4 POLITICAL AND CORPORATE ISSUES
4.1 INTRODUCTION - THE EVOLUTION OF DEVOLUTION
4.1.1 This chapter deals with the political and administrative processes that determine Ministerial priorities and translate them into spending programmes.
4.1.2 Many of the issues in this chapter are determined or influenced by devolution. Our work confirmed that devolution in Scotland is a continuing process of which this report is part. We hope it will contribute to the process of improvement, although recognising that it represents a 'snapshot' at a period in time and is part of a wider picture.
4.1.3 We would highlight some key features of the arrangements for planning, management and accounting for the SE Budget:
- The Scottish Budget (or Block) is determined by HM Treasury using the Barnett Formula. The SE budget total is what remains after deductions have been made for the costs of the Scotland Office, the Scottish Parliamentary Corporate Body and Audit Scotland.
- The distribution of the SE budget total is the responsibility of the SE Cabinet advised by the Ministers for Finance and Public Service Reform (subject to Parliamentary scrutiny and approval).
- The SE budget is currently distributed over ten spending portfolios with a Cabinet Minister responsible for each plus the Administration budget, covering eight SE departments (see Appendix D).
- The Principal Accountable Officer for the SE budget (under the Public Finance and Accountability (Scotland) Act 2000) is the Permanent Secretary, who delegates his authority to the eight Departmental Heads as Accountable Officers with direct responsibility to the Scottish Parliament for the use of resources under their stewardship. This differs from pre-devolution when Scottish Office Accounting Officers (usually Department Heads) reported directly to the UK Parliament through the Public Accounts Committee. Responsibility for the Administration budget (£263m) lies with the Permanent Secretary.
- Below Departmental Head, each budget holder has delegated authority to manage their budget.
- Changes in spending within the Parliamentary term or financial year are generally managed within each portfolio or budget. Central arrangements exist for Central Unallocated Provision ( CUP) and End-Year Flexibility ( EYF).
- The SE complies with the Scottish Public Finance Manual - and any other relevant guidance issued by the Scottish Ministers - and prepares annual accounts in accordance with the principles and disclosure requirements of the Government Financial Reporting Manual.
- A significant proportion of the SE budget is transferred to external agencies who deliver public services: the principal agencies are local authorities (32% of the overall SE budget), Health Boards (28%) and agencies and arms length bodies (28%).
4.1.4 The arrangements are both complex and dynamic. A 'money map' of the SE budget is set out in each annual Draft Budget document, though it is not a simple schematic of how decisions are made or the consequences in terms of allocation of funds. We also found some gaps in terms of formal delegation of spending authority to budget holders. There are rules relating to delegated authority but we believe there is a lack of clarity on what decisions can be made by whom at the local level, and a lack of consistency leads to upward delegation and a less efficient governance process. Equally, we accept that it reflects the nature and role of the Finance Ministers and Finance Group within current SE arrangements. They are not the equivalent of the Chancellor and HM Treasury at UK level, nor are they equivalent to the Finance Director in a private sector model. A private sector Group Finance Director would provide a supportive role to the Board and to the divisions to ensure that the overall business and commercial objectives of the organisation were met, particularly in key decisions on future long term investment. In both cases, there is a robust role played in challenging the organisation, its need for resources, its efficiency, the value for money it delivers in respect of the projects undertaken and the overall operation of the 'business'.
4.1.5 In our many discussions we heard comparisons made between 'the centre' or the corporate viewpoint and the Department. We do not think such descriptions are appropriate for the SE post-devolution, but recognise that such perceptions are symptomatic of a tension that needs to be balanced if a fully cohesive organisation is to be achieved.
4.1.6 The strength of the current arrangement of designating Department Heads as Accountable Officers is that each is clear about his or her responsibilities. They are in overall control of the management of their departments. They are the primary point of contact with Ministers on policy issues; have full responsibility for the management of their staff; control of budgets and for the overall performance of their departments. We were not surprised to recognise a landscape populated by strong departments, led by strong Department Heads.
4.1.7 A key challenge for this system is to enable consideration, management and delivery of many difficult issues that do not sit comfortably within one department. Such issues can only be tackled through effective cross-departmental working. This issue is not exclusive to the civil service in Scotland, but the pivotal position of the Scottish Executive in Scotland means this key challenge needs to be met effectively.
4.1.8 The Management Group, chaired by the Permanent Secretary and including the Department Heads and the Director of Finance provides a mechanism for organisation wide examination, assessment and monitoring. It can be an effective vehicle for devising structures and processes to deliver on complex and difficult issues that transcend Departmental boundaries. We saw evidence of a recognition and understanding of the value of this approach, actively encouraged by the Permanent Secretary. We commend this approach and encourage a style of management that gives equal weight to cross-departmental as well as departmental working.
The Budget Process
4.1.9 The Scottish Executive has autonomy over its spending decisions: allocating the funding it receives through the Barnett Formula to meet Scottish needs and priorities.
4.1.10 Under current arrangements for determining public expenditure in the UK, there is a cycle of Spending Reviews, normally every two years. This delivers a fixed total sum to the Scottish Executive for the first two years of the new review period, and indicative figures for a further year. The indicative figures are regarded by the Executive as very firm and highly unlikely to be reduced.
4.1.11 The allocation of the SE budget for any spending review period is determined by the Scottish Cabinet on the advice of the Ministers for Finance and Public Service Reform. In previous spending reviews, the Finance Ministers have reviewed and challenged portfolios. We found less evidence of well-developed processes for determining spending decisions outwith the spending review process, i.e. in-year variations or new spending initiatives. Table 2 outlines the process as we understand it.
