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6 PORTFOLIO/PROGRAMME ISSUES

6.0 INTRODUCTION

6.0.1 This chapter sets out our findings for each of the eleven Portfolios (and their level three programmes) of the SE budget. Each section follows a standard format: Background, Key Findings, Programmes and Conclusions. The sections reflect the diverse nature of the portfolios and the different teams reviewing them, although we followed the standard approach set our in Chapter 3. Each team interviewed the relevant Ministers, senior civil servants and most level 3 budget holders.

6.0.2 Each section also has a table summarising the headroom (at 2007-08 figures) we found in three categories:

(1) Potential headroom for SR07, using 2007-08 figures.

(2) Areas for review that might yield potential headroom, where an estimate or top limit can be given.

(3) Areas of potential where more work is required before any estimates can be made.

6.0.3 In each of the sections, we have used the 2007-08 figures from the Draft Budget 2006-07, unless otherwise stated shown in £ million (£m).

6.0.4 Table 1 in the Executive Summary aggregates the potential portfolio headroom figures to give totals for the SE budget. They represent best estimates and the wider, strategic exercise preparing for Spending Review 2007 that should provide firmer figures.

6.1 JUSTICE

Background

6.1.1 We interviewed the Minister and Departmental Head (separately) and 18 senior civil servants holding 25 budgets, valued at almost £1.4 billion at 2005-06 prices (over £4.6 billion over three years to 2007-08). We also met Inspectors of Prisons, Police and Fire and the Chief Executive of the Scottish Prison Service and the Honorary Secretary of the Association of Chief Police Officers in Scotland ( ACPOS) and both the Chair and Chief Executive of the Scottish Legal Aid Board.

6.1.2 Our conversation with the Minister confirmed that considerable change had already taken place within the Justice portfolio and made clear that much more was yet to be achieved. The Minister aims to build on the High Court administration reforms following the Bonomy report and to create capacity in criminal justice to cope with minor offences to avoid the need for prison. Our subsequent discussions with civil servants showed this was a vital component in the drive to create a prison service fit to protect communities, but allow communities themselves to deal with low risk offenders.

6.1.3 The Head of the Justice Department has created a focused team. With few exceptions, they are clear about providing a streamlined Scottish justice system which deals speedily with offenders, protects Scottish society from serious offenders and provides a clear route out of offending.

Key Findings

6.1.4 Our interviews with budget holders in the Justice Department revealed a way of working that has already led to improvements and provides the environment for further rationalisation. We were impressed with the High Court improvements to date and could see the benefits of streamlined administration and related crossover with the Prosecution Service.

6.1.5 We feel the process of rationalisation in the protective services can be accelerated and that some savings can be made by phasing out the arrangements for capital grants to police and fire authorities.

6.1.6 We think also that arrangements around the Legal Aid budget can be developed to create a more effective budget environment and replace the existing concept of a fund with one based on more robust budgeting principles.

6.1.7 Table 4 summarises our conclusions and recommendations and assesses potential headroom.

Table 4

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

Programmes

Police Grant (£541.4m: in addition over £500m per annum within the local government settlement)

6.1.8 Civil servants recognise (and we agree in principle) that the process to fund police services could be simplified. The Grant Aided Expenditure allocated among all Councils together with the specific police grant to the Joint Boards is a cumbersome process. Joint Boards themselves are a stage removed from the democratic process but have a statutory role in challenging or calling to account the police hierarchy. The existing process, complex though it may be, does reflect the statutory responsibility of local government for police and the strategic role of the Scottish Executive. If simplification were to result in direct grant to Joint Boards, then the local accountability element would be removed. There is an increasing trend for the Executive to fund central initiatives directly, for example, common police services. We can see the benefits of some centrally funded initiatives as a reasonable development but would not wish to change the balance which remains between the Boards, the local authorities and the Scottish Executive, as each has a vital role in the provision of funding for the police service. The present approach to funding the police reflects the fact that the Police Service is a Local Authority function, (albeit operated through joint Police Boards) with additional and important national responsibilities.

6.1.9 Some put to us that Police Authorities should be rationalised, as currently proposed in England. The organisation of any public service should be subject to assessment and challenge, but the drive for any change should be based on evaluation of operational effectiveness and key to the effectiveness of the Police Service is performance at both local and national levels.

6.1.10 From that perspective, the Minister for Justice (and her Department) and the present eight Police Boards are crucial in creating a support and challenge environment for Chief Constables and their colleagues in which both locally based and nationally based objectives are clearly articulated and monitored.

6.1.11 To recognise the duality of responsibility for the Police Service between the Executive and local government, there needs to be clearly articulated national performance targets set by the Executive and local performance targets set by each Board.

6.1.12 We can see benefits in developing the present role of Joint Boards. Each needs to set clear objectives and take responsibility for delivery. If we are to see a greater focus in the activities of Joint Police Boards to improve performance, then the role of Joint Police Boards needs to be fully recognised and encouraged. As well as setting national targets, the Executive needs to set out its views on the governance arrangements that should apply to all Joint Boards. This would require Boards to outline the ways in which they would effectively manage systems for finance, audit, risk and performance. We see a stronger role for Joint Boards in a support and challenge function with Chief Constables. Examples of good practice include the Strathclyde Police Board's development of a Policing Priority Plan and Tayside's establishment of performance targets.

6.1.13 The recent legislation dealing with the Fire Service makes clear the role and responsibility of the Fire Boards in the performance of their Fire Service and given the importance of the democratic basis of the Police Service, we see considerable value in similarly enhancing the role and responsibilities of the Police Boards. We also believe there is scope to augment the capacity of Police Boards by considering the involvement of non-executive (non-voting) members, in a similar role to the one carried out by non-executive directors on the boards of management within the Scottish Executive Departmental Management Boards.

6.1.14 As an aside, we found it difficult to understand why there had been to date, no consistent information technology platform across all present police authorities, although we appreciate this situation is being rectified. If managed and linked effectively, this improvement will also provide the potential for significant operational benefits involving both the Justice Department and the Crown Office. We support the moves to develop common police services which can be shared across all police authorities. We also encourage further development of this trend to include sharing specialist services as a way of both saving money, improving performance and maintaining the integrity of separate police authorities.

Police and Fire Capital Grant (£56.0m)

6.1.15 In the new age of prudential borrowing, we think this grant is something of an anachronism and no longer needed.

6.1.16 Prior to 2004, Police and Fire authorities funded capital projects from a combination of borrowing and revenue contributions. The capital spending needed prior consent from the Scottish Executive and the resulting debt financing charges qualified for ongoing annual revenue support to contributing Councils. Since the advent of prudential borrowing, Councils are now free to borrow to fund capital projects without the need for prior approval of the Scottish Executive, provided they can demonstrate that the borrowing is prudent, sustainable and affordable.

6.1.17 For Police and Fire authorities however, new capital expenditure is now funded by a direct capital grant with all of the accompanying structures of process and control applied by the Scottish Executive: although Fire and Police revenue budgets are well managed and staff at Boards and lead authorities have the necessary skills to carry out the work needed to put local funding in place for local projects.

6.1.18 If the capital grant were phased out over a two year period, Boards would incur additional borrowing costs, albeit on an incremental basis. There is an argument to allow a small amount of loan charge support to be added to the local government settlement, which would enable Councils to fund a core level of Police and Fire Board capital borrowing equivalent to the current scale of capital investment. £4m a year (around 7% of this budget) could be considered as an ongoing revenue supplement to loan charge support for Councils and would generate the equivalent of £56m capital investment for Police and Fire Boards. The Joint Boards would then have flexibility to increase funding for capital projects in a consistent prudential framework to that in local authorities (4.3.17).

6.1.19 We understand government accounting arrangements mean this proposal would shift the measurement of spend from capital to revenue. Nevertheless, we believe the cash value of the potential saving, certainly in the early years of such a change, would be sufficiently worthwhile to justify further work in the Executive to overcome the challenge of classification, either by changing the process of measurement or more simply by removing the grants and providing no further support.

6.1.20 Rationalisation would release around £50m from 2009-10, with transitional savings in 2007-08 and 2008-09.

Police Central Government: Central Support Services and Representative Associations (£63.5m)
Scottish Criminal Records Office (£10.6m)
Scottish Drug Enforcement Agency (£18.9m)

6.1.21 The Executive is increasingly funding central initiatives directly via the Scottish Police Common Services Authority. If these initiatives prove successful and in co-ordination with police forces and the prison service, we could anticipate more effective service delivery. Progress is being made with procurement initiatives in the police service.

6.1.22 We see no reason why contracts for supplies and services across police authorities cannot be extended to Fire and Ambulance services, particularly in relation to fleet purchase, uniforms, supplies, energy costs, etc.

6.1.23 We believe that a target of 10% should be set, given the scale of purchases involved (£8.7m from 2007-08)

Criminal Injuries Compensation Scheme (£28.5m)

6.1.24 We saw this as a national ( UK) scheme with little scope for influencing policy or implementation at a Scottish level. We believe any opportunity for efficiencies would only be available through UK revision or by Scotland withdrawing from the scheme, with associated political and statutory issues.

Civil Defence and Emergency Planning (£2.6m)
Fire Central Government Miscellaneous (£2.4m)
Risk Management Authority (£2.9m)

6.1.25 We could see the benefits of creating national funds for direction to specific initiatives. The Fire service requires an effective radio communications system compatible with Police. The airwave system has been agreed for use in England for Fire, Police and Ambulances and for Police in Scotland. It is vital that a decision is speedily taken on a compatible system for the Fire Service. A common communication system automatically raises the issue of the number of Fire control rooms, and we welcome the moves to rationalise (i.e. reduce) the number of Fire Control rooms for Scotland as an efficiency and cost saving measure.

6.1.26 Taking further the concept of rationalised Fire Control Rooms, we suggest an examination of the principle of joint control rooms for Fire, Police and Ambulance Services, not only to improve co-ordination, but also to generate savings. The success of the joint approach to the delivery of the emergency services during the 2002 fire service dispute is an indication that such a combined approach can work.

6.1.27 We have not examined overall Fire Service performance because this is funded from the local authority part of the Executive's budget, i.e. Grant Aided Expenditure (outwith our remit). However, one important issue we consider merits comment is the enhanced role of Joint Fire Boards in holding to account Chief Fire Officers and their staff. This results from provisions in the recent Fire Services Act which lays considerable expectations on Joint Fire Boards, increasing their accountability for performance of their service. For the same reasons referred to in our consideration of the Police Budget, we recommend that the scope for the involvement of non executive directors (non-voting) is worth investigating to augment the capacity of the Boards to meet this increased responsibility.

Scottish Fire Services College (£4.6m)
Scottish Police College (£14.4m)

6.1.28 We see scope to rationalise on one site (Tulliallan), part funded by a potentially significant capital receipt from disposal of the Fire College at Gullane. The Scottish Ambulance College at Peebles and the Scottish Prison Service College at Polmont should also be considered in any rationalisation to create a protective services training campus. Investment in infrastructure could release long term savings and produce more effective working.

6.1.29 In our experience, merging budgets provides opportunities for savings and we suggest a target saving of 10% (£1.7m). A working group should be established to assess the potential for mergers and efficiencies. It should consider all SE budgets.

Scottish Prison Service (£427.7m)

6.1.30 There is a clear commitment in the service to work with the Justice Department to reduce reoffending and prison numbers, particularly short term. Ongoing running costs are well managed with efficiencies being recycled in an effort to contain expenditure. However, the practicalities are far from achieving reduced numbers, with over 7,000 people presently in prisons with notional capacity of 6,500. 1,000 are in prison on remand. Between 80% and 90% of prisoners have drug or alcohol addiction problems on entry to the prison system and around 50% of prisoners return to prison within two years. It costs almost £50,000 each year to keep each prisoner contained. All of these factors place significant strain on the prison system and raise four issues of concern:

• the absolute number of people in prison;
• the treatment of prisoners with alcohol and drugs misuse and general health issues;
• the number of people in prison on remand; and
• the recidivism rate.

