for some reason the money is not spent by 31 March - for example, if bad weather delays construction - the Executive has to ask Parliament to approve the expenditure again.

Simple Guide to EYF

2. Before the introduction of End Year Flexibility (EYF), Scotland's total budget for the following year was not increased by the amount of any resources not spent in the previous year. Either we used the resources, or we lost them.

This had the potential to lead to a culture of rushing to spend money as the end of the year approached. Since the introduction of the End Year Flexibility system, Scotland's Budget is automatically increased by the amount of any resources carried forward from the previous year. The Executive still needs to seek Parliamentary approval for the resultant changes to the spending plans set out in the Budget Act.

3. EYF is therefore neither new money or free money - it is simply resources carried forward from one year to the next. This is a common sense and prudent approach to financial management. It is a financial system that allows us to carry forward any unspent resources from one year to the next. It is part of a broad approach to public expenditure that allows us to plan spending programmes over the medium term and to avoid wasteful end of year spending.

Like any household or efficient business, we need to manage our expenditure each year to ensure that the money is spent to best effect. This includes taking advantage of the flexibility open to us at the end of any financial year.

4. The amount of End Year Flexibility carried forward is calculated on the basis of the difference between the final budget (i.e. following the Spring Budget Revisions) in any year and the provisional outturn figures. This represents a change from the previous presentation based on out-turn against the Departmental Expenditure Limit. This has been introduced at the request of MSPs in order to bring the numbers presented for EYF purposes into line with those published in the Executive's accounts later in the year.

5. The most significant change resulting from the use of the new definition is to clarify the status of the Contingency Fund. Provision held in the Fund is not approved by the Scottish Parliament until it is drawn down for an identified purpose, and is therefore now excluded from the Scottish EYF Process.

6. This report sets out the End Year Flexibility for 2003-04. It sets out where carry-forward arose and details the amounts which will be allocated to portfolios. In total, the Executive is bringing forward EYF of £403m from 2003-04 to 2004-05. Arms length bodies within the overall budget are bringing forward £220m.

Background

7. Since devolution, the Scottish Executive has been able to carry forward any unused resources within the Scottish Block from one financial year to the next under EYF. We use EYF in a planned way to carry money forward for specific purposes, to handle any slippage in capital projects, and to avoid any last minute pressure to spend at year-end.

Simple Guide to EYF

8. EYF ensures that available resources are applied to our priorities. It ensures that resources stay in Scotland and don't return to the Treasury. It might explain the benefits if we consider the possible outcomes if we didn't operate this system:-

The incentive for managers would be to make sure the budget was spent by the year-end - what it was spent on would be less important. This was what has led in the past to the 'quick and inefficient spend'.

The ability to plan ahead would be hit by a double whammy. Say we were planning ahead for a really big commitment - major infrastructure investment in schools, hospitals, prisons, housing or roads. We might have set aside significant resources for the project - say in the order of £100m.

If the project was delayed for some reason and we couldn't spend the money in that financial year, without EYF we would "use it or lose it". So we'd spend the £100m on other, lower priority projects just to make sure the money was spent. When we got to the next financial year we'd in effect be short of the £100m we were going to put into the project - so we'd have to find the resources from other parts of our programme, displacing other priority projects.

9. The systems we have in place mean money is not lost - the spend is merely delayed until the next financial year.

10. There are five main reasons why we might have unspent resources at the end of the financial year:

11. Our final EYF position at the end of 2003-04 in relation to these five elements is shown in Table 2. An explanation of how the EYF arose is detailed in Annex A.

EYF Allocations

12. Scottish Ministers can decide how each year's EYF should be used. This decision will depend on where the EYF has come from. For example, if the EYF is a result of the final bill for a capital project slipping a few weeks into the next financial year, the bill will still need to be paid. In these circumstances, the portfolio will usually be allowed to carry forward the provision into the new financial year to meet the costs, rather than having to find the provision from elsewhere in their budget.