HM Treasury and SE through Barnett formula
SE portfolio allocations
Cabinet through Spending Review
Relevant Ministers and Heads of Department
Annual authorised budget
Scottish Parliament on recommendation of Scottish Ministers
4.1.12 In practice, the process is complicated by several factors. Scottish Executive Ministers do not necessarily ask the Scottish Parliament to authorise expenditure on programmes up to the maximum amount available. Authorised budgets must be 'taut and realistic', so Ministers seek Parliamentary approval for the amount they expect to spend in year, which may be less than the total amount available. The difference between authorised expenditure and available provision is accounted for as CUP. This provides flexibility to deal with expenditure spread over more than one year, in-year pressures or unanticipated demands. The CUP currently runs at just under 4% of the total Scottish budget. It encourages realistic budgeting and is a prudent mechanism for dealing with annuality and uncertainties. Equally, with careful and tighter management, it may yield a little 'headroom' for future Scottish Executives.
4.1.13 There have also been recent changes to the process of dealing with EYF, mainly to reduce the amount of underspend of resource budget a portfolio can transfer to the following year. It is too early to say what impact this has on the management and monitoring of budgets. We understand that SE Finance regularly reviews the rules for both. We encourage them to continue to do so to maximise headroom and incentivise budget holders to achieve value for money.
4.1.14 In simple terms therefore, the SE budget total is allocated across Ministerial portfolios and thereafter to departments and budget holders through the spending review and budgetary process outlined above, with some variations possible through the CUP and EYF. The effectiveness of that process depends critically on the identification of Ministerial priorities and their resultant interpretation by those charged with their implementation.
4.2 SETTING PRIORITIES
4.2.1 Political success for any government depends, to some degree, on its ability to set out aspirations and priorities in ways (and especially language) that can be delivered by the system (machinery of government). This is especially true in relation to setting budgets that will determine action/activity and, ultimately, outcomes and impacts. This section sets out our understanding of how priorities are set within the budget process at first political and then official level in SE.
The Political Dimension - The Partnership Agreement ( PA)
4.2.2 We found widespread recognition that a Partnership Agreement ( PA) is necessary to the political process in a devolved Scotland, where coalition proves necessary. Devolution is still very new, and 2003 saw only the second Scottish Executive being formed. The current PA sets out the coalition's programme for the Parliamentary term that will end in 2007. The Scottish Parliament electoral system makes it unlikely that any single political party in Scotland will gain an absolute majority at Holyrood. A PA can, therefore, be seen as the 'binding contract' that allows two or more political parties elected on individual manifestos to come together to form an administration. We found no criticism or complaint of this aspect of devolution in political terms.
4.2.3 However, to the extent that any PA (or whatever it is called) is to be used to determine priorities to be implemented through spending programmes, we found a wide range of comment and criticism. Our subsequent analysis of the performance of spending programmes against priorities vindicated much of that general concern. Any PA will reflect the economic climate in which it was agreed. The current PA was agreed in a relatively benign economic climate where there was little evidence of pressure on public sector spending. The next PA is unlikely to be set in such a benign economic climate. It is therefore imperative to learn lessons from the first two PAs to ensure future SE Ministers have clear choices and can articulate them in ways that can be delivered.
4.2.4 The key issues with respect to compiling a PA include:
- Timescale - the Parliamentary timescale of 28 days to elect a First Minister following an election effectively limits the negotiating time for the political parties involved in trying to establish an administration. In our view, this factor is a significant contributor to many of the other issues discussed below.
- Lack of clear priorities - the current PA has 450 commitments under four themes. It was widely seen as a collection of valid and worthwhile aspirations that lacked clear prioritisation. The cross-cutting themes also added complexity in agreeing clear priorities for spending decisions within the four year Parliamentary term. BABS, which sets out the Executive's high level spending plans, identifies a clearer and smaller number of spending related targets (90). Figure 1 illustrates the issues.
- Lack of costings - a widely perceived weakness of the current PA is the absence of published costs attached to many of the commitments. We found that some consideration had been given to costings in the development of the PA, but this was at a general level of affordability.
- 'Mixed nature' of commitments - many saw the PA as a mixed bag of commitments, ranging from very general, strategic statements to some very specific policy commitments (Box 1). Some saw this as an inevitable consequence of conflating two political manifestos. We believe greater consistency would be possible if there were more time for the negotiations.
Examples of Partnership Agreement Commitments
We will significantly increase teacher numbers to 53,000 by 2007.
We will increase the higher and further education budget by 16% by 2006.
We will ensure that our transport system meets the needs of business, transport users and the environment by reopening the Airdrie to Bathgate railway.
We will systematically introduce free eye and dental checks for all before 2007.
We will regenerate those communities where there are persistently high levels of unemployment.
We will continue to assist public bodies to improve quality of life for local communities.
We will work towards our target for 40% of Scottish electricity generation to be from renewable sources by 2020 as part of our commitment to addressing climate change.
We will set targets for local authorities to recycle 25% of waste by 2006 and 55% by 2020 through increasing use of doorstep collection and through provision of recycling facilities in every community.
Commitments that support a stance
We will not support the introduction of top-up tuition fees.
We will not support the further development of nuclear power stations while waste management issues remain unresolved.
- 'Mixed outputs' - partly as a consequence of the mixed nature of the PA, many commented on the different outcomes or outputs that it required. Some commitments related to changing legislation, others to changing action and not all had cost implications. Again, such distinctions might be made clearer if there were more time in conducting the negotiations.