6.1.31 As outsiders, we think the size of the prison population is disproportionate to the Scottish population, with Scotland one of the highest in Europe. The number of long term prisoners has remained constant over recent years, but numbers of short term prisoners (i.e. below four years sentence) have increased significantly. Measures to reduce the number of short term prisoners would free up space both physical and financial. There is an obvious connection with the new Community Justice Authorities and other offender services as a possible alternative to short term prison sentencing.

6.1.32 As far as the health of prisoners is concerned, we were advised of (and we welcome) the moves to have NHS take direct responsibility for prison healthcare.

6.1.33 Currently 15% of the prison population is on remand. The primary reasons for placing people on remand are fear of absconding, witness intimidation, or repetition of criminal activity. There seems to be no alternative to remand than prison, with little apparent appetite in the prison service and Scottish Executive for the concept of bail hostels, which we understand operate in England. We believe the principle of bail hostels or other supported accommodation as well as the greater use of tagging and home detention is worthy of further consideration in an effort to reduce this source of pressure.

6.1.34 Private sector support in terms of capital (Kilmarnock prison) and services (prison escort) were demonstrated as cost-effective.

6.1.35 The main funding pressure being tackled is that of increasing prison capacity and simultaneous improvements to the quality of prisons. The need to create a modern prison environment is fully recognised, the demand for new prisons will grow unless something is done to reduce the trend in increased short term prisoners. This cycle needs to be broken. We believe that prison numbers can be reduced by:

(a) finding alternatives to prison for those who would ordinarily be given short term sentences;

(b) improving the quality of healthcare for those prisoners with drug or alcohol abuse problems or other health problems, e.g. mental health;

(c) improving the quality of education and vocational training for long term prisoners;

(d) reducing the number of remand prisoners by providing alternative arrangements that do not place the public at risk; and

(e) improving the throughcare of prisoners when they leave prison, utilising the proposals for Family Support Plans outlined in the Communities portfolio of our report.

6.1.36 Effective implementation of all of these proposals would provide scope for capping the number of prisoners, reduce the pressure for construction of new prisons to accommodate the growing prison population, and perhaps most importantly, reduce the rate of recidivism.

6.1.37 There is evidently a professional approach in running the prison service and savings have been demonstrated. What is not so clear is any path which will lead to reduced numbers of prisoners and thereby costs. Notwithstanding that the new Community Justice Authorities have yet to bed in, we recommend a serious examination of the option of expanding Criminal Justice Social Work in the new Community Justice Authorities with all of the required investment to reduce prison population to create space for greater personal attention to prisoners, improving their health, educational and development needs.

Offender Services (£96.4m)

6.1.38 Community Justice Authorities divide Scotland into eight areas with partnership involvement of prisons, social work, police and procurators fiscal. This is a positive step. Risk assessment techniques are being used to manage low risk offending and to target resources at managing higher risk offenders, including sex offenders, with new funds going to electronic measures (tagging).

6.1.39 We think prison numbers can be reduced by expanding the Criminal Justice Social Work structure, but pressures on social workers are increasing. Present pilots, e.g. Youth Courts and Drug Courts, represent a major new dynamic as an alternative to prison and are therefore welcomed, reducing prison numbers and creating opportunities for some savings.

6.1.40 The Scottish Executive funds local authorities Criminal Justice Social Work to provide a throughcare programme for prisoners with drug and alcohol problems when they leave prison. We were advised that NHS Scotland does not continue this level of support at the end of the programme. It is hardly surprising therefore that so many people re-offend and return to prison. An improved level of throughcare for ex-prisoners and a more effective passport into the health service could well reduce the numbers re-offending.

6.1.41 This service is central to a strategy to reduce prison numbers and associated revenue and capital costs. It needs to be developed and a further review is needed. A realignment of funding may be needed to provide the alternatives.

Legal Aid (£168.4m)

6.1.42 We were advised from several sources within the Justice portfolio that the recent changes to the High Court system could lead to a downward movement, or at worst, a flat trend in Legal Aid. There is evidence of some small scale efficiencies in setting advocates' fees and co-ordinating legal advice via community law centres. The concept of directly employed personnel acting in a capacity of 'public defender' should be looked at in more detail. All of these initiatives should lead to a reduction in Legal Aid expenditure. We understand that there is a plan to release both cash and time efficiencies in the Legal Aid budget and we recommend that the scope for further reduction should be examined through the establishment of a joint working group involving Police, Crown Office, Scottish Courts Service and Legal Aid. We recognise the important steps being taken to manage this budget and we encourage this trend.

6.1.43 There is scope for further savings as a result of the rationalisation process affecting also Scottish Court Service and Crown Office (Procurator Fiscal) budgets. We believe that many of these changes will reduce the demand for Legal Aid and suggest a target efficiency of 10% (£16.8m in 2007-08).

Scottish Court Service (£77.8m)

6.1.44 As noted, the High Court reform programme (Bonomy) has released some cash savings to SCS (built into the current efficient government programme targets). Time releasing savings are likely and will be evaluated next year. A programme of unification of district and sheriff courts will commence from 2007-08. At the same time, fines administration will be reviewed. Savings will be evaluated through the projects that have been set up for these. A review of courts management has been carried out and when implemented, there should be improved performance. There is an ongoing need for investment to modernise the court estate.

6.1.45 Loss of expertise in the service because of age profiles is a potential issue to be addressed over the medium term and will require investment.

Court Groups (£14.3m)
Judicial Salaries (£25.2m)

6.1.46 There are linkages to, and potential benefits from, Sheriff and District Court unification and the High Court reforms. This budget funds the administration and judicial salaries and there is little scope for direct action to produce savings.

6.1.47 Although a sensitive issue, we acknowledge the developing interest in performance appraisal of the judiciary on which the Justice Department has had discussions with senior representatives of the judges and sheriffs.

Antisocial Behaviour Initiatives (£34.2m)
Community Safety (£5.7m)

6.1.48 These budgets are examples of micromanagement by the Scottish Executive. The extent to which this form of management is appropriate is discussed more fully in the Communities section (6.7.57-61). These budgets could be amalgamated and a new style single Fund used to develop antisocial behaviour initiatives, with associated savings in delivery.

6.1.49 It is too early to comment on the measures to address antisocial behaviour but evidence so far provided, although modest, is encouraging.

6.1.50 There is a long history of geographically based regeneration initiatives and correctly, much of the funding is concentrated on the same areas identified in the Communities portfolio.

6.1.51 The concept of focusing resources on the needs of targeted families and individuals within these geographical areas as an alternative to investment in 'bricks and mortar' is being developed within the Scottish Executive. We would encourage a greater emphasis on such focused investments to achieve a greater impact on the individual and thereby on associated societal issues.

6.1.52 The amalgamated budget should be transferred to and implemented by the Community Planning Partnerships in conjunction with the new Community Justice Authorities.

6.1.53 We believe the scope for reducing this joint budget by a modest amount of 10% (£4m) should be examined.

Residential Accommodation for Children (£3.5m)
National Family Support Grant (£1.3m)
Scottish Criminal Cases Review Commission (£0.8m)
Accountant in Bankruptcy (£6.6m)

6.1.54 We acknowledge the separate functions funded from these budgets and see little scope for rationalisation.

6.2 CROWN OFFICE AND PROCURATOR FISCAL SERVICE

Background

6.2.1 We separately met the Lord Advocate and the Crown Agent. Both are clear about their remit and have made considerable progress in the modernisation of the service. The Crown Agent acknowledged the work of his predecessor. We record recognition of his own work to continue the process.

6.2.2 The Lord Advocate outlined what had been achieved and why, where next he was leading the portfolio and what he considered to be the main issues following the High Court reforms of the Bonomy report.

6.2.3 Sheriff Court administration and a streamlined estate were considered vital.

Key Findings

6.2.4 Within the overall budget (around £100m), we found a culture that encouraged creation of savings to cope with identified future targets. Our subsequent discussion with senior civil servants responsible for budgets confirmed an effective approach to the management of change.

6.2.5 Rationalisation of offices was being considered and administration staff had been reduced via heavy investment in information technology. As a consequence of this, together with the changes to the High Court system, more streamlined and focused working procedures were encouraging more pleas of guilty prior to trial, with consequential savings accruing to this service, the police service, the court service and ultimately, the Legal Aid Fund.

6.2.6 Further procedural streamlining was emerging as a result of initiatives such as a pilot in Tayside where police issue on the spot fines, with subsequent workload reduction in the prosecution service. The Prosecution Service now processes witness citations (as opposed to police) with consequential savings in police budgets.

6.2.7 We are clear that a culture exists in managing the budget which effectively prepares the service for the future. Further savings are possible, and the service should be encouraged to continue to recycle efficiencies into service improvements. Given its central role within the Justice system, we encourage greater joint working between the Justice Department, the Crown Office and Procurator Fiscal Service, the Court Service and Legal Aid.

6.2.8 The Crown Office and Procurator Fiscal Service are exemplars for the Scottish Executive in effective management of change and we recommend that their approach to delivery efficiency is made more widely known across Scottish Executive Departments.

6.3 EDUCATION AND YOUNG PEOPLE

Background

6.3.1 This portfolio ( EYP) includes key programmes that address cross-cutting objectives in the areas of economic growth and 'Closing the Opportunity Gap'. Controlling a direct 2007-08 spend of £861m, the Department levers significantly higher funds that are delivered through Grant Aided Expenditure ( GAE).

6.3.2 We held over 20 meetings with officials responsible for over 30 budget lines. We also met with the Minister for Education and Young People and the Head of Education Department. We also had input from other bodies (such as Audit Scotland, Her Majesty's Inspectorate of Education and the Social Work Inspection Agency) to whom we turned for supporting information.

Key Findings

6.3.3 Overall, the Department readily accepts the enormity of challenge in this portfolio and recognises the contribution that it can make to a successful Scotland. We were impressed with the modern and pragmatic view of portfolio issues throughout the Department and recognise the complex landscape for delivery that includes local government and a number of NDPBs. Efforts have been made to standardise performance reporting systems throughout the Department (these have been exported to at least one other department), but found attention to budget and financial management patchy throughout the organisation. More work is required to improve the quality of SMART goals and deliverables. The Department needs to work harder, and ensure partner participation, towards the setting of outcome as opposed to input targets. The balanced scorecard used by the Department, while a step in the right direction, would also benefit from more SMART goals.

6.3.4 We are concerned at an attitude in more than one area that regarded budget lines of single-digit millions of pounds to be 'trivial'. These may represent a very small percentage of the overall EYP budget, but this mindset does not engender confidence in general cost control practices. We were impressed by the subject knowledge of many of the key people in this department, but unconvinced that they all had the skills to manage large financial budgets.

6.3.5 As with other review teams, we see opportunities for cross-department linkage in a number of programmes. It was not clear what incentive exists at a departmental level to encourage this. We were concerned at the potential for overlap within and without the EYP portfolio, and the lack of specificity of some budget lines. Within some areas of the department there was little evidence of pilot programmes ever being considered to have demonstrated poor outcomes, leading to a corresponding continuation of expenditure regardless of results.

6.3.6 We found it interesting that there seemed to be an expectation of continued growth in EYP budgets, despite currently forecast demographic trends that imply reduced numbers of young people in the population.

6.3.7 We estimate headroom of approximately £48m within this portfolio, but recognise that further work could potentially raise this (while also raising stark political choices). Table 5 gives a breakdown.

Table 5

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

6.3.8 Senior officials within the department were extremely helpful, and many of them made positive suggestions on areas for improvement.