13. Where EYF is generated as a result of lower than expected demand for a particular service, this is in effect a windfall bonus to the portfolio. For example, if the use of the Legal Aid scheme in a particular year is lower than expected, then the unused provision from one year would not necessarily be required for the following year and this provision could be reallocated to the Executive's other priorities.

Adjustments to EYF allocations

14. The EYF numbers are by necessity based on provisional out-turn data i.e. our earliest indications, following the financial year end, of expenditure incurred by the Scottish Executive. The audited accounts for 2003-04 will not be published until December, by which time it would be too late to use any resources carried forward into this financial year (and many of the bills would already have been paid). If there are differences between the provisional and final out-turn data, these are accounted for by adjustments to the following year's EYF allocations.

15. So this year's allocations take into account adjustments for any under/over allocation of EYF from 2002-03. Portfolios will either surrender any surplus EYF or are credited with additional EYF (dependant on their final outturn position relative to provisional outturn). The net difference between the provisional outturn and final outturn figures for 2002-03 was an increase in resources carried forward of around £4m, which has been added to the relevant portfolio allocations for this year.

16. In other years, allocations would also take account of whether portfolios have been allowed access to the Contingency Fund. Access to the Contingency Fund is only allowed if portfolios have insufficient resources to meet a particular pressure from within their existing budgets. Any portfolio ending the year with unused resources to carry forward would not have needed any access to the Contingency Fund it had been granted, and EYF allocations are therefore calculated as if any such access had not been granted.

2003-04 Portfolio Allocations

17. Taking account of the principles and adjustments outlined above, the following table shows the allocations made to portfolios compared to resources not used from the 2003-04 Budget:

Table 1: EYF Portfolio Allocations

PORTFOLIO	EYF Source	EYF Allocation

Justice	27	17
Education	21	30
Tourism, Culture & Sport	3	0
Health	19	51
Enterprise& Lifelong Learning	46	36
European Funds	7	7
Transport	58	67
Communities	65	50
Environment and Rural Affairs	90	92
Finance & Central Services	49	38
Administration	18	19
TOTAL EYF	403	407

The difference of £4m between the two columns is the adjustment explained in paragraph 15 above.

18. As Table 1 shows, all of this year's EYF has been reallocated to portfolios. A large proportion of this provision (£119m) will be used to meet the future commitments that have been identified by the various portfolios. Some of the main items included in this category are; funding to meet Partnership Agreement commitments on wider role support of housing associations, the Urban Land Fund and also funding for the EU Rural Development Programme.

19. Another major element of the allocated EYF will be used to finance capital projects that have fallen behind schedule (£114m). This expenditure is now expected to fall in 2004-05 and will therefore be returned to the projects from which it originated. Examples of projects within this category would include expenditure on major roads projects including the M74 and also progression of several cancer related Health capital projects.

20. The remainder of the EYF allocations arises from and will be used for a large variety of other commitments within the portfolios. The uses of this money vary enormously. A selection of some of the commitments include

promotion of Scotland within the EU and beyond
significant infrastructure investment on Local Authority waste plans
digital inclusion challenge fund
scottish Forestry Grant Scheme

21. Table 2 below sets out the sources of the 2003-04 EYF by portfolio, analysed over the four categories that were set out in paragraph 10 of this paper; Future Spend, Capital Slippage, Demand Led Changes and Other Variances.

Table 2: Sources of EYF 2003-04 by Portfolio

KEY

PORTFOLIO	(a)	(b)	(c)	(d)	TOTAL

Justice	0	28	-9	8	27
Education	0	0	0	21	21
Tourism, Culture & Sport	0	3	0	0	3
Health	0	19	0	0	19
Enterprise& Lifelong Learning	25	0	3	18	46
European Funds	0	1	0	6	7
Transport	0	37	0	21	58
Communities	33	5	0	27	65
Environment and Rural Affairs	19	13	12	46	90
Finance & Central Services	30	7	1	11	49
Administration	12	1	0	5	18
Total	119	114	7	163	403

(a) Provision for future spending
(b) Slippage in committed capital projects
(c) Fluctuations in demand led expenditure
(d) Other Variances

22. More detailed descriptions of the sources of the EYF can be found in Annex A. Full detail on the allocation of the EYF within portfolios will be available when we seek Parliamentary Approval to spend the money through the Budget Revisions process.