- Focus on new ideas/policies - many saw this as having unintended consequences as it deflected attention from 'core business'. There is a 'catch-all' phrase in the introduction to the current PA that "general policies and processes…… shall be supported, unless amended by the policy agreement…..". This might allow 'core business' to continue but, in our view, has the unintended consequence of allowing many established or inherited policies and programmes to continue without challenge as to their continuing relevance or even need.
- Later changes to priorities - the current PA was initially presented as the programme for the Executive for the Parliamentary term. Given the above comments, and the dynamic nature of government, inevitably there have been and continue to be adjustments to priorities, new directions or policies. BABS can be seen as one, generic, attempt to refine the spending priorities. However, within the various portfolios/programmes we found new policies/programmes or projects being developed subsequent to the PA or even BABS. For example: in October 2005, the announcement to reduce the Business Rate poundage required a budget of £100m for 2006-07 and £180m for 2007-08; and in January 2006, the Executive's response to the Cultural Commission report required a budget of £20m from April 2007. We are not clear on the process by which the Executive checks changes in priorities or new initiatives for consistency against the PA, BABS, or such other priorities Ministers may have. To counter this lack of clarity, we see a need for a 'challenge function', and this is a recurring theme through our work (4.3).
- Language - we found widespread agreement that the language of the PA was mixed and that some of the commitments could have been better expressed for political or managerial purposes - or sometimes both. We see a need to ensure that commitments are framed in ways that allow clear outputs and/or outcomes to be identified. In turn, this leads to the development of SMART targets at programme level.
4.2.5 The above issues are largely for politicians of all parties. We believe all would wish to continue to learn from and improve the process of translating priorities into actions. An essential first step would be to recognise that manifesto commitments should be costed in the run up to an election. We found general agreement that the current arrangements need to be reviewed to allow the parties forming an administration to develop clearer statements of desired outcomes that can lead to better costed programmes for the new administration - another step in the evolution of devolution. To assist that process, we suggest the following:
- Create more time for negotiations, within current legislative timetable.
- Allow earlier access by political parties to the civil service - at least for budgetary purposes. The critical time for parties to consider the budgetary implications of their proposals is when manifestos are being agreed.
- Amend the process to allow the PA, or programme for the new administration, to become the vision or strategy statement with the requirement that it be followed by detailed policy and budget proposals, say within six months. This approach might avoid some of the sensitivities of much earlier contact between political parties and the civil service than current protocols permit. Equally, it might increase pressures on political parties and make the negotiation much more complex and generally protracted.
- Increase the involvement of civil servants and other programme managers in the negotiation of the PA or programme for the new administration. With the current timescale, this would present major logistical difficulties. Equally, our work, when combined with the other strategic reviews taking place, should provide a much better framework. One way to facilitate such engagement might be to roll forward our work on a regular basis.
4.2.6 We would record that everyone we spoke to was very positive about the need to continue to improve the process through which political priorities are articulated so that they can be implemented in a clear, transparent, and durable way.
The Organisational Dimension - Delivering Priorities, Policies and Programmes
4.2.7 The Scottish Executive (as successor to the Scottish Office), at official level, has many years of experience of translating political manifestos into policies, programmes and budgets. Like everyone else, it is still coming to terms with devolution and, more especially, the politics of coalition government. 4.1.3 shows the SE is a complex, multi-functional organisation charged with developing policies and programmes over a wide range of diverse public services. It is many businesses rather than one, with the added complication that much of the delivery of its policies, programmes and services is the responsibility of external agencies over which it has varying degrees of influence and control. It is also now accountable to many more Ministers, who are increasingly interested in the delivery of services, and the Scottish Parliament. Given these many pressures and changes, we believe the SE performs well overall and has managed a period of major change remarkably smoothly.
4.2.8 The Scottish Executive ( SE) operates a model of Departmental/Group/Divisional planning that is recognisable in most large organisations, whether public or private sector. Its effectiveness is largely dependant on the clarity of the vision and priorities it is given. Budget holders are supported by various central functions such as Finance Group and Analytical Services. Building a Better Scotland ( BABS) to some degree provides evidence that the model works. BABS represents the SE's collective response to some of the difficulties of working with the PA set out at 4.11. It tried to refine the many PA commitments into 90 targets. It also set out progress on the two additional cross-cutting themes (Sustainable Development and Closing the Opportunity Gap/Promoting Equality). Technically BABS was the outcome of SR2004. Our view is that BABS was a significant improvement on the PA for budgetary planning purposes but not sufficient and, to some degree, confused the picture. Paragraphs 11-17 of the submission from the Parliament's Finance Committee (Annex G) sets out their views on these issues. We would endorse them, while recognising that the essential problem lay in the PA. Equally, our review has identified a number of issues we suggest should be reviewed before the next Holyrood election and the likely tighter fiscal position of SR 2007.
4.2.9 Appendix D lists the Ministerial spending portfolios, their 2007-08 budgets and relevant Departmental/Group responsibilities. The Minister for Finance and Public Service Reform currently has spending responsibilities. He does not therefore have a role exactly akin to HM Treasury Ministers. The table underlines the complexity we faced in trying to analyse the performance of programmes against priorities, especially when set against the issues raised earlier about defining priorities and managing the budget process.
4.2.10 We would encourage the SE to review the strategic management of the budget. If a new PA can be developed that deals with the issues raised earlier, then the 'top-down' model that currently exists (Figure 1) is well suited to delivering the desired outcomes. Budget management is inevitably more challenging when taking account of cross-cutting themes/priorities.