Programmes

Schools and Teachers

6.3.9 This is the most significant area of spend in this portfolio, but is predominantly channelled through GAE. Recent political will has sought to address historical under-investment in the school estate and to correct historical issues in teacher reward and recognition. Measurement of these significant programmes has focused on the input (number of schools and teachers) as opposed to any outcome, and this is a weakness in ensuring effectiveness of spend. We note however that the step-change nature in this spending area required a vigorous focus on 'doing things differently' and agree that to some extent a focus on the input measurement has been effective. We also accept the difficulties inherent in measuring effectiveness of educational change when results may take ten years or more to appear, but we continue to believe that better assurance of effectiveness is required.

6.3.10 A concern was expressed (which we accept), that there has been inconsistent application of funds by local authorities in respect of teacher numbers. We also were surprised by the lighthandedness of the approach to enforcement, and by the relatively slow pace of the dialogue in this area. Specifically, several councils have not yet addressed teacher number targets, with a variety of reasons being cited for this. The overall target looks likely to be met in 2007, but it is probable that several local authorities will miss their share of the overall measure. We are concerned about those occasions where funds intended for specific targets are substituted by local authorities without specific agreement. We are also concerned by the relative difficulty in assessing an accurate baseline for teacher numbers.

6.3.11 We were surprised to hear of the lack of significant data and research to support any particular model of class size or physical environment in new buildings. This is not a peculiarly Scottish issue, but we believe this is a gap that should be filled with some urgency given the size of spend. We also reflect a view from the department that the opportunity to rationalise the schools estate should remain a high priority during this phase of significant capital spend.

6.3.12 It is not within our remit to comment on the nature of the PPP programme, but we believe that financial models for capital programmes should be chosen on the basis of the best commercial approach to funding. We noted that there was a gap between schools PPP budget assumptions and actual approved build programme, potentially leading to a large degree of in-year flexibility across programmes that is not subject to the same level of scrutiny as the budget settlement. (As with other portfolios, we are concerned that this flexibility allows projects which do not pass a prioritisation test at the first attempt to be initiated without proper scrutiny) (4.3.8-10). We recognise that the PPP programme has driven some schools rationalisation, which could potentially be further facilitated by the Schools Improvement Fund.

6.3.13 Several interviewees expressed concern that the proposals of the McCrone report into teacher pay and conditions have yet to deliver any significant results outside of the area of teacher pay and benefits. It would be disappointing if McCrone did not deliver significantly improved effectiveness in the education system. Worryingly, it was felt that the costs of the McCrone pay agreement may not have been fully scoped, in particular with regard to the costs of the Chartered Teacher scheme. Initial take-up has been slow, but we were advised that any significant increase in numbers will cause budget pressure that has not been anticipated (and in effect 'negative headroom'). We also consider that the requirements for teacher training provided a 'windfall' opportunity for Higher Education institutions and did not see evidence of a robust procurement process in sourcing this training.

6.3.14 In summary, we did not quantify a specific positive headroom opportunity in this area, but believe that the effectiveness of the spend could be improved by the following:

• an appropriate return from the compensation benefits afforded by the pay deal to teachers in the wake of the McCrone report;
• a shift in emphasis from input targets (e.g. 53,000 teachers) to outcome measures (e.g. improvement in learning outcomes);
• a more focused approach to ensuring that Executive funds are focused on their intended targets by local authorities; and
• more scrutiny of decisions made in-year on reallocation of expenditure forced by the schools build programme being behind plan.

New Educational Developments

6.3.15 This area covers a variety of 'initiatives' and other school 'improvements'. We were concerned at the lack of SMART goals for the National Priorities Action Fund ( NPAF). We recognise the presentational advantages in having such a fund, but there was insufficient evidence of successful initiatives being moved into GAE upon successful completion. We believe that the level of this budget line should be re-justified on an ongoing basis to avoid the impression of a continuing 'rolling' budget line for short-term political priorities. We recognise that there has been some progress in reducing the number of initiatives in this area.

6.3.16 We found some difficulty in understanding the separation of programmes in other areas of this spend - most notably the Schools Digital Network, Schools ICT and the Schools Improvement Framework. We saw the potential for overlap between these programmes. When compounded with goals that are not SMART, this suggests that a more detailed review could release some headroom from this spend. Unfortunately we did not see any evidence of tight budgetary challenge within this area.

• In summary, we believe that there is scope for saving in this area by a degree of consolidation amongst the funds for modernisation and improvement of schools infrastructure. Our estimate of potential headroom here is £8m.
• A review of the Support Teachers element within NPAF (Continuous Professional Development funding is available elsewhere) could provide further headroom of up to £9.6m.

Qualifications and Curriculum

6.3.17 This area is a crucial element in improving educational outcomes, and we recognise the focus on this subject. As with other areas, we note the difficulty in setting SMART objectives, and in particular those related to outcomes, though we recognise there has been some progress. We were concerned there was no obvious end-point in curriculum development. We accept that continuous improvement is an essential part of work in this area, but felt the expectation of a steady or continued growth in budget should be challenged more effectively.

6.3.18 We see opportunity for much closer ties between the Scottish Qualifications Authority ( SQA) and Learning Teaching Scotland ( LTS) which could potentially lead to improved outcomes and efficiencies. We also believe that the opportunity to derive revenue from these organisations has not yet been fully realised. We are concerned that LTS has struggled to deliver over a prolonged period and therefore question whether continuation of this organisation provides any net gain to Scottish education.

6.3.19 There appears to be an opportunity for this department and Enterprise, Transport and Lifelong Learning Department ( ETLLD) to work more closely in the fields of Higher Education ( HE) and Further Education ( FE), particularly in the overlap area between school sixth year and the first year of tertiary education.

6.3.20 In summary, we believe that within this area there is opportunity for headroom via:

• a greater challenge to 'continuing' initiatives. Either they are successful, in which case they become mainstream, or they fail, in which case the spend should stop. If this saved 10% of the budget, that would create headroom of £2.5m; and
• increased commercial activity by SQA (and potentially LTS) with a target to deliver surpluses could provide headroom of up to £22m.

Changing Children's Services Fund

6.3.21 This is a complicated area with approximately 40 budget lines/funding streams being applied. We recognise the desire to consolidate this spend and provide a more standard model for outcome agreements. We also note the relatively small proportions of this fund (£61m) versus the overall spend in the area of children's services.

6.3.22 We felt there was a reluctance in this area, as with the NPAF, to release funds into GAE upon successful completion of initiatives, though we acknowledge a positive trend in this behaviour as the joint inspection and quality improvement regimes become established. We accept that the motivation for this reluctance to release funds is largely due to the potential for GAE to be reallocated locally. We believe there has to be greater joint activity in this area to ensure that a child-centric focus is more generally applied.

• Small headroom potential by closure of unsuccessful pilots and consolidation of Family, Workforce Development and Innovative Programmes for 2 year-olds funds. Potential headroom of £3.5m.

Unified Voluntary Sector Fund

6.3.23 This fund (some £6.85m in 2007-08) is itself a consolidation of previously separate funds. We note the existence of other similar funds (e.g. Family Fund) and suggest there is room for increased efficiency by further consolidation so that administration costs are spread over a larger number of grant applications. Based on our review, we regard this fund as quite unstructured, and we note that grants range in size from £25k to £1.5m, thus requiring departmental officials to participate in a large degree of micromanagement.

• Small headroom potential by transferring this fund to a more appropriate management agency - say 10% saving, or £0.7m.

Youth Justice and Children's Hearing System

6.3.24 All interviewees in this area recognise the value of early, positive intervention in a child-centric manner, though there were different views on the relative performance of the various elements of the process. A view was advanced that practitioners in the field are required to do more 'joining up' of government policy than they should, and that there is significantly more room for co-operation between agencies. A significant, and ongoing increase in the number of referrals in this area has driven a comparable increase in costs, though within the Scottish Children's Reporters Administration ( SCRA) there is a desire to reduce this spend once investments in IT and other systems are complete. (It is not clear that this desire is recognised outside the SCRA.)

6.3.25 In performance terms, this area is struggling with the target of a 10% reduction in re-offending, and we were not convinced that the £6.5m spent on tagging programs had proved good value.

6.3.26 On a positive note, there was good recognition within this area of the benefits of cross-agency and cross-departmental working, though little evidence of it in practice. This manifests itself by strong focus on the transactional costs of specific processes (e.g. SCRA) and insufficient incentive for departments to address 'bigger picture' issues (e.g. a targeted Justice/Education/Health approach to children who come to the attention of the authorities at an early age). We applaud the focus on transactional costs (efficiency) and would encourage a more radical approach to cross-departmental working (effectiveness).

• There is opportunity for significant headroom to be generated from Justice-related portfolios by a more joined-up approach across the Executive.

Inspectorates, etc.

6.3.27 We note the plethora of inspectorates that exist (and are being created) across the Executive, including in this portfolio, the SWIA, HMIE, and the Children's Commissioner. We believe there is opportunity within this portfolio, and across the Executive, for more co-operation and sharing between the inspectorates, beginning with more attention to the potential for shared services (5.7).

6.3.28 We also observe that there is no clear remit for the activities of the Children's Commissioner. We understand the nature of the role well, but would suggest a more robust challenge on budget issues during the establishment of new positions such as this.

• A 10% saving in inspectorate costs as a result of closer ties would create £2m headroom.

6.4 TOURISM, CULTURE AND SPORT

Background

6.4.1 The Portfolio's over-arching objective in the Draft Budget for 2006-07 is …'to enhance everyone's quality of life in Scotland through widening participation in sport and culture and building on a successful and sustainable tourism and creative industries sector to grow the Scottish economy, creating jobs and opportunities'.

6.4.2 The Draft Budget confirms plans to spend around £291m in 2007-08, about 1% of the overall Scottish Executive's budget and an increase of 33% in real terms since 2002-03. The programme budgets within this Portfolio have been described to the Review Group by various contributors as areas of 'discretionary spend', i.e. no statutory imperative for spend.

6.4.3 The 2003 Partnership Agreement determined there would be a cultural review. This led to the formation of the Cultural Commission in April 2004 with a remit to consider how to achieve Best Value from existing resources. The Commission delivered its report to the Minister in June 2005. Following a debate on the report in the Scottish Parliament in September 2005, the Scottish Executive's response was published in January 2006. The response also confirmed the commitment of £20m of additional resources. There is, of course, some overlap with the findings of this Review.

6.4.4 We interviewed the Minister, the Head of Education Department and five Group or Divisional Heads, including the Chief Executive of Historic Scotland, and their support staff. We were represented at an open session with Chief Executives of various NDPBs and National Institutions including Visit Scotland, the National Library for Scotland and the Royal Commission on the Ancient and Historic Monuments of Scotland.

Key Findings

6.4.5 We were surprised by the limited availability of SMART goals and deliverables. We consider some effort is needed here, particularly to make the Scottish Executive's business relationship with the NDPBs and National Institutions more transparent. We recognise that the monitoring effort and quality is in part affected by the skills and management resources available to the Portfolio and we recommend this is reviewed.

6.4.6 We noted that the delivery Institutions were dependent on Lottery monies and private donations for the current range of activities. There was a significant risk that there would need to be a reduction in these activities if these funds decreased in the future.

6.4.7 We see an opportunity to join up marketing and the use of logos to secure better value for the marketing spend across this and other portfolios and provide headroom in this budget of about £2.6m annually. This will require a focused medium term procurement strategy and a review of the short term nature of the funding arrangements with the NDPBs, etc.