2003-04 Allocations: Arms-length bodies

23. The arms-length bodies are in general allowed to carry-forward 100% of EYF, subject to the adjustments mentioned above, and such other limits as Ministers may impose (for example, health boards' automatic entitlement is limited to 1% of their budget). Their EYF allocations are as follows:

Table 3: Allocations - Arms Length Bodies

Arms-Length Body	2003-04

Scottish Water	205
Forestry Commission	5
Crown Office	0
Food Standards Agency	1
Health Boards	7
Total	218

24. A separate announcement of Scottish Water's carry-forward was made by the Minister for Environment and Rural Affairs on Monday 14th June. That announcement explained that what scores for EYF purposes is how much of Scottish Water's approved borrowing facility is drawn down in year, not how much of its planned spending is undertaken.

25. For 2003-04 Scottish Water invested £408m, that is £72m below the target of £480m. Of the £408m approximately £350m was paid for in 2003-04 and £60m will be paid for in 2004-05 and lowered operating and interest costs by £45m.

For these reasons Scottish Water borrowed only £42m of the £249.7m originally budgeted. So, whilst only £72m of the capital investment programme was delayed into 2004-05, Scottish Water generated EYF of £208m.

26. Scottish Water have indicated that they will not require additional borrowing beyond that already included in the Budget Act for this financial year. Ministers have guaranteed that Scottish Water will have access to this money in the future when it is required. But since Scottish Water will not be requiring access to these resources in this financial year, the Executive can bring forward other spending from future years - provided this frees up resources in those future years which can then be returned to Scottish Water when it is needed.

27. One way in which this can be done is by reducing the Executive's outstanding debt. By paying off debt now, we not only meet a commitment that would inevitably fall due in years to come - but we also free ourselves from the burden of annual interest payments. This not only brings forward spending, it also frees up additional resources in every future year that we can then allocate on improving front-line public services.

28. Ministers have therefore decided to pay off all the remaining debts carried over from Scottish Homes at a total cash cost of around £220m. Due to budgeting classification conventions, only £120m hits the Scottish DEL budget.

Taking account of the saving from the interest payments saved this year by early repayment, and receipts already identified for refunding a planned partial repayment, the additional investment required is around £90m. This will bring annual budget savings of over £15m a year, an annual return of over 10% on our investment.

29. Growing the Economy is the Executive's top priority. Ensuring we continue to deliver the highly educated and skilled workforce needed to drive economic growth is central to our ambitions for locking in future economic growth. So the remaining spending that will be brought forward marks a small step in helping maintain our comparative advantage in this key area. £20m of capital investment in Further and Higher Education Institutions will be brought forward into this year, to allow them to take forward plans to modernise the teaching infrastructure and promote collaboration.

30. Scottish education is aiming to lead the world in online learning. Research evidence is already showing us that teachers and pupils are beginning to see real benefits from using online materials in the classroom. We need to make the most of this opportunity. £10m will therefore go towards upgrading technology to allow schools better access to the latest online learning material, including the Digital Curriculum currently being developed by the BBC. Finally, in light of the pressures on the health service this year from the introduction of the new pay contracts, the Health Department will be allowed to retain their loan of £85m for a further year.

Table 4: The Unallocated Scottish Water EYF - Where does it go?

	£m
Scottish Water 2004-05 EYF Allocation	205
Scottish Water 2004-05 Drawdown	0
Unallocated Balance	205

Scottish Homes Debt	90
Further & Higher Education	20
Schools IT	10
Health Budget Loan	85
Total Allocation	205

Comparison with Previous Years

31. EYF is a valuable part of the financial system, allowing resources to be carried forward for future requirements. Avoidable delays in spending result in delayed improvements to public services, and the Executive therefore aims to keep EYF to the minimum required for sound financial management.

32. Table 5 below shows a comparison between the levels of EYF generated by the External Bodies between 2001-02 and 2003-04. The main reason for the increase in this year's figure can be attributed to Scottish Water. More detailed explanations of the sources of these carry forwards, can be found in Annex A.