4.2.11 Any review should also consider a move towards a priority based budgeting process for SR 2007. We have seen evidence in some departments that the current process is based on the previous year's allocation, with increases to reflect new initiatives. This provides for limited scrutiny on the baseline, creates inflexibility and allows contingency funds to be built-in at every level of the budget setting process. Such a process makes it very difficult to stop doing anything and so make room for new and more effective policies/spend. There is also no incentive for a more holistic approach to be taken with regard to budgeting for issues (e.g. health, social inclusion) that run across what are, in effect, functional departmental boundaries. SR 2007 gives the SE a significant opportunity to improve on current processes and deliver a real step change on the effectiveness of its spend.
4.2.12 We understand that the Executive is carrying out an internal Financial Management Review. The aim is to assess current financial management processes, identify ways in which financial operations could be improved and produce a plan for implementing specific improvements. This review can draw on our findings.
4.3 SE STRUCTURES, FUNCTIONS AND PROCESSES
The Challenge Function
4.3.1 Since devolution, funding allocated to the SE has grown by 70%, increasing to over £30bn by the 2007-08 financial year. With this ever growing funding stream, an active Executive and Parliament and pressure for change in Scotland, the priority has been to determine policy, make laws and allocate funds. The underlying maxim has been 'get things done and make a difference'.
4.3.2 In stark contrast, we were told that the next spending review is likely to be much tighter, with less growth in the overall Scottish Budget. This led us to question the basis for future funding for specific programmes. We found evidence of monitoring at portfolio level, but limited evidence of any central monitoring of programmes against stated priorities or outcomes, except for a small number of PA commitments. The Minister for Finance and Public Service Reform is responsible for monitoring delivery across the SE. This is mainly done through bilateral meetings with each portfolio Minister focused on PA commitments. Cabinet considers a report on progress every six months. At official level, performance against objectives is regularly reviewed by a sub-group of Management Group, which also considers the wider issues of delivery across the SE. The Balanced Scorecard method is now being used by the Management Group and Department Management Boards.
4.3.3 Our main concern is to ensure robust processes exist before programmes start and that good financial disciplines are applied at the early stages of policy development. We found large quantities of data, gathered by programme managers, that sought to justify programmes, mostly in terms of specific targets (usually input based) or separate priorities determined subsequent to the PA/ BABS process. Even this was rather patchy. While there is some very good practice, we found instances where there appears to have been little real challenge to legacy programmes (5.2) for some considerable time. For example, the Central Heating Programme continues to consume resources long after one might have expected the initial issue - affordability of heating systems for the economically vulnerable - to have been solved.
4.3.4 We conclude that the current approach to financial planning across the Executive, whilst adequate in terms of profiling and forecasting expenditure and accurate in accounting for it, needs a more robust challenge function, strongly supported by the Director of Finance and Finance Group.
4.3.5 Box 2 identifies what we consider to be the key features of a challenge function.
THE CHALLENGE FUNCTION - KEY FEATURES
Authority - needs to, and be seen to, have authority. Might include or report to a senior Cabinet Minister. Those involved also should have personal authority.
Political Dimension - must have political element as the main function is to ensure strategic decisions are consistent with overall political aims and priorities
Independent - needs to be, and be seen to be independent of portfolios and departments. Might include external advisers/assessors.
Corporate - should look across all SE portfolios/budgets. Key function is to tackle corporate assessment of the relative merits of differing budgets.
Comprehensive - covers all SE spending and activities, including 'legacy' spend/ programmes and new initiatives.
Cross-Cutting/Lateral - should ensure all spending has regard to cross-cutting themes/priorities and should highlight any cross-portfolio issues.
Confidential - must be able to 'think the impossible' and consider proposals that could be rejected.
Rigour - must be rigorous, with support from financial and analytical services.
Consequences - should consider all consequences of any proposal, particularly in terms of quality and cost - to ensure risk is properly assessed and no unintended consequences arise.
Fast and Flexible - should not be a long, involved process. Should be a final filter/quality assurance check.
Regularly Refreshed - should be regular turnover of those involved to avoid stagnation or personal power bases emerging.
Challenge Only - the process should involve only challenge and not become involved in policy development.
Best Practice - should identify and promote best practice.
4.3.6 We believe the challenge function is required to:
- ensure the concept of Best Value is understood and applied consistently across all public spending;
- examine expenditure across the continuum, i.e. to look at what particular areas of expenditure are trying to achieve and make recommendations, where appropriate, as to how such expenditure should be controlled, particularly where the target of such expenditure covers input from more than one department;
- provide greater frequency of scrutiny, ensuring that optimal use is obtained of the limited resources available; and
- challenge departments on the need for and effectiveness of expenditure.
4.3.7 The PA includes this commitment, 'We will evaluate all new spending commitments for their economic and social impact and value for money'. We found mixed practice in carrying out pre-expenditure assessments for new initiatives. We would expect the challenge function to ensure that existing spend - not just new commitments - is also tested for economic and social impact.
4.3.8 The challenge function should encompass new expenditure and in-year changes within portfolios. Many programmes had either no or very weak links with the PA or BABS. Instead, they were founded on new or revised decisions by Ministers outwith the electoral or spending review cycles. Some new spending was ring-fenced and specifically targeted, sometimes with quite specific outcomes. While each may be very valuable in its own right, we found little evidence of challenge from outwith the portfolio or agreement on the relevance or priority of such initiatives to the overall strategic priorities/direction of the SE (Box 3). We see similar issues in terms of the resources held in the CUP. We would therefore encourage SE Ministers and Finance Group to develop a set of agreed criteria and protocols for dealing with new expenditure and in-year changes in budgets. For example, formal levels of delegation could be set out at Ministerial, Head of Department, and Programme Manager level. We see a major challenge here for the SE to devise a system that identifies underspends or savings within portfolios without creating perverse incentives for budget managers. As a first step, we suggest that the £50m limit for reporting changes to Parliament, should be lowered for internal challenge, possibly as a proportion of budget rather than an absolute figure.