6.4.8 We noted the potential for improved cross-portfolio working to lever in resources for areas where this Portfolio leads. Some examples were the health and dance projects in schools and sport, the use of new schools as venues for community activity in sports and culture and the support to the farming community and tourism. We also noted that cross-portfolio arrangements worked best at the margin and where additional resources were available. More effort is needed to secure better joined-up working outcomes across core budgets.

6.4.9 We reviewed the SE's response to the Cultural Commission's report. We recognise that the work of the Cultural Commission and the Executive's response have involved a considerable effort from key staff over an extended period. The bodies responsible for the national collections are being given the opportunity to rationalise the common functions that service them and reduce their administration costs. We would encourage the Minister to adopt a more holistic approach to her vision of common services and join up the initiative across all the major cultural organisations. The Minister has set out an ambitious programme of reform. We believe her ambition for a more vibrant cultural life for the whole of Scotland will be assisted by the setting of financial targets and timescales in these areas.

6.4.10 We note the intention to invest a further £20m a year (an increase of almost 10% from 2007-08) in cultural activity. We believe that there are savings opportunities within this Portfolio and the availability of the extra £20m should not be allowed to deflect attention from the need to secure best value across the cultural programmes.

6.4.11 We were advised that the NDPBs and the National Institutions had absorbed significant financial pressures over recent years and this had influenced the approach to the Executive's Efficient Government Initiative. Nonetheless, we feel the Portfolio's contribution to the Efficiency Initiative is very limited. Not all NDPBs are expected to make efficiencies, and the overall contribution identified is £1.75m or 0.6% of budget. By comparison, the Department for Culture, Media and Sport at Westminster has been given an efficiency target of 6.8% of budget. If adopted here, this would increase the savings target to £15.7m annually.

6.4.12 We noted the arrangements for funding capital spending by cash grants and recommend the Executive reviews these arrangements to reflect the expected life of the asset and enable the spend to be funded by borrowing over that period to produce further potential headroom of at least £34m (4.3.17).

6.4.13 We believe there is the potential for increased income generation by Historic Scotland and that steps can be taken to ensure the necessary protection of the historical environment. We believe that a further 5% real growth target is possible and would provide additional headroom of around £1.3m annually.

6.4.14 We noted the compelling historic and political drive towards the promotion of the Gaelic language but we are concerned by the dispersed nature of funding across the Executive and the risks this brings of overlap and duplication.

6.4.15 We consider the headroom potential for this Portfolio to be about £19.6m in 2007-08 and annually thereafter, with further potential savings as summarised Table 6.

Table 6

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

Programmes

VisitScotland

6.4.16 A key priority for the SE is to improve the performance of Scottish tourism as one of the strongest performing sectors of the economy. VisitScotland has a strategic role in the development of Scottish tourism and is charged with growing tourism revenues by 50% (from a 2005 base) in real terms by 2015. VisitScotland spends about 40% of the overall public sector investment in tourism - mostly on its marketing budget - and has a planned budget of about £44m (includes £0.261m of budget for Promotion of Scotland) for 2007-08. Savings of around £1m annually through the merger of the former area tourist boards with VisitScotland in 2004-05 had been achieved and will be channelled into additional tourism marketing.

6.4.17 By 2007-08, funding will have increased by over 50% from 2002-03 levels, yet we found no correlation between funding allocated and targets to be measured. The key performance target is year on year real terms increases in Scottish tourism GVA (Gross Value Added). We noted that over the past four years this has increased for every pound invested by VisitScotland from £12 to £13 to £14.50 to £15. A new tourism index is being developed to track the growth in tourism on a quarterly basis from 2004 onwards, but the information is not yet available.

6.4.18 We are concerned there is no up to date performance information for such a key performance area and, despite the technical difficulties, we consider this gap should be addressed urgently. Several SMART objectives were in place, but their value is significantly impaired if they cannot be produced timeously. Again, we suggest this should be addressed urgently.

6.4.19 VisitScotland's 2005-08 Business Plans show operating deficits totalling £1.85m forecast for 2005-06 and 2006-07. We understand VisitScotland was not required to take any action to address these deficits and that they are being underwritten by the SE, despite the allocation of additional marketing resources of £7m in 2005-06. We understand the reason for the operating deficits is related to the area tourist boards' merger with VisitScotland and have been reassured that VisitScotland will deliver at least a breakeven financial performance in 2007-08.

6.4.20 We understand VisitScotland has a controlling interest in the website Visitscotland.com and is reluctant to consider outsourcing due to previous under-performance by the private sector. The internet is a significant enabler in the holiday choices of individuals/families, both at home and abroad, and it is essential that the website is a market leader. The potential for partnership with the private sector should be kept under regular review, not least as a potential revenue source as well as enabling the future development of the website.

6.4.21 The biggest area of spend by VisitScotland is on marketing with £26m budgeted for 2007-08. VisitScotland is already working on its 2007 marketing plan and the absence of any forward commitment of funding means they are not securing best value in their marketing procurement. We believe there is a significant spend on marketing across all portfolios and we would recommend a fundamental review to join up campaigns, etc where appropriate and to secure best value through a long term procurement strategy. We believe this has the potential to deliver headroom of at least 10% of budget or about £2.6m annually (6.10.15-20).

National Institutions and Related Organisations

6.4.22 The Minister is committed to promoting the best of Scotland's cultural treasures in the care of the National Collections. The Executive's ambition is to enable the National Institutions and the other identified National Collection holders to continue as 'centres of excellence', but more effectively and efficiently. Table 7 below confirms that planned budgets for this area for 2007-08 will be over £93m, an increase of 29% since 2002-03.

Table 7

(Note: Funding for the National Archives of Scotland is presently held within the Scottish Executive Administration and Associated Departments budget.)

6.4.23 We found an incremental approach to budget construction and no correlation between funding allocated and targets to be measured. There is tacit acceptance over pay and other pressures, despite significantly increased funding levels from Spending Reviews 2002 and 2004 (4.6.2).

6.4.24 EYF and CUP funds have been added to the limited capital resources and will fund some of the improvements identified in the Royal Museum Masterplan (£9.2m) by 2007-08 and the Museum of Flight - Concorde (£1.2m) this year. £10m capital funding is included in the 2007-08 budget for a new building for the Royal Commission on Ancient and Historic Monuments and provides equivalent headroom the next year. Capital pressures however remain with a further £15m sought for the Royal Museum Masterplan and £5m for the Portrait Gallery.

6.4.25 The SE should consider legislative changes to provide the National Institutions with powers to fund their capital investment needs through borrowing, thus spreading the benefit of the investment over the life of the asset improved. This would enable a more stable funding requirement for the next Spending Review and provide further potential headroom of about £9m.

6.4.26 We considered the SE's response to the recommendations of the Cultural Commission. The bodies responsible for the National Collections are being given the chance to rationalise common services to reduce their administration costs. We could not find any specific bureaucracy related savings which any change would deliver, but understand each Institution has been asked to deliver efficiency savings of £200k. This has not been assumed in the budget levels agreed and each is left to redistribute any savings within their own priorities.

6.4.27 We believe more can be achieved. The Department for Culture, Media and Sport at Westminster had to achieve efficiency savings equivalent to 6.8% of its budget. The incremental style of budgeting prevalent over the last two spending reviews will not have secured the best value use of resources. A target for efficiency savings of around 7% on operational budgets is achievable. This should deliver reduced bureaucracy related costs desired by the Minister and would generate additional headroom of about £6.5m annually (including the current target of £600k).

6.4.28 Policy performance is measured mainly in terms of visitor numbers and the most recent results for the main Institutions are shown in Table 8.

Table 8

6.4.29 There is a trend of increasing participation, and officials were confident they could achieve the 3% increase on 2004-05 visitor numbers by 2007-08 (as determined by BABS2) which also requires the balance of participation to be maintained (particularly in under-represented groups). We are concerned that officials do not have current relevant data about the delivery of this target and what action needs to be taken, if any. We were surprised by the limited availability of SMART goals and deliverables. Some effort is needed here, particularly to make the Scottish Executive's business relationship with the National Institutions more transparent.

Scottish Arts Council and Related Organisations

6.4.30 The Scottish Arts Council ( SAC) is the main channel for government sponsorship of the arts in Scotland. Table 9 confirms the planned budgets for this area for 2007-08 will be over £66m, an increase of 69% on 2002-03.

Table 9

6.4.31 Again, we found an incremental approach to the budget construction, and no correlation between the funding allocated and targets to be measured. Post devolution, the funding allocated has increased significantly and by 2007-08 will have more than doubled - a real terms increase of almost 70%.

6.4.32 Over this period, the SAC has levered in significant lottery funding, but this is expected to reduce in future. For 2005-06, lottery funding is expected to reduce by £2m to £20m, but will still account for 27% of planned spend. About 41% of the lottery funding is spent on capital commitments which will inevitably suffer as lottery funding reduces.

6.4.33 The SE's response to the Cultural Commission recognised the unique function of the national performing companies. It determined that they would be integrated with the National Theatre and funded directly by the SE by arrangements similar to those operated for the National Institutions. Resources of £15.4m currently committed by the SAC, together with the appropriate expertise, will transfer from the SAC.

6.4.34 Like the National Institutions, the national performing companies are being encouraged to 'share' common services, but there are no details available on the efficiency savings which these changes will deliver.

6.4.35 A new Scottish cultural development agency - Creative Scotland - is to be formed by amalgamating the reformed SAC and Scottish Screen. The Screen Archive is to be transferred to the National Library of Scotland. The SE has recently announced an additional £7m of funding for Creative Scotland. The proposals deliver a less cluttered and more transparent institutional landscape, but the lack of any financial definition to the efficiency expectations compromise the desire for reduced bureaucracy related costs.

6.4.36 The SAC and Scottish Screen have been asked to deliver efficiency savings of £200k and £50k respectively to the Efficient Government Initiative. Like the National Institutions, no account has been taken of these savings in the budget levels agreed. We believe a target of around 7% of operational budgets is appropriate to drive the common services objective, reduce bureaucracy related costs and create additional headroom of about £4m annually (including the current target of £250k).

6.4.37 Policy performance is measured mainly in terms of visitor numbers. The most recent results for the SAC and Scottish Screen are shown in Table 10.

Table 10

(Note: Includes 1.8 million at two major, but exceptional exhibitions)

6.4.38 There is again a trend of increasing participation. We are concerned that the baseline of 2004-05 participation is not yet available and the target of a 3% increase by 2007-08 is clearly not influencing the SAC's or Scottish Screen's performance assessments. We were surprised by the limited availability of SMART goals and deliverables. Some effort is needed here, particularly to make the SE's business relationship with the national performing arts companies, Creative Scotland and the SAC more transparent.

Sportscotland

6.4.39 The SE is committed to the continued development of a network of world class national and regional sports facilities to improve access and opportunities for high performance sport. The widest possible participation in sport is to be promoted as it benefits communities and individuals in terms of health, well-being, confidence, self esteem and competitive excellence. A range of multi-sport facilities will be developed. All local authorities have agreed to develop the concept of active schools. Table 11 confirms a planned budget for 2007-08 of over £34m, an increase of 150% on 2002-03.

Table 11

6.4.40 We again found an incremental approach to the budget construction and no correlation between funding allocated and targets to be measured, except for the centrally driven policy initiatives such as sports facilities and the active schools programme.

6.4.41 There seemed to be an assumption that the budget was above scrutiny. External pressures like the successful London 2012 Olympic bid and the Glasgow 2014 Commonwealth bid seemed to be a comfort blanket meaning significant additional funding was 'guaranteed'. However, investment of £250m underpinning the bid, including major infrastructure and the athletes' village, is within planned budgets.

6.4.42 The funding of new sports facilities could be managed by local authorities using prudential borrowing powers and provide one-off further potential headroom of about £25m (90% of £28m identified for the National and Regional Sports Facilities Strategy).