Table 5: EYF Comparison between 2001-02 to 2003-04 (External Bodies)

Arms Length Bodies	2001-02	2002-03	2003-04
Scottish Water	114	34	208
Forestry Commission	3	2	3
Crown Office	0	1	2
Health Boards	49	24	7
Food Standards Agency	0	1	0
Total Arms Length Bodies	166	62	220

33. A comparison of the Scottish Executive Portfolios' EYF over the last three years can be found in Table 6 below. Further detailed explanations of the component parts of each of the headings that appear in Table 6 can be found in Annex A.

34. While the 2003-04 figure of £403m is higher than the previous year, it represents less than 2 per cent of our total £23bn Budget.

Table 6: EYF Comparison between 2001-02 to 2003-04 (Executive Portfolios)

Scottish Executive Portfolios	2001-02	2002-03	2003-04
Provision for future spend	141	28	119
Slippage in committed capital projects	141	101	114
Fluctuations in demand led expenditure	121	33	7
Other	57	170	163
Total Executive portfolios	460	332	403

Windfall Income	17	328	0

Annex A

EYF - Sources 2003-04

Within each portfolio, EYF is calculated net of overspends on particular budgets. Where such overspends significantly influence the breakdown below, they are shown below as negative numbers. For example, the Demand-Led changes section reflects higher than expected spending on Legal Aid. Parliament approves budgets at the departmental level, so that "overspends" on individual budget lines do not reflect any breach of Parliamentary approval.

Provision for Future Spend (£119m)

ELLD - There was a planned carry forward in 2003-04 of around £25m to meet Partnership Agreement items in 2004-05 such as Education Maintenance Allowance Pilots (£3.5m), Business Learning Account Scheme (£1.74m), Holyrood Small Business Conference (£0.05m), Small Business Start-up scheme (£5m), Centres of Excellence (£3m), Learning Centres in a box (£0.25m) and Broadband (£12m).

Communities - There was a planned carry forward of around £33m. Of this carry forward, £10m was set aside for rural housing. The remainder is part of an arrangement to meet Partnership Agreement commitments on anti-social behaviour, the Urban Land Fund, wider role support of housing associations and Futurebuilders.

ERAD - Rural Development - carry forward reflects provision for the new Farm Waste grant and Farm Business Advice Schemes and DEL match funding for CAP modulation sums collected but not yet spent on EU Rural Development Programme Agri-environment and Organic Aid measures.

FCSD - Local Government (Support to Local Authorities) - there wasa planned carry forward on Fire Pay as negotiations are still ongoing and no decisions could be taken prior to the approval of the 2004 Local Government Finance Order. As part of the long term approach to managing forward expenditure in the Cities Growth Fund, the grant terms allows local authorities to carry forward allocations from one year to the next. This is to take account of the fact many of the projects involved are likely to have long lead-in times. There were also managed carry forwards on smaller projects such as Fresh Talent, Improvement Service and Broadband.

Administration - Provision set aside to meet future year pressures on the Admin operating budget.

Capital Slippage (£114m)

Justice - Scottish Prisons Service - this carry forward is due to capital slippage on the Prison Estates Review project. In order to implement the Prison Estates Strategy, SPS have been deliberately carrying forward provision to meet contractual obligations for capital works. This is offset by an operational overspend of £10m (explained in Other Variances section).

Tourism, Culture & Sport - carry forward of around £3m due to delays in refurbishment work at the National Museum and work necessary to accommodate Concorde at East Fortune. There was also some slippage in Historic Scotland's grants programme and delays in obtaining bids for the national and regional facilities strategy at sportscotland.

Health - There was around £19m of capital slippage on a range of centrally funded capital projects including Cancer Plan/Linear Accelerators and late commencement of Phase II of the Beatson Oncology Centre. These resources will be fully utilised this year.

European Funds - There have been delays in the implementation of some of the European Structural Funds projects, approximately £1m of this slippage was on capital projects.