In the Transport portfolio, when a major road project was delayed, instead of the funds being returned to the centre to be reallocated to a high priority area elsewhere in the Executive, the money was retained in Transport and another road project was brought forward from a later year.
4.3.9 The SE has published its ten year Investment Strategy, and work is going on to monitor the progress on its implementation. We would encourage the SE to review the variety of appraisal methodologies used across the SE in determining whether specific projects should proceed, with a view to ensuring the most efficient use of public sector capital. We cover this further below under 'Capital v Resource Spending' (4.3.13).
4.3.10 Paragraphs 4.3.4-8 deal with the process of identifying headroom and exposing it to challenge. A much harder issue is comparing effectiveness of policy and spending across portfolios. Paragraph 6.1.35 illustrates some of the issues that arise when considering alternatives to building a new prison. We discussed this 'apples v pears' question quite extensively and benefited from advice and presentations from Analytical Services Division staff. At present there is no easy answer. Most governments and many of their agencies are grappling with it, and we were advised of various models and approaches that are being developed or evaluated. This is the key point where political values become critical in any decision making process. It is imperative that all spending proposals are subject to rigorous appraisal before political values are added.
The 'Crowded Landscape'
4.3.11 SE policies and spending are delivered through many, diverse bodies. Table 3 shows the current numbers by type. With a population of five million people, we question whether this is efficient or effective. In chapter 6, we highlight the possible efficiency savings in most portfolios from simple measures such as sharing back office functions and locations, as recognised in the Efficient Government Initiative. We were also advised of potential savings and greater effectiveness through improved consistency in the 'sponsorship' of external bodies, i.e. the relationship between the SE and the external agency. For example, NDPBs have yet to benefit from three year budgeting, and SE officials sometimes question matters of detail already approved in corporate or business plans.
ARM'S LENGTH BODIES
Type of body
As at April 2006.
Financial and Accounting Issues
4.3.12 All SE budgets are extensively monitored, but too much is programme specific and not well related to Ministerial priorities as set out in PA/ BABS. We also draw attention to the diverse nature and scale of the many programmes we examined. We found budgets ranging from a few thousand pounds to several billion subject to the same financial discipline and arrangements, although we understand some of these were created at the request of Parliamentary committees. Many programmes contain a mixture of resource or capital spend, which are identified separately on the budget database, but are not always explicit in all budget documents. Some are straightforward, for example, PPP payments are resource and locked-in for considerable periods. Other budget lines contain a mix that can vary from year to year, for example grants in aid to NDPBs. Our greatest concern about many of the programmes was the inability to specify clear outcomes. Many had targets (though seldom could they be defined as SMART targets) and most could identify some kind of output. The picture was variable and not well linked to the priorities set out in PA/ BABS. In terms of monitoring the effectiveness of policies, we believe significant improvements are possible if any future PA has greater clarity on its desired outcomes and priorities.
Capital v Resource Spending
4.3.13 The SE budget is broken down into capital and resource spending. In June 2004, the then Minister for Finance and Public Services announced the setting of a target to increase the Executive's net investment by at least five per cent a year in real terms over the Spending Review period.
4.3.14 We recognise the need to maintain investment in Scotland's infrastructure. However, a fixed target does not allow for any slippage in capital spend. Slippage in any year means the target will not be met, unless other projects are brought forward to ensure it is met. This could mean projects proceeding that do not demonstrate the threshold benefit for investment, possibly at the expense in future years of more beneficial investments. Another, more flexible measure of infrastructure capital investment should be devised.
4.3.15 Slippage of capital projects not only impacts on the net investment target and delays the delivery of the project, it also has a cost. Inflation in the construction industry is 10% 4, well above the general inflation rate. Therefore, if a costed and timetabled project slips, when it is delivered it will either cost more, which will impact on future budgets, or its scope will have to be reduced, hence undermining value for money.
4.3.16 Capital spending is one-off, although there are generally recurrent resource implications. Therefore, in theory, all capital expenditure beyond legal commitments could be considered as headroom for the next spending review.
4.3.17 There are suggestions in the Justice (6.1.18), Communities and Tourism, Culture and Sport (6.4.12) sections of Chapter 6, concerning the move from payment of capital grant to supported borrowing. This provides short-term headroom, if supporting the same level of expenditure. Finding the most effective and efficient funding method for a capital project is relatively complex. The decision on whether to fund through direct capital grants or some form of supported borrowing requires a thorough value for money analysis of a variety of options, taking into account particular circumstances. The options can involve prudential borrowing, municipal bonds, PFI/ PPP structures and Not for Profit Distributing structures. In implementing the ten year Investment Strategy, the SE should review whether a greater shift to supported borrowing in a number of areas could offer not just improved affordability, but also more efficient finance, e.g. by transferring risk outside the public sector, or through external funders who are strongly incentivised, to ensure the efficient delivery of projects.
4.3.18 We had problems reconciling some budgets. Resources appear to be allocated to programmes throughout the year, making it difficult to reconcile to the initial published spending plans. In one Health case, twelve separate allocations letters were sent to NHS Boards, one of which was after the end of the financial year. We noted that the Parliament's Finance Committee (among others) has also expressed its concerns, and we share them. Two major problems appear to lie at the heart of this matter: in-year adjustments to budgets and frequent changes in accounting rules and classifications. The latter issue has been exacerbated in recent years by the introduction of 'Resource Accounting and Budgeting'. Our view is that there is insufficient understanding of the purposes and principles of Government Accounting across the SE.