6.4.43 A significant element of the budget is earmarked for the Active Schools programme. Major efforts have been made to ensure each school has the relevant and dedicated resource, but there is little tracking of what this is achieving in terms of the broader objectives (a further example of an absence of SMART targets). The programme is delivered through local authorities. We were unsure what value sportscotland adds to the funding framework.

6.4.44 Sportscotland is also expected to deliver £200k of efficiency savings. We believe this to be tokenistic and non-challenging. We would suggest a target of around 7% of its gross budget to secure savings of around £1.7m annually.

6.4.45 We noted the operation of the Scottish Institute of Sports but could not review its costs and effectiveness in the time available. The benefits of this approach as an effective delivery model should be tested. We recommend the SE reviews its operations.

6.4.46 Policy performance is measured mainly by reference to the numbers participating in sports. The SE's key objective is to increase participation by 3% by 2008, with the 2002-2005 yearly average as a baseline. Table 12 illustrates the recent trend.

Table 12

6.4.47 There is a worrying trend of reduced participation. We are concerned that there is not more up to date data and, therefore, no objective basis on which to measure sportscotland's performance. We were surprised by the absence of SMART goals and deliverables. These should be developed urgently to deliver a more business like relationship with sportscotland.

Historic Scotland and Related Organisations

6.4.48 Historic Scotland is key to the development of Scottish tourism with a mission to safeguard Scotland's historic environment and promote understanding and enjoyment. Table 13 confirms the planned budgets for 2007-08 will be around £49m, an increase of almost 31% on 2002-03.

Table 13

6.4.49 Historic Scotland plans to generate income of over £24m in support of its activities in 2007-08. Table 14 breaks down their overall planned spending.

Table 14

6.4.50 Historic Scotland is the largest operator of paid visitor attractions in Scotland, employing over 900 people throughout Scotland. There are 70 charging sites. Fifty do not make a profit, but the overall commercial operations trading account delivers a surplus of around £2m annually. The charging sites include Edinburgh and Stirling Castles - the most popular tourist attractions in Scotland. There are tensions between protecting the historic environment and securing the maximum revenue from paying visitors. We see potential for increased income generation while ensuring the necessary protection of the historical environment. A further 5% real growth target is possible and would provide additional headroom of around £1.3m annually. This is a challenging target for Historic Scotland. We would expect them to consider the potential for further outsourcing. The monarchy would have to be consulted over any fundamental changes, but we believe these would not present any insurmountable obstacles.

6.4.51 We welcome the recognition in the Cultural Commission response that Historic Scotland should participate in the joint working arrangements envisaged. We repeat our concerns that the proposals lack any financial detail or targets.

6.4.52 We recognise the benefits of closer working with the National Trust for Scotland and think solutions can be found to enable the operation of facilities or properties by either organisation which also protect their respective interests. There is potential for reduced operational costs and increased income generation. We have not attempted to put any scale to this.

6.4.53 We again found an incremental approach to the budget construction and no correlation between the funding allocated and targets measured. We recognise that Historic Scotland is delivering about 1% of efficiency savings, but believe much more can be done. We would suggest a target of 7% of funding to secure additional headroom of around £3.5m annually.

6.4.54 Six City Heritage Trusts are to be established by 2007-08. All except Glasgow are already in place. The Trusts are expected to lever £2.50 for every £1 from Historic Scotland. It is too early to make any comment on their performance.

Bord na Gaidhlig and Gaelic Broadcasting

6.4.55 A key priority for the Scottish Executive is to help the Gaelic language flourish alongside Scotland's other languages. A budget of over £13.5m is planned for 2007-08, an increase of 34% on 2002-03. Bord na Gaidhlig is charged with securing the status of the Gaelic language as an official language of Scotland and providing support to a wide range of Gaelic groups. The Gaelic broadcasting budget is to assist with the commitment to establish a Gaelic digital channel and funding for a new Centre for Creative and Cultural Industries on Skye. There is pressure to enhance the funding for Gaelic with £3m of additional funds sought for a Gaelic digital television channel.

6.4.56 No SMART targets are in place. There is no basis to judge what difference the budgets make to the development of the Gaelic language. It is important to develop such measures to enable the SE to be satisfied these resources deliver Best Value.

6.4.57 We noted some collaboration with related programmes run by the Education Department, Highland and Islands Enterprise and the Scottish Arts Council. We are concerned that the policy delivery is not sufficiently joined-up and carries a high risk of overlap and duplication. We recommend a cross-departmental review to consider the consolidation of the budgets held and future responsibility for the delivery of the policy goals.

Recommendations

6.4.58 The performance monitoring arrangements in place for the NDPBs, the National Institutions, the Executive Agency and the Executive-led programmes should be reviewed and replaced as an urgency with SMART goals and deliverables.

6.4.59 VisitScotland should review the arrangements for the development and maintenance of its website Visitscotland.com and reconsider the benefit of increased partnership working with the private sector.

6.4.60 There should be a cross-portfolio review of marketing spend with the objective of joining up campaigns to secure better value.

6.4.61 The Executive should review the current approach to funding of the NDPBs, etc to enable better medium term financial planning and to facilitate a longer term procurement strategy in areas such as marketing where there is a potential for headroom of circa £2.6m annually.

6.4.62 The Executive should provide the NDPBs, etc with the necessary powers to borrow to fund their capital investment needs and provide further potential headroom of about £34m.

6.4.63 The Minister should update the Executive's response to the Cultural Commission's Report to include financial targets and other SMART goals.

6.4.64 A more challenging efficiency target of 7% should be introduced for all NDPBs, etc and would provide headroom of £15.7m annually.

6.4.65 The Executive should review the performance of sportscotland, including the Institute of Sport, in the light of the evidence available on sporting activity participation rates.

6.4.66 Historic Scotland should review the current arrangements, including the further potential for outsourcing, for charging for the major visitor attractions to secure real growth in visitor numbers and income to provide additional headroom of about £1.3m annually.

6.4.67 The cross-portfolio working arrangements need to be reviewed to secure better leverage for the Portfolio's interests.

6.4.68 A cross-departmental review to consider the consolidation of the budgets held for the promotion and teaching of the Gaelic language and future responsibility for the delivery of the policy objectives.

6.5 HEALTH AND COMMUNITY CARE

Background

6.5.1 We met with the Minister and Deputy Minister and, separately, with the Head of Department and his Departmental Management Board. We conducted almost 40 interviews and meetings with Group and Divisional Heads within the Health Department ( SEHD), senior managers in Health Boards, senior staff within Audit Scotland and some external commentators on health policy and finance.

6.5.2 National Health Service ( NHS) Boards are key to delivering the PA commitments on Health - some 60 in total. These range from aspirational (e.g. tackling alcohol abuse in Scotland) to input driven (e.g. bringing 12,000 nurses and midwives into the NHS by 2007). However, there are no outcome based commitments.

6.5.3 The Department has published many significant policy documents, strategies and updates of strategies on specific health services since the PA was agreed. Probably the two overarching reports, however, are:

• Building a Health Service Fit for the Future - A National Framework for Service Change in the NHS in Scotland (the Kerr Report) published in May 2005. This major report is about the future of the NHS in Scotland; and
• Delivering for Health, published in November 2005, describes in practical terms how the SE will turn its vision of the health service into reality.

6.5.4 These two important policy documents, above all, will drive the work of the Department in the years ahead.

6.5.5 Finding headroom within the Health and Community Care portfolio was difficult for two main reasons. First, the Department had more than played its part in delivering Efficient Government savings (£98.8m at the half year in 2005-06 and £187.4m for the full financial year 2005-06). Second, most of the additional resources allocated to health in recent years have been consumed by unprecedented increases in pay across the sector arising from the new Consultants' Contract, the new General Medical Services Contract and Agenda for Change (yet to be fully implemented).

Key Findings

6.5.6 This portfolio is the largest in the SE, with expenditure planned to increase to over £10 billion in 2007-08, made up in the following way:

• 84% to 22 Health Boards (14 unified NHS Boards deliver patient care in acute and primary care; eight Special Health Boards, some of whom provide direct patient services (e.g. the State Hospital); and others who provide support services to the NHS (e.g. National Services Scotland);
• 6% to GP, Pharmacy, Dental and Ophthalmic services;
• 5% to capital expenditure;
• 1.5% to Education and Training;
• 1% to IT;
• 1% to Ministerial national priorities; and
• 1.5% is for other services, half of which is for the Waiting Times Coordinating Unit.

6.5.7 Health spending has doubled since 1997. The NHS is the largest single employer in Scotland. It is therefore important to the Scottish economy and the well-being of the country that the NHS performs effectively and delivers health gain across its expenditure programmes. However, we agree with the Audit Scotland Report, Overview of the Performance of the NHS in Scotland 2004/05, which says "… a comprehensive picture of NHS activity, costs and quality is still not available and it remains difficult to assess whether the NHS in Scotland is delivering value for money".

6.5.8 The budgeting process within the NHS, under which last year's figure is uplifted for cost pressures, militates against best value and developing a culture of continuous improvement (4.2.11 and 4.6.2). Pay is treated as a fixed cost. There does not appear to be pressure within the budgeting process to be more cost effective; and this seems to filter down into the budgeting process of the Boards.

6.5.9 Productivity in the NHS is the subject of much debate, and there is ongoing work - the Atkinson review - to assess this at UK level. Again at UK level, pay contracts have been negotiated without being linked properly to productivity gains. The Quality and Outcomes Framework ( QoF) in the new GMS contract is intended to provide additional quality and productivity, but we found criticism that the QoF had not extracted sufficient benefits. In some cases in Scotland, there has been a reduction in the number of sessions run by consultants.

6.5.10 We welcome the Department's efforts to tackle productivity through targets on reducing sickness absence and improving consultants' productivity. We understand the new e-Health strategy being implemented in the context of Delivering for Health, is designed to maximise the benefits from NHS information systems and exploit the implementation of information systems to realise further benefits and efficiency savings.

6.5.11 Labour costs account for over 60% of expenditure across the NHS but are treated very much as a fixed cost, both in the way the budget process operates and in the reluctance to impose compulsory redundancies within National Health Service Scotland ( NHSS). We believe this is an impediment to productivity improvements, Best Value and, therefore, the delivery of improved patient service.

6.5.12 We welcome the new statement of Key Objectives, Targets and Performance Measures for Local Delivery Plans, set out on 1 December 2005 to the NHS Boards. This has shifted the focus away from the input targets of the PA and generally sets out SMART targets aimed at improving health outcomes.

6.5.13 The programmes directly managed by the Department have made some use of the CUP, which has been encouraging. There remain some areas where the ethos is one of spend the budget or lose it. We also hear reports of this at NHS Board level.

6.5.14 The policy process also presents a mixed picture. We are concerned that some policy initiatives are not subject to a thorough cost benefit analysis, or pre-expenditure assessment, before being adopted. Financial analysis and economic analysis should be embedded more firmly in the policy development process, so that there is a clear picture of how much a policy is likely to cost, the risks associated with delivery and the benefits expected to be achieved. Benefits realisation should include an assessment of health gain, i.e. the likely impact on life expectancy or quality of life from the new policy. For time limited programmes, we would expect the policy development process to identify what the exit strategy would be. We were pleased to see some examples of this - pilot projects funded centrally, evaluated and then funds withdrawn where objectives had been met, so that the programme could be incorporated as part of the normal operating budget, or where the objectives had not been met and the programme terminated.

6.5.15 We identified several areas of 'headroom' shown in Table 15.

Table 15

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

Programmes

NHS Board Unified Budgets

Background

6.5.16 Some 70% of the SE's spending on Health goes directly to NHS Boards to provide health and community care services. In 2005-06, this figure is just short of £6bn, an increase of 7% over 2004-05, and it is planned to increase by 14.7 % to £6.9bn in 2007-08.