Transport - Mainly due to strategic acquisition of land for delivery of major transport infrastructure projects not being concluded during financial year 2003-04.

Communities - Homelessness - Around £3.7m of the carry forward relates to slippage on Rough Sleepers initiative capital projects and the balance of the carry forward was due to problems encountered with site acquisition, planning and pre-development work associated with the Homelessness Task Force programme.

ERAD - Fisheries - approximately £15m of slippage in the capital programme for the construction of a new fisheries protection vessel. This carry forward was offset by overspends of around £2m on other capital projects within the Natural Heritage and Environmental protection programmes.

FCSD - Local Authority Net Capital Allocations - two main sources of carry forward, the main elements of which are HRA grants (£5m) and slightly lower than planned borrowing by Local Authorities due to slippage in capital investment projects typically as a result of planning delays (£2m).

Administration - General Register Office for Scotland - the carry forward relates to slippage in capital spending which will be required to be carried forward to cover contractually committed expenditure on three high priority areas

replacement of IT systems
digital imaging of genealogic records
indexing of census records

Demand Led Changes (£7m)

Justice (-£9m) - Legal aid - demand led service where volume of account submitted is continuing to increase as they did in the previous year (overspend).

ELLD (£3m) - Departmental Investment Assistance - decrease in the number of applications to the scheme, due to a reduction in the level of inward investment in Scotland as a continued result of the last downturn in the world economy.

ERAD (£12m) - Fisheries - forecast carry forward reflects lower than expected demand in claims for award of a number of grants, most notably in the Fisheries Decommissioning and Transitional Aid schemes.

FCSD (£1m) - Support to Local Authorities - lower than anticipated level of claims on the Bellwin scheme.

Other Variances (£163m)

Justice (£8m) -There were carry forwards including £10m in Community Justice Services arising from alternative to custody pilots not proceeding as quickly as planned and court disposals being lower than anticipated, £3m in Criminal Injuries Compensation where the Scottish Contribution for 2003-04 dropped from an expected 13% to 11% and £2m from Judicial Salaries and the Office of Accountant in Bankruptcy, arising mainly from a delay in filling vacancies and increased fee receipts. £9m was carried forward from 2002-03 to meet higher forecast demand for legal aid. These carry forwards were offset by overspends of £10m in Prisons, £4m in police grant due to a reduction in police forces' contribution to Common Police Services and £2m in Scottish Courts Services due to their quinquennial revaluation of the Court Estate, where the valuation of the estate was reassessed as significantly less than current book value.

Education (£21m) - Carry forward results from legislative delays in the Additional Support Needs programme and a number of delays across a range of project work. Grant payments were delayed in the Teachers' Induction Scheme pending the outcome of pay negotiations and lower numbers of students completing their initial teacher education (ITE) course than was originally forecast (numbers of student teachers failing to complete the course will vary each year and by each university). There was slippage on a range of other projects including Health Education, New National Qualifications and the National Debate programme (£11m). There was also slippage in provision of the secure accommodation programme due to delays in planning approvals and agreements being reached on contract details and Closing the Opportunity Gap to address the pressures associated with the child protection reform programme in future years (£10m).

ELLD (£18m) - There were delays in the approval of projects within the Enterprise in Education Determined to Succeed fund, which led to delays in the funding being released (£4m). There was a carry forward in Renewable Energy due to a delay in the Corpach CHP project (£3m). There was also carry forward on DTI Broadband due to slippage in the Western Isles Connected Communities project (£1m). There were also delays in rolling out the new SEEKIT and SCoRe grants schemes, resulting in a carry forward of £4.2m. The remainder of the carry forward was due to a successful, retrospective, SMART/SPUR European Fund bid, which brought in additional receipts of £3.8m. The receipt of these European funds will be used to fund specific innovation activities over the next few years. A further carry forward (£1m) on the Developing Individual Learning Accounts Scotland programme which is to be re-launched late this summer. Finally, £1m has been set aside for the implementation of the Centres of Excellence commitment in the Partnership Agreement.

European Funds (£6m) - There have been delays in the implementation of several of the European Structural Funds projects.