4.4 SE SKILLS, CULTURE AND ATTITUDES
4.4.1 Any organisation is only as good as its people. Overall, the SE is a sound organisation that delivers a wide range of policies and services. Like any large organisation, it is subject to many tensions and changes that mean there are always areas for improvement.
4.4.2 Our impression is that budget managers did not all have all the necessary financial skills and acumen. We found differing levels of knowledge and expertise, distinct from the level of budget. It is imperative that all budget holders understand that every budget is tax-payers' money and that even a 'small' budget of say £1 million is a substantial amount of money. There was varied evidence of a Best Value culture.
4.4.3 We found patchy performance in considering relevant cost information. There was very little information on unit costs or the costs per outcome. In some cases, there was voluminous data and statistics but they did not provide evidence on outcomes or performance. The use of benchmarking as a performance tool is limited. There needs to be greater consistency in appraising new or existing policies or programmes, with greater emphasis on the Best Value duty to secure continuous improvement in performance, balancing quality and cost considerations in a manner which is economic, efficient and effective and learning lessons from evaluations of previous policies or programmes. Analytical Services Divisions have a critical role in this area.
4.4.4 We also see a need for greater understanding of the skills needed for different roles. The SE is a complex, multi-functional organisation, and there is a wide range of skills required. We believe those dealing with strategy should leave delivery to those responsible and equipped to do it. However, policy and delivery agents should engage actively with each other, so that the policy process can benefit from an understanding of what is deliverable and the associated risks. Too many staff move too often across too wide a spectrum in the SE. This results in the frequent dilution or loss of experience critical to the efficient running of departments. It also moulds the culture - people who know they are going to be around for the longer term tend to take more ownership than if they know they are going to be 'moved on' within a relatively short time period.
Culture and Attitudes
4.4.5 We are aware of the efforts that have been and continue to be made to meet the many challenges facing the SE, most notably the 'Changing to Deliver' programme. As in most large organisations, public or private, we found that commitment to change is not universal. We recognise that progress towards modernisation is being made in some areas, such as Justice, but found that the concept of real change has not yet been fully embraced by all. Culture is also influenced by matters such as staff churn referred to in 4.4.4 and other reports 5 have highlighted the dilution of expertise and the lack of consistency due to internal movement of civil servants.
4.4.6 We would encourage the SE to develop a culture of risk management rather than risk avoidance. We found some evidence of risk aversion. This is understandable (given that officials deal with public funds and given the level of political and media scrutiny), but there is a cost being borne by the tax-payer as a result. A culture of managed risk will provide better outcomes or better value for money. Nursing recruitment is an example where we believe a desire to avoid risk in terms of missing a stated target (as noted in 6.5.88: add 12,000 nurses to NHS Scotland by 2007) has contributed to a situation where too many trainees are being 'forced' through the system, resulting in perceived poorer quality training and materially higher graduate attrition rates than in England.
4.4.7 There is some evidence that cross-cutting themes including growing the economy, sustainable development and closing the opportunity gap/equality are being recognised to differing degrees in portfolios. There is less evidence of joint working across portfolios, although there are some notable examples of good practice (Box 4). There are some areas where there is limited evidence of joining up and others where there is some attempt to make linkages at the final, delivery end, that would perhaps reap better rewards if done earlier at policy formulation or organisational level.
Transport, Education and Young People and Health and Community Care Portfolios are working well together on school transport policy.
4.4.8 Despite the difficulties of specifying clear outcomes and priorities through PA/ BABS, some areas seem to have made progress with regard to targets. There is still some way to go on producing SMART6 targets that focus on outputs or outcomes as opposed to inputs (Box 5).
SMART targets recognised as best practice
Education and Young People Target 9: Increase the average tariff score of the lowest attaining 20% of S4 pupils by 5% by March 2008.
Environment and Rural Development Target 4: Increase the proportion of waste collected by local authorities which is recycled or composted to 30% by March 2008.
Examples of Poor Targets
Enterprise and Lifelong Learning Target 6: Increase the number of people in employment undertaking training.
Finance and Public Service Reform Target 4: Promote Scotland overseas - guided by the existing European Strategy and the developing International Strategy - in close co-operation with delivery partners. This will include a new project to promote Scotland's international image, launched in July 2004 and running throughout the Spending Review period to March 2008.
4.4.9 Greater impetus would be given to the efforts to change the culture and attitudes of the SE, were there a broader acceptance of the principles of Best Value. Best Value (Box 6) became a statutory duty for local authorities in 2003. For other public bodies, it is a non-statutory duty, although it has received some acceptance. The SE issued further guidance on the duty of Best Value to all of Scotland's Accountable Officers in May 2006. This will ensure a common framework for continuous improvement across the whole Scottish public sector. Audit Scotland will now be considering Best Value as part of its mainstream audit of SE Departments and arm's-length bodies. We endorse this move to make Best Value an integral part of all public services.
Best Value is a framework to ensure the continuous improvement in performance of public services.
The principles of Best Value are: commitment and leadership; responsiveness and consultation; sound governance at strategic, financial and operational levels; sound management of resources; use of review and options appraisals; sustainable development; equal opportunities arrangements; joint working; and accountability 7.