6.5.17 Our remit covers Level 3 budgets, so we have not investigated the detailed spend of 15 NHS Boards. That would have taken us far too long. However, we interviewed several Board chief executives and considered the Audit Scotland Report, Overview of the Performance of the NHS in Scotland 2004/05 and the Finance Committee's initial consideration of that report on 13 December 2005.

Resource Allocation

6.5.18 Once the overall level is set, allocation of voted expenditure to NHS Health Boards is done on the basis of the Arbuthnott formula. It is broadly population driven, with adjustments for deprivation factors. It could be argued that the allocation methodology accounts for one of the Minister's priorities: reduction of the health gap between people living in the most affluent and most deprived communities. The formula is not, however, designed to support Ministerial priorities. We have not, therefore, considered whether Arbuthnott should be reviewed to reflect more closely Ministerial priorities, when allocating funds. A limited review of Arbuthnott is under way in any event. Ministerial priorities are also funded through the National Priorities programmes, discussed below. We note that is no financial incentive for Boards to meet targets - funds are not linked to the achievement of objectives.

Performance Management

6.5.19 The Department manages performance at a strategic level through Accountability Reviews, now conducted by the Minister and held in public. At an operational level, the Department introduced a new framework for monitoring performance in the NHS on 1 December 2005: Ministers' Key Objectives, Targets and Performance Measures for the NHS and Local Delivery Plans: Guidance 2006/07. This framework contains four key objectives - health, efficiency, access and treatment - with 28 targets supplemented by 32 performance measures and 20 supporting measures. We note that healthy life expectancy is not among them.

6.5.20 The Framework has been broadly welcomed by NHS Boards as more manageable and measurable than the previous Performance Assessment Framework. We welcome the move to broadly SMART targets.

6.5.21 We cannot say whether the unified Board programme is performing well for the same reasons as set out in the Audit Scotland report. We urge SEHD to improve costing information across the NHS in Scotland to aid sound financial budgeting, management, benchmarking and delivering best value for this £7 billion programme. The tariff structure, which is being introduced for cross boundary flows between Health Boards, will provide one incentive to improving costing information.

Financial Management

6.5.22 Action is being taken in several NHS Boards to tackle forecast deficits. When faced with potential deficits, Boards generally seem to have taken a thorough look at their services and devised programmes likely to be more sustainable than to have implemented across the board cuts.

6.5.23 We are concerned that a process of continuous improvement does not seem to be a routine part of financial planning and budget setting in the NHS. The SE sets the tone in its budget preparation by using the current year's budget as the baseline with uplifts for the next year to meet 'cost pressures'. This approach filters down through the NHS system. Justification is made for increases, but no strong process for challenging existing expenditure seems to exist. Pay is treated as a fixed cost rather than being rigorously examined. We feel that more cognisance needs to be made of factors such as skill mix, (given the changes in health care delivery that are under way), staffing levels and more productive models of care.

6.5.24 NHS Lothian is developing a programme budgeting approach to measure health gain across specialties to provide the information necessary to maximise the delivery of health gain from investment. There may be other examples, and we would like to see a Best Value approach being more routinely adopted within health.

6.5.25 Given that Boards are simply allocated funds, irrespective of their performance or activity (except at the margins on cross-boundary flows), there needs to be a stronger incentive for Boards - and the Department - to take a stronger and more transparent approach to budget setting.

Cost Pressures

6.5.26 Boards are dealing with the pressures of implementing the new General Medical Services ( GMS) and consultant contracts. As we were concluding, Audit Scotland published its report on implementing the latter, indicating that, under the consultants contract, the annual pay bill for consultants will have risen by 38% over the three years to 2005-06 (44% if on costs and inflation are included).

6.5.27 These contracts were negotiated at a UK level, without any obvious linked increases in productivity. More people work in the NHS than any other public service in Scotland, but there is a reluctance to use compulsory redundancy as a means of delivering change. These factors limit the NHS's ability to provide 'more for less'. There is a widespread debate around productivity in the NHS and how this is measured. Given the much larger proportion of GDP in Scotland that comes from the public sector, productivity in the public sector - and the NHS as a large part of that - has a wider implication for Ministers' cross-cutting theme of growing the Scottish economy.

Drugs

6.5.28 We comment specifically on the drugs bill because of its size as a proportion of the expenditure of Health Boards. The annual spend on drugs within NHS Scotland is estimated at around £1bn. Drugs for hospitals (£200m) are purchased through a variety of regional and national contracts with suppliers. Reimbursement to community pharmacists (£800m) for drugs dispensed to patients is controlled through the existing contract with pharmacies and the Pharmaceutical Pricing Regulatory Scheme ( PPRS).

6.5.29 There is a good level of information on drug spending. Generic drugs are prescribed wherever possible. Around 90% of prescriptions (20% of the cost of drug use in NHSS) issued are for generics. Put the other way, 10% of prescriptions issued by doctors account for 80% of the drugs spend each year, the vast bulk of which goes on proprietary (patented) medicines.

6.5.30 Continued pressure on drug prices needs to be maintained through the PPRS, which regulates the profits that companies make on the sale to the NHS of branded prescription medicines. However the scheme must continue to encourage research and development to lead to the future availability of new and improved medicines and this is recognised in the prices paid by the NHS. 6.5.31 Further work needs to be done to move towards the optimal outcome for the use of prescribed medicines. This means focusing on:

• correct diagnosis;
• ensuring that physicians choose the most cost effective medicines for the condition presented;
• ensuring that medicines are presented to patients in a way that encourages them to take them;
• ensuring that a review is held with the patient where possible to determine the outcome of the prescribing;
• minimising adverse drug reaction; and
• minimising medication problems (through, for example, incorrect dosing).

6.5.32 Further work could be undertaken to improve the monitoring of prescribed drugs, paying particular regard to drug wastage. It has been estimated that annual wastage of scripted drugs is running at around £15m.

6.5.33 Data exists to allow spending to be analysed at NHS Board level and by type of medicine prescribed. Use of the patient unique Community Health Index ( CHI) number would allow analysis of patient-specific data.

6.5.34 A new General Pharmacy contract focuses on quality of input from pharmacists rather than rewarding them on the basis of the volume of drugs prescribed. This should have a beneficial impact on the overall cost of drugs in the NHSS.

Headroom

6.5.35 NHS Boards have played their part in providing cash releasing efficiency savings in 2005-06 - amounting to just over 2% of the NHS resource budget (£88m) (6.5.5).

6.5.36 We would need more time and information to come to specific conclusions on headroom in NHS Board budgets, with the exception of our comments on drugs. However, we suggest Ministers examine the following areas before the next spending review:

• The Department and Boards should drive out the savings from single status working and should give consideration to savings that might be achieved from a further reduction in the number of NHS Boards in Scotland.
• Boards should look at disposing of surplus assets more effectively - within an overall property strategy linked to the Local Delivery Plan.
• The Department needs to develop more rigorous cost information as a basis for improved decision making in allocating resources. For example, the introduction of tariffs for cross-boundary flows has spurred development of more accurate cost information for the specialties affected.
• The Department needs to develop a budget setting process which recognises the impact of services on health gain, leading to better allocation of resources to priority areas. The current approach of 'uplifting' last year's figure for 'cost pressures' is not in line with good practice elsewhere in the public or private sector. NHS Boards, in allocating resources to their respective divisions should not follow this lead. They should take a more challenging approach to budget setting to ensure that a culture of continuous improvement is ingrained, that resources are optimised and that they are allocated effectively to priorities
• We challenge the widely held view that much of the expenditure of Boards is locked in, even given the new pay contracts combined with the apparent reluctance to employ any form of compulsory redundancy policy. We believe these constraints should be challenged and the NHS should look more creatively at how it could redesign services for patients in an efficient way, taking into account the shift in focus from acute to primary and community care.
• The Department and Boards need to maximise productivity gains from the more effective use of existing technology, including information and management systems. Maximising the use made of current systems should provide significant cash and time releasing savings.

6.5.37 With regard to drugs, the overall estimated spend in NHSS is estimated at £1bn per year. There is upward pressure which is forecast to continue to rise at 10% a year. In a budget of this size, it is not unreasonable to seek headroom in the order of 5%. Through improved contracts with community pharmacists, reduced drug wastage, improved prescribing and improved monitoring of drugs spend, we feel that £50m of headroom could be created across NHSS in 2007-08 and beyond. A savings target of this level of saving would be reasonable in addition to £20m savings already identified as part of the Efficient Government Review.

Special Health Board Unified Budgets

National Waiting Times Centre (including the Waiting Times Co-ordinating Unit)

6.5.38 The Board of the National Waiting Times Centre operates the Golden Jubilee Hospital in Clydebank. The Hospital works with the NHS Boards across Scotland to reduce waiting times for patients by providing outpatient consultations, diagnostic and imaging services and inpatient and day care surgery. Its budget in 2005-06, was £34.3m. The Waiting Times Co-ordinating Unit, on the other hand, is part of the SEHD. Its principal objective is to provide leadership, planning and coordination to ensure that waiting times are reduced for services across Scotland and that specific waiting times standards are achieved. The Unit's budget is £46.8m in 2005-06, rising to £70m in 2007-08.

6.5.39 We heard many comments that there was an over-concentration on reducing waiting times, to the detriment of other clinical priorities. However, waiting times are highly relevant to the PA. The major policy document for this sensitive area is Fair to All, Personal to Each - the Next Steps for NHS Scotland, published in December 2004, which is the Executive's plan for tackling waiting times for inpatients, day cases and outpatients.

6.5.40 The PA commitment is that no one with a guarantee would wait more than nine months for hospital treatment by the end of 2003, or more than six months by the end of 2005. Performance in reducing waiting times (except in respect of cancer) has been impressive. The six month target was achieved by November 2005, and new targets of 18 weeks from GP referral to outpatient appointment and 18 weeks from a decision to undertake treatment to the start of that treatment have been set, to be attained by December 2007. They are to be achieved by more efficient ways of working; better workforce planning; increased use of the Golden Jubilee Hospital (which has already made a significant contribution to successful performance); increased investment in new diagnostic and other equipment; more use of the independent sector; an increased focus by Community Health Partnerships ( CHPs); and more strategic and effective use of IT.

6.5.41 We see no headroom in this programme at present. There may be headroom in future as processes become embedded and the new targets are met. Inevitably, diminishing returns will set in and a decision will need to be taken at some point on whether a sustained level of investment is worth a marginal reduction in times.

Scottish Ambulance Service ( SAS)

6.5.42 The budget for the Scottish Ambulance Service in 2005-06 is £143m.

6.5.43 Parliament's Audit Committee has reviewed the Service, and its recommendations are currently being implemented. The Service identified the need to review NHS transport arrangements, particularly those that relate to inter-hospital transfers. Only 10% of transfer work can be classified as 'emergency'. A dedicated inter-hospital transfer service would free paramedics and other practitioners to develop their emerging role as providers of mobile health care in the community, to improve performance on emergency work and to support Boards in National Framework for Service Change.

6.5.44 There may be headroom for patient transport but not for emergency transport. We appreciate any reduction in patient transport would be unpopular with some, but we feel that decisions on this aspect of the service should be based on clinical need, not social circumstances. A radical review of patient transport, including options for public transport, could drive substantial savings, even if they cannot be costed at this stage.

6.5.45 Like other emergency services, the SAS maintains a separate training college. We believe that there are common aspects to training undertaken in each of the emergency services and that serious consideration should be given to merging the disparate emergency services' training facilities into a central Scottish unit (see para. 6.1.28). This, we believe, will create further spending headroom.