Transport (£21m) - There was an overspend (-£6m) from additional expenditure on the Motorways and Trunk Roads programme due to increased routine and winter trunk road maintenance. The main components of the carry-forward were slower than anticipated uptake of Integrated Transport Fund grants, delays in the Road Haulage Modernisation programme and delays on the review of the Campbelltown to Ballycastle ferry service. These savings were largely offset by spending on additional local government transport initiatives such as Regional Partnership Funding, additional concessionary travel, supplementary support to Local Government bodies and also increased funding was required to support the Northern Isles Ferry Services (£18m). The underspend on the Grant for Rail Services (£12m) was mainly due to updated information on ScotRail's performance penalties. There were small overspends on British Waterways Board & HIAL programmes which partly offset the carry forwards in Other Transport and Grants for Rail Services programmes (-£3m).

Communities (£27m) - The main carry-forward arises from the Community Ownership Programme (£30m). This arises in part, from higher than expected receipts from right to buy sales (£12m). There were also carry forwards as a result of reprofiling the investment programme for Glasgow Housing Association (GHA) covering reprovisioning, demolition costs, Owner Occupiers, and central heating (£11m). There was slippage on the reprovisioning of Glasgow Hostels programme (£9m), and on the implementation of the Homelessness Task Force (£3m). There were also carry forwards on Refuge Provision for domestic abuse and other social justice, voluntary issues and equality projects (£11m). This was offset by additional expenditure on the Housing Management & Support Services programme to meet liabilities on the Scottish Homes Pension fund (-£12m) and also to redeem a significant portion of Scottish Homes debt (-£40m).

ERAD (£46m) - Mainly slippage in the Strategic Waste fund projects, Bathing Water projects, Waste Initiatives, Noise and Air Quality & Flood and Coast Protection schemes (£26m). There were delays in Water Framework Directive and also Access & Nature Conservation legislation, leading to consequent delays in implementation (£4m), in the implementation of research projects and also delays in payment of Sustainable Action Fund grants. Delayed implementation of regulations for private water improvement generated carry forward of £9m.

Carry forward also arises from resources earmarked for revised Resource Accounting and Budgeting treatment of the SEERAD Pensions scheme for staff of the Scottish Agricultural and Biological Research Institutes and Scottish Agricultural College. This has no effect on the rights of the scheme members and is simply a matter of accounting.

FCSD (£11m) - Carry forward in 2003-04 relates to Level Playing Field Support grants not being distributed due to slippage on various PFI projects (£4.5m), less than anticipated spending on the advertising budget (£2.2m), slippage on progressing some Scottish Neighbourhood Statistics data development projects (£1.7m) and delays in completion of other projects, such as digital inclusion and e-procurement (£2.6m)

Administration (£5m) - Slippage in the current elements of the IT programme which will be utilised next year for the Electronic Records and Data Management project.

Controlled By Arms Length Bodies (£220m)

Crown Office - Carry forward of around £2m.

Health Boards - Carry forward of approximately £7m.

Food Standards Agency - Carry forward of around £0.5m.

Forestry Commission - Carry forward of around £3m.

Scottish Water - Carry forward of about £208m.

The two major areas of carry forward in the Arms Length Bodies are the Health Boards and Scottish Water.

Health Boards - Health Boards are entitled to carry forward up to 1% of their annual budget. The Health Department also operates a brokerage system where Health Boards can "bank" capital allocations in order to plan for future developments. At the year end the bank held £13m of planned capital spend. This was offset by a £6m current overspend by the Health Boards.

Scottish Water - Scottish Water had originally planned to invest £480m in capital works in 2003-04, and to fund £249.7m of this by additional borrowing. Slippage in the capital programme meant that only £408m was invested. The investment was funded by customer charges of £350m, of which £45m arose because of lower operating and interest costs, £42m through borrowing and £60m was accrued to 2004-05. The EYF generated is the difference between the borrowing limit (£250m) and that taken up (£42m), and is therefore £208m - though only £78m of capital work was actually delayed.

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Detailed explanatory note on End Year Flexibility 2003-04