The Best Value duty is: to make arrangements to secure continuous improvement in performance (while maintaining an appropriate balance between quality and cost) and in doing so to have regard to economy, efficiency, effectiveness, equal opportunities requirements and to the achievement of sustainable development.
4.4.10 Best Value audits on councils have provided a vital overview of council performance, highlighting both strengths and weaknesses. It also complements the Efficient Government agenda (4.5).
4.4.11 We see the critical feature of Best Value as its focus on a culture of continuous improvement throughout any organisation. This creates a 'challenge function' at every stage from the development of policy to the delivery of the service, project or programme. Best Value encourages everyone to think laterally as well as vertically, consider the interests of all stakeholders and, above all, seek to maximise the benefits from every public pound spent. Best Value also requires regular review of existing policies, programmes and services. With appropriate links to the challenge function (4.3.1-8), a Best Value approach across the SE would address one of the key programme issues covered in the next chapter: legacy spending. The correct links between the challenge function and Best Value would ensure that 'core' business not covered in any PA is subject to regular reviews and challenge.
4.4.12 Many of the areas we cover in relation to SMART targets, Best Value duty, involvement of finance and pre-expenditure assessments are already included in the Scottish Public Finance Manual ( SPFM). The above suggestions are not about rewriting processes or procedures, but mostly about implementing what is already there. (In many organisations, it would be a compulsory requirement to have read - and been trained in - the equivalent of the SPFM, and for certain posts to have passed annual tests on its contents). Box 7 gives details of the responsibilities of SE Group Heads for delegated authority for budgets. They would require only minor amendments to capture our proposals and recommendations, especially relative to the challenge function. The real challenge is to ensure everyone in the organisation understands them and adheres to them.
General Financial Responsibilities
The Principal Accountable Officer is responsible for ensuring the reliability and integrity of the core Scottish Administration accounting system. The general financial responsibilities of a Group Head associated with delegated authority for budgets are as follows:
- to ensure that risks, whether to achievement of business objectives, regularity, propriety or value for money, are identified; that their significance is assessed; and that systems appropriate to the risks are in place in all relevant areas to manage them and to protect public funds and assets from loss or fraud;
- to seek to achieve value for money in the use of public funds by ensuring that functions are discharged with due regard to economy, efficiency and effectiveness;
- to seek to achieve best value from resources by pursuing continuous improvement with due regard to economy, efficiency and effectiveness and equal opportunities requirements;
- to ensure that in the consideration of policy proposals, all relevant financial considerations, including any issues of propriety, regularity or value for money is taken into account and where necessary brought to the attention of Ministers;
- to ensure the Group contributes effectively to public expenditure planning and monitoring exercises co-ordinated by Finance Group;
- to ensure that departmental Finance Teams are involved at the earliest possible stage in the preparation of all policy proposals etc which may have resource or other finance related implications - and that departmental Finance Teams are kept informed of developments. Departmental Finance Teams must also be consulted on all responses to reports, reviews etc with resource implications or which include issues of financial propriety, regularity or accountability;
- to ensure that all payments made by the Group are applied only to the extent and for the purposes authorised by the Parliament; and
- to provide the assurances to the AO on the systems of internal control within their areas of responsibility.
Source: Scottish Public Finance Manual
4.5 EFFICIENT GOVERNMENT
4.5.1 This review complements the Efficient Government Initiative. We have highlighted some areas where efficiencies could be made. The 'crowded landscape' (4.3.11) is a driver of unnecessary cost within the Scottish public sector, and we believe that an attempt must be made to streamline the number and nature of public bodies.
4.5.2 We found that it was difficult to verify if savings promised through Efficient Government were actually obtained. We also found a lack of clarity in relation to the categorisation of savings relating to time or cash-releasing. The Executive needs to guard against the possibility of double counting savings from this review and the Efficient Government Initiative.
4.5.3 We also feel that there is scope to use technology better to improve public sector productivity, e.g. having clinicians make the best use of existing IT could reap significant rewards.
4.5.4 Much has been written about productivity levels in Scotland. The PA notes that increasing productivity is part of the vision for the future of the Scottish public sector. The Efficient Government Plan 8 expands on this theme and provides some examples where productivity is increasing. We endorse the intention to increase productivity. However, we have found areas where new pay and contracts have not included or led to increased productivity. This is particularly the case in the health sector with the new General Medical Services and consultants' contracts and in the education sector with the new teachers' pay deal. Our comments on the GMS contract are set out at 6.5.95. In relation to the consultants' contract, which was implemented in April 2004, a recent Audit Scotland report, Implementing the NHS Consultant Contract in Scotland (March 2006) found that, while the new contract offered an opportunity to focus the work of consultants on priority areas and improve patient care, it was not yet being used to its full potential and there was limited evidence of its benefits to date. In the education sector, similar concerns have arisen about the new teachers' pay deal.
4.5.5 We consider shared services to be a fruitful area for delivering savings. It is one of the five workstreams within the Efficient Government Plan. It is reported to be a key driver for the delivery of the 2010 efficiency targets set out in the plan. The SE published A shared approach to building a better Scotland - a consultation paper on a national strategy for shared services on 5 May 2006.
4.5.6 Asset management is another important workstream. More work is needed on the whole life costs and utilisation of assets. Also, bringing the management of the disposal of surplus assets together under a central control could speed up the process, thus realising funds earlier.
4.5.7 Procurement is another workstream, which has the potential to release significant funds. There are already over 60 public sector organisations on the eProcurement Scotland ( ePS) system, with others in various stages of engagement. However, some bodies are not taking advantage of the system and may not be realising the savings to be made.