National Services Scotland ( NSS)

6.5.46 NSS provides a diverse range of services from support services, such as the Central Legal Office to direct services such as the Scottish National Blood Transfusion Service. It also has responsibility for National Procurement. The organisation has one of the better corporate business plans and performance assessment frameworks, containing mostly SMART objectives, underpinned by business plans for each division.

6.5.47 The budget is currently £194.5m, and its principal components are £70m for Blood Transfusion, £26m for Practitioner Services, £25m for Information Services Division ( ISD) and £35m to cover the cost of secondees and the running costs of their programmes.

6.5.48 National Procurement was launched in November 2005 with a target to save £30m by March 2006 and £50m per annum by 2008. There is a growing argument that NSS should take over a range of activities currently provided by other Special Health Boards and/or programmes directly managed by SEHD. On several occasions, we heard the argument that all, or most of, the Special Health Boards should be consolidated into a 'beefed up' NSS, resulting in a substantial saving in administrative costs.

6.5.49 This proposal has the prospect of producing considerable headroom over the period of the next spending review, and we feel that the Department should undertake some detailed work on what might be saved through it.

NHS Quality Improvement Scotland ( QIS)

6.5.50 QIS is a Special Health Board set up to provide clear advice and guidance on effective clinical practice through review of evidence. It has a budget of £11.7m in 2005-06, most of which is spent on research and monitoring.

6.5.51 QIS seems to work reasonably well with its stakeholders. We were concerned that the burden it imposes on NHS Boards during periods of monitoring might be too onerous but we understand that QIS has agreed that a more joined-up approach could minimise such burden.

6.5.52 We could identify no headroom in the QIS budget but, if the organisation were included in any consolidation with Special Health Boards, there would be some longer term administrative savings.

State Hospital

6.5.53 The budget for the State Hospital for 2005-06 is £28.8m a year, producing a unit cost of £90,000 a year per patient. We understand this compares well with Rampton Hospital in Northamptonshire.

6.5.54 The planned reduction in patients will increase unit costs unless the budget can be reduced. We were advised that there could be potential savings in administration if the facility transferred to Lanarkshire Heath Board.

NHS 24

6.5.55 NHS 24 was established in April 2001 to provide a confidential 24 hour nurse-led consultation service where callers would have their symptoms assessed by experienced nurses and their questions about specific health issues would be answered. Following implementation of the new General Medical Services ( GMS) contract, NHS 24 provides access and triage to out-of-hours services provided by NHS Boards where appropriate.

6.5.56 Although it pre-dates the Partnership Agreement, NHS 24 underpins many of the commitments in the Agreement. Its budget in 2005-06 was £11.7m

6.5.57 The blueprint for NHS 24 failed, leading to a review of the organisation, which was completed in October 2005. The service is now being redesigned under a respected chief executive and a new chairman. Call backs are falling month by month. Since Christmas 2005, NHS 24 has had the facility to transfer 2,000 calls a day to partner Health Boards.

6.5.58 It is too soon after the review to challenge whether NHS 24 is now providing best value but it is important that the performance and delivery of NHS 24 continues to be the subject of regular and careful scrutiny and that the process of developing the NHS 24 service is continued.

6.5.59 The review team do not believe that there is any headroom available in this area in the short term.

NHS Education for Scotland ( NES)

6.5.60 NES was formed in April 2002 from three predecessor organisations:

• to provide education and training at a postgraduate level for doctors, dentists and clinical psychologists to enable them to become fully qualified while 'on the job'; and
• to provide education and training to these three and a range of other professional groups - allied health professionals ( AHPs), nurses and midwives, pharmacists - to enable them to adapt to the changing requirements of the NHS.

Its budget in 2005-06 is £289.2m.

6.5.61 Increasingly, NES is being asked to help with the education and training of non-clinical groups such as data protection officers, communications officers, biomedical scientists and audiologists, admin and clerical and estates staff. The implementation of Agenda for Change will increase the focus on these groups.

6.5.62 NES is currently working through its Strategic Work Plan for 2005-08. Pressures on the budget are coming from the new waiting times targets, which, the organisation feels, are extremely challenging and demand educational underpinning; rising standards and expectations; and medical and technical advances. Modernising Medical Care ( MMC), Modernising Clinical Careers ( MCC) and the Kerr Report will all have major impacts on the shape of service delivery. The Strategic Work Plan has four key themes:

• building workforce capacity;
• delivering educational support for national clinical priorities (cancer, coronary heart disease ( CHD), stroke, etc);
• developing an educational infrastructure for clinical skills, e.g. through e-learning, e-library and an NHS 'careers framework'; and
• strengthening partnership working, with NHS bodies, Higher Education and Further Education, the Academy of Royal Colleges, etc.

NES has indirect links with 15 of the PA commitments.

6.5.63 In 2005-06 the NES budget is £289.2m. About 87% is locked up in the salaries of trainee health professionals (including doctors, dentists and clinical psychologists) and in the payment of Medical and Dental additional cost teaching. After allowing for these, the balance available to support NES's work in 2005-06 is £43m. 'Discretionary' spend is around £7m.

6.5.64 We understand 1,000 doctors are being trained each year, when the need is for only about 600, and many doctors trained in Scotland leave immediately after they have qualified. If true, it cannot represent Best Value and opens up the issue of headroom. The average cost of training a doctor is upwards of £200,000. Quantifying the potential saving is not, however, straightforward. We recognise that trainee doctors are engaged in the delivery of health services as part of their duties. If the intake of doctors were reduced from the current level of 1,000 to around 600, the services delivered by the other 400 trainee doctors would have to be replaced in some way, although not necessarily by the same level of resource. We suggest that the Department looks carefully at how it might align the supply of trainee doctors with demand more closely, using this as a catalyst to change aspects of service delivery currently carried by trainee doctors. Modernising Medical Careers ( MMC) will also have an impact on this. The full impact is unlikely to be felt on the service for a number of years.

6.5.65 We also recognise that reducing the supply of doctors in training will reduce the demand for undergraduate medical training which may potentially create further headroom in parts of the Further Education funding budget in ETLLD.

6.5.66 Finally, there are a number of bodies involved in health education and training, including the Scottish Funding Council. We see scope to consider establishing a single organisation. This would produce additional headroom, which cannot be quantified at this stage.

NHS Health Scotland

6.5.67 NHS Health Scotland ( NHSHS) is Scotland's national health improvement organisation. Its purpose is to work with others to protect and improve the health and well-being of everyone living in Scotland and to reduce health inequalities. Its budget is £12m in 2005-06.

6.5.68 Despite the high priority afforded by the Minister to health improvement, this organisation is of low direct relevance to the PA and scores low on performance. The Annual Review, which we see as showing a degree of frustration by the Minister concerning its performance, required NHSHS to:

• produce a Delivery Plan agreed by SEHD by the end of March 2006;
• agree with each Health Board by end March 2006 an explicit statement explaining the contribution the organisation will make to the achievement of their delivery plans;
• agree with COSLA an explicit statement of how the organisation would support COSLA and councils to deliver health improvement outcomes;
• ensure that increased urgency is injected into all NHS Scotland's activities, 'making significant efforts to engage with all stakeholders to promote and raise awareness around health improvement and disseminating best practice'.
• ensure that all staff were fully engaged in the change agenda, particularly with regard to relocation and that NHSHS are organisationally equipped to deal with the implementation of their remit;
• put in place a Patient Focus and Public Involvement ( PFPI) framework;
• have a communications strategy in place, including advice about the status of the organisation's website; and
• work with Quality Improvement Scotland ( QIS) to maximise potential efficiency gains from relocation and co-location.

6.5.69 We cannot identify specific headroom in the budget of NHSHS. However, we believe there is potential headroom if health improvement activity were pooled. This could be done in two ways. First, NHSHS could be abolished and its functions carried out elsewhere - e.g. by a combination of the Health Improvement Division within SEHD and the Health Boards. Or, secondly, it could take over more of the health improvement activity from the direct management of SEHD. This would impact on staffing levels within the SEHD.

National Priorities

Coronary Heart Disease/Stroke

6.5.70 The coronary heart disease and stroke programme has high Ministerial priority. A strategy was drawn up in 2002 to tackle the problem and was reviewed in 2004. The Programme has an annual budget of £15m, which, from 2006-07, will transfer to Health Boards, where it will be ring-fenced. The programme is used to support projects, not to pay for routine patient care, which is met by Health Board budgets.

6.5.71 Performance is generally good. The Department is on track to meet the targets of reducing mortality by 60% by 2010 and 50% for stroke (using 1995 as the baseline). Waiting times have also fallen. For example, by 2007 no patient will have to wait more than 16 weeks from first seeing a cardiologist to intervention. The impending ban on smoking in enclosed public places will enhance performance further.

6.5.72 A reduction in the budget would fall on the Health Boards. As this programme has a high priority and the strategy is working, we could find no headroom.

Delayed Discharges

6.5.73 About 8% of all hospital beds are occupied by patients who are ready for discharge. Most are aged 75 or over. There is an explicit commitment in the Partnership Agreement to invest £30m a year for three years to provide 1,000 community and convalescent care places for people leaving hospital.

6.5.74 Performance in reducing delayed discharges has been good. An Audit Scotland report of June 2005 showed that delayed discharges had fallen by 40% from September 2000 to January 2005. The number of patients delayed for longer than six weeks had fallen by 45% over the same period. The latest statistics showed that between October 2004 and October 2005 there was a 12.3% decrease (from 1,798 patients to 1,576). 75% of people delayed in hospital are waiting for community care assessments to be completed or community care arrangements to be put in place. The length of delay has fallen from 149 days in January 2001 to 102 days in January 2005.

6.5.75 The current national target is for a 20% reduction in delayed discharges each year, but the Audit Scotland report criticised the way the target was set. It potentially penalised partnerships that were performing well; acted as a deterrent to doing better than the target; and led to a less challenging target for those partnerships that did not hit their annual target. This is because the national target for each partnership is based on actual reductions in the preceding year rather than the target figure. Also ring-fenced money for delayed discharges is not linked to achieving targets, so there is no financial incentive to hit the targets. We agree with Audit Scotland that the initiatives adopted by partnerships need better evaluation to assess whether they are delivering value for money. Evaluation is patchy across partnerships and most have yet to develop robust evaluative methods.

6.5.76 We understand that there has been a change to the targets for delayed discharges as partnerships have been advising that the 20% year on year reductions are not sustainable beyond April 2006 for all patients ready for discharge. The new targets are to:

• reduce all delays over six weeks by 50% by April 2007;
• free up 50% of all beds occupied by delayed patients in short stay (acute) beds by April 2007;
• reduce to zero the number of patients delayed over six weeks by April 2008; and
• reduce to zero people delayed in short stay beds by April 2008.

6.5.77 We feel that there may be some headroom in this programme if policies on preventing people going into hospital prove effective. The question, however, is at what point in time the pump priming afforded by this budget should be stopped. A reduction in the £30m would certainly impact on council/Board partnerships. We are reluctant to put a figure on headroom until an evaluation of the programme is undertaken and we suggest that this be the subject of a Best Value review.

Drug Misuse Expenditure by NHS Boards

6.5.78 Drug Misuse funding will transfer to Justice Department for 2006-07. In 2005-06, £25.7m was allocated to NHS Boards for drug treatment services, with over £6m funding miscellaneous projects and initiatives, including research and communications activity.

Audiology Service Modernisation

6.5.79 This programme has an annual budget of £6m, fulfilling a specific PA commitment to allow the issue of digital hearing aids and support where they are the most clinically effective option. The commitment has now been met.

6.5.80 Some see an ongoing need for this service, particularly if waiting times for hearing aids are to be reduced. We have been informed that recurring funding should be £5.3m, made up of £4.4m for allocations to Boards (£2.6m for staff, £1.7m for aids) and £0.9m for a BSc in Audiology. However, if the PA commitment has been fulfilled, the £6m represents headroom from 2006-07 onwards.