4.5.8 The McClelland report on reform of public sector procurement was published on 14 March, and we note it recommends more collaboration and adopting ePS as the standard for all of the public sector in Scotland. This is in line with our findings.
4.6.1 This chapter has set out the political and corporate issues we believe need to be addressed to improve the financial and budgetary planning of SE. The ultimate aim is to develop the best ways of translating political aspirations and priorities into reality. The challenge is to do so in a period when there are likely to be greater constraints on public spending than at any time since devolution. The first and most critical element of any approach is the specification of the aspirations and priorities. We strongly recommend that all political parties reflect on our comments at 4.2.2-6 and especially our suggestions for change.
4.6.2 We would also offer some recommendations on the corporate issues. They are based on our view that financial planning should be done using priority-based budgeting (Box 8) and in conjunction with the proposed challenge function. The process should take into account the effectiveness of the spend. For example, £1m on smoking cessation work could be considered discretionary, but is extremely effective in meeting health targets, improves economic activity levels and reduces the burden on the National Health Service ( NHS). We believe that more work needs to be done in many areas to assess the evidence of effectiveness of spending - perhaps building on the themes of physical, human and social capital. Spending needs to be assessed across programmes and not just in terms of whether each individual project stacks against a narrow definition of value for money. In a tight spending environment, relative value for money becomes much more important.
Current incremental model
We know that there is some degree of realignment of budgets and programmes within portfolio baselines at each spending review, but the main assumption is that the baseline will roll forward and that the main decisions are based around additions to those baselines.
Priority-based budgeting model
Priority-based budgeting ( PBB) recognises that resources are finite, and demand exceeds supply. PBB is intended to ensure that spending is allocated to the areas which can demonstrate the most effective use of spend to meet the organisation's priorities. It requires an understanding of the outputs achieved by the spend and ensures a rigorous assessment of the spend in the first instance - why should we do this, what value does it add? It also provides a framework for understanding what is likely to happen if spend were reduced and therefore a clear picture of the alternative choices available. Robust costing is at the heart of PBB.
4.6.3 Our major recommendation is that the SE should develop a rigorous, 'independent' challenge function to ensure that all spending decisions/programmes are consistent with overall Ministerial priorities. We would encourage SE Ministers to consider whether it is appropriate for the Finance Minister to have functional (i.e. spending) responsibilities. We appreciate the differences in Scotland post-devolution, but suggest that any new structure would benefit in terms of financial control and planning if the role of the Finance Minister were more akin to that of the Chief Secretary to the Treasury.
4.6.4 Our recommendations need to be read in conjunction with the suggestions made in 4.2.5.
- Post election, the SE Cabinet should agree an overall strategy and set of related priorities (based on its programme for the new administration) before taking decisions on the allocation of funding in Spending Review 2007.
- Strategies and priorities should be set out in clear language that enables outcomes to be defined with SMART targets.
- The SE should review its budget and financial planning arrangements. In particular, it should consider ways of improving the challenge function for both spending reviews and any in-year proposals for new expenditure, to be more akin to the Treasury model. Specifically, this should include some form of central monitoring of progress to assess critically performance of current expenditure and programmes against targets. This function could also act as a mechanism to share financial and performance best practice across portfolios.
- SE Ministers and officials should review the nature and scale of the different spending programmes to achieve greater consistency, streamline bureaucracy and avoid duplication. They should also require all new spending bids to have a clear exit strategy (or sunset clause if legislation) wherever possible and appropriate. The review should consider the respective roles of the Ministers for Finance and Public Service Reform, Finance Group and Analytical Services to ensure that they are able to provide support and guidance to budget holders across all portfolios and can act objectively across all portfolios in their challenge role. The review should also seek improvements in corporate reporting of both budgets and expenditure to ensure consistency of presentation, a clear reconciliation of budget movements and a ready 'read across' between published documents.
- The SE should also review its appraisal methods, especially for major capital projects, to ensure greater consistency and clearer priorities. Projects need to demonstrate value for money. The efficient use of public sector capital has already been discussed. Value for money, as the latest HM Treasury guidance makes clear, is not simply a narrow quantitative process, based on a Net Present Value ( NPV) analysis. However, an NPV analysis is an essential piece of work which needs to be undertaken in any investment appraisal. Practice seems to be mixed, and perhaps the Scottish Public Finance Manual could be updated to provide more detailed guidance on how to undertake a robust quantitative analysis.
- In the public sector, projects will also be assessed for wider benefits. The return on investment for public sector funds can also include the enhancement of Scotland's human, physical, social or environmental capital. If projects are undertaken involving very significant investment for minimal benefit - that is not money wisely spent and could, no doubt, be spent more effectively in other areas within the portfolio or in other departments. If all projects are assessed using a suitably rigorous framework and, subject to challenge, it would ensure that public sector funds were being used to maximum effect. Box 9 contains an extract from the appraisal checklist in the SPFM.
- Related to the above points, the SE should increase its efforts to devise a performance rating tool to assist cross Portfolio comparisons.
- The SE should review its human resources function, induction and training to ensure staff have the appropriate skills and are circulated in the most effective way.
- Embed a Best Value culture of continuous improvement throughout the SE, and public sector.
1. Define the objectives
Objectives and outputs should be set out clearly and relate explicitly to policy or strategy. They should be defined so that it can be established by evaluation after the event whether and to what extent objectives have been met. It is important that objectives are not described in such a way as to exclude options. Ideally they should be specific, measurable, agreed, realistic and time-dependent ( SMART).
2. Consider the options
Consider the options (i.e. the alternative ways of meeting the policy objectives).
Source: Scottish Public Finance Manual