Diabetes

6.5.81 There is a small budget for diabetes - £1.3m in 2007-08 - to support the Diabetic Framework, published in 2002 and reviewed in 2004. The funding supports specific projects.

6.5.82 There is little evidence to judge the returns from the expenditure. However, there are ramifications across other illnesses, particularly CHD and stroke, arising from diabetes and as the condition is increasing in Scotland, there is strong logic for keeping the programme intact. We see no headroom.

Centre for Change and Innovation

6.5.83 The Centre for Change and Innovation ( CCI) was established in November 2002 to spread good practice in service redesign, fulfilling a specific PA commitment. SEHD has set up a new Delivery Group to scrutinise the performance of Health Boards against local delivery plans to ensure that targets are met and, if necessary, to intervene. The Group brings together, into a single streamlined team, the National Waiting Times Unit, the CCI, the Performance Management Division and others. The role of the CCI within the new Group will not change. Its work is grounded in a solid business plan and it has an informative website

6.5.84 The CCI has a planned budget of £23.4m in 2007-08, split roughly between programmes (£15.9m), intervention funds (£1.5m), spreading good practice (£0.75m) and 'other' (£1.9m). £2.3m has been identified as an 'easy savings cut' in 2006-07, and almost £0.1m has been unallocated so far for next year.

6.5.85 The 2005-06 budget was underspent. £6.1m has already been returned and another £0.5m is due to be returned. Underspend is not expected in the future. The creation of the Delivery Group is to be cost neutral, and funds will be reallocated to achieve this.

6.5.86 A reduction in the budget would reduce the CCI's capacity to intervene and would impact on programmes, some of which, we are told, would have to be decommissioned. Therefore, key targets would not be met - e.g. if the diagnostic programme was stopped, eight key targets would be missed. Nevertheless, as CCI activity is currently incurring expenditure of £16.8m a year, it could be argued that anything in excess of this sum represents an improvement over current activity. This would be a matter for the Department itself to determine, having regard to its overall priorities. We see headroom, therefore, of around £6.5m a year in this budget.

Education and Training

6.5.87 The planned budget for this programme in 2007-08 is £154.7m. Most goes on the education and training of new nursing resources. An improved focus on the key outcome (nurses graduating and staying within NHS Scotland for a period of, say, five years post qualification) would lead to better value for money from this budget.

6.5.88 Trainee attrition rates are currently 28%, against the average of 22% for all medical training in Scotland and 17% for nursing trainees in Wales. The pressure to add 12,000 new nurses into NHS Scotland by 2007 generated too many trainees for the available training infrastructure, resulting in a fall in the perceived quality of student training and mentoring during the three year programme.

6.5.89 The current annual intake of nursing trainees is around 3,000, producing an average 2,200 graduates from each three year programme. 'Leakage' of newly trained graduates continues to occur during the first five years post qualification, so maintaining pressure on the supply (training) side. By focusing on reduced attrition (down to 15%) and better post-graduation retention, and reducing demand for new graduate nurses to 2,000 each year, annual savings of up to £26m could be achieved.

Primary Care Services

General Medical Services

6.5.90 Pay accounts for over £4bn of spending within NHS Scotland. Large increases in pay have resulted in recent years from three strands of 'pay modernisation' - the new Consultant contract, the new General Medical Services ( GMS) contract and Agenda for Change (covering ancillary professional staff). We have been told that the first two of these mean British GPs and hospital doctors are now the highest paid in the world outside the USA, and only Australian nurses and US nurses are better paid than their British equivalents. Additionally, the New Deal for Junior Doctors and the European Working Time Directive have substantially reduced the hours that junior doctors require to work. In simple terms, the immediate impact is that a roster that might have required five doctors in the past now requires eight. The implications are considerable for the additional staff required and the financial resources required by Boards.

6.5.91 The GMS contract has been designed to encourage recruitment and retention in the GP workforce through better management of GP workload, investment in primary care infrastructure and the transfer of responsibility for out of hours services to NHS Boards. GPs now have significant new money, with the contract giving an average uplift in investment of 11% each year for the next three years. (This related to the initial GMS contract, i.e. 33% over the three years ending in 2005-06.) The new contract provides a practice-based budget, allowing practices flexibility in how they deliver services including best use of skill mix. GP practices are also able to access significant additional earnings opportunities if they contribute to the expansion of the primary care sector by developing the range of services available to patients in the community.

6.5.92 The contract links GP payments to the quality of care they provide for patients through the Quality and Outcomes Framework ( QOF), under which GPs are rewarded for the volume and quality of the work done. This framework is designed on a strong evidence base to reward improvements in clinical and organisational standards, while giving GPs professional autonomy to determine how to organise their work to achieve these standards. It is monitored through a system of review visits backed up by electronic data on performance.

6.5.93 The programme budget is large - £662.2 million in 2006-07 - although in practice the Boards pay GPs and have to meet the costs of the contract from their Primary Care Allocations and their wider Unified Budgets. In future, Primary Care allocations will be subsumed within Unified Budgets to give Boards maximum freedom of action.

6.5.94 The programme is UK wide and the contract was negotiated at UK level. Concerns were expressed to us that the initial contract had been poorly negotiated with large increases for GPs in return for inadequate increases in productivity. The QOF has been criticised for being too undemanding. Many of these concerns were taken into account in negotiating the revised contract implemented from 1 April 2006.

6.5.95 Scottish Ministers have some practical limitations to their freedom of action on negotiating the UK-wide GMS Contract with much of the agenda being set by Whitehall. However, we are unsure whether there would be better or less value for money if Scotland went alone in negotiations in the same way that Scottish local authorities broke away from UK negotiations in recognition of devolution. There would be significant costs in resourcing separate Scottish negotiations and a risk that no better value for money could be achieved, with the profession no doubt demanding parity with England as a minimum outcome. Nevertheless, it is essential that the negotiations take sufficient account of Scotland's health needs where they differ from England's, and the agreement for April 2006 has allowed for some variation between the four UK countries to pursue separate policy initiatives without deviating from an overall UK contract.

6.5.96 NHS Boards do appear to have implemented the new contract well, given the scale of the task, and each Board has now submitted a benefits realisation plan. However, as the contract is still in implementation phase, we feel it is premature to undertake a formal evaluation.

6.5.97 The only Partnership Agreement commitment specific to the GMS contract is the 48 hour access guarantee. However, much of the PA will not happen if there is no contract to procure general medical services.

6.5.98 For 2006-07, there is a freeze on inflation in the main contract, giving a real saving of 2.5%. In addition, the QOF has been radically modified and should improve value for money. The British Medical Association ( BMA) has accepted this. Therefore value for money is being achieved.

6.5.99 An additional £12.6m was also invested in the contract in 2006-07, directed towards services which contribute towards Delivering for Health. Although these particular services are for one year only, the expectation is that the resources would be redeployed, along with any new money available for future years, in implementing the Delivering for Health agenda.

Pharmaceutical Services

6.5.100 The PA commitment for pharmaceutical services is to protect the status of community pharmacists. The programme has a budget of £125.4m in 2005-06 to pay community pharmacists, dispensing doctors and appliance suppliers. This programme does not cover the budget for drugs, which is in the NHS unified Board budget.

6.5.101 1,150 pharmacies currently receive payment, and the average per practice is about £100,000. There are so few practices operating outside the NHS, that the SEHD does not keep a record of them.

6.5.102 The traditional payment to pharmacists was based on (1) a fee per prescription; and (2) a fee for a high street presence. However the new contract will freeze this and there will be transitional phasing to a new method, under which there will be four different services, and each will be paid for separately:

• an allowance;
• an item of service for acute prescription;
• a capitation fee for minor ailments service; and
• a chronic medication service (also capitation fee).

6.5.103 The whole pharmaceutical service is paper based. As a consequence of the e-pharmacy programme, the savings in the New Staffing Structure ( NSS) Practitioner Services Division ( PSD) (not the Pharmaceutical Services Programme) are £0.5m in 2007-08; £2.7m in 2008-09; and £3.9m in 2009-10. These are updated figures from NSS, following the NSS Accountability Review. NSS points out that these need to be seen in the context of the wider five year development programme for PSD, which might need additional investment in other key areas. In our view, this assumes that there will be development following the next spending review, and we would see the above as headroom.

6.5.104 Reductions in future years would come from a smaller number of pharmacies, and we would suggest that a Best Value review of this issue is undertaken to ascertain whether the scope for further savings.

6.5.105 We recognise that any savings from the pharmaceutical programme might be offset by increases in expenditure following the review of prescription charges for people with chronic medical conditions, and for young people in full time education or training (a Partnership Agreement commitment). A consultation paper on this issue was published in January with a closing date for comments of 30 April 2006.

General Dental Services

6.5.106 The General Dental Service ( GDS) provides the majority of dental services in Scotland. General Dental Practitioners ( GDPs) are independent contractors who work under existing NHS arrangements, treating children and adults under a hybrid capitation and continuing care arrangement, supported by a service fee structure. Some GDPs only undertake private work but many undertake a mix of private and NHS treatment.

6.5.107 The two issues for SEHD here are the very poor state of oral health in Scotland, compared with the rest of Europe; and access to dental services in the community.

6.5.108 There are several specific PA commitments in the area of dentistry - free dental checks for all by 2007; increasing the number of dentists; pursuing preventive dentistry; and establishing an outreach training centre.

6.5.109 SEHD has undertaken reviews of the general dental service - for example, of recruitment and retention and, in 2003-04, a whole service review. This covered tackling oral health; services for children and young people; patient led standards; a strengthened salaried dental service; simplification of remuneration; better support and incentives for practices demonstrating commitment to the NHS; support to encourage recruitment and retention of all dental team members; better training; and closer integration of dentistry within the NHS through a national framework with local flexibility.

6.5.110 The NHS is retaining 90% of dentists, but in recent years dentists have been shifting their business to the private sector, where they say they can earn more. The main thrust of the programme, therefore, is to ensure there is an adequate supply of dentists in the NHS. It may be difficult to persuade those who have gone private to return to the NHS. An action plan resulting from the review is currently being implemented, and 135 dentists are currently being trained. More recently, dentists from Poland have arrived to supplement the number working in Scotland.

6.5.111 Expenditure on GDS traditionally ran at around £200m. The review resulted in additional money in SR04 of around £150m a year. This would allow 400,000 additional patients to be registered. In November 2005, the Deputy Minister announced that 80% of the extra money would go to NHS dentists, not those who have opted out. The practices eligible to receive the money will need to have at least 500 registered NHS patients per dentist. Of these, 100 will have to be fee paying adults. Practices earning £50,000 or above per dentist will receive 100% of the new allowances. Claw back will kick in if practices do not maintain or increase the existing profile of their practice;

6.5.112 The Deputy Minister also announced that the general dental practice allowance (for premises, health and safety, staffing support and information collection and provision) was to be increased from 6% to 12% of total NHS earnings for dentists who meet the NHS commitment criteria. The potential, therefore, is for a practice to receive a practice allowance of £26,000 (the average figure).

6.5.113 The budget for the General Dental Services programme is large - £253.6m in 2005-06. Increasing charges from 80% of the cost of treatment to 100% would bring in £10m to the NHS. There would also be unintended headroom if there was a failure to recruit dentists. We are aware of the political sensitivities concerning this suggestion. Nevertheless, there is potential headroom of £10m in this programme. Further potential for headroom might come from examining the spending on training for dentists.

General Ophthalmic Services

6.5.114 The budget for this programme is £50.8m in 2005-06. The PA commitment is to provide free eye checks for all by 2007. Progress towards this target is reasonable with more people taking up eye checks each year and more vouchers being used.

6.5.115 We asked whether free eye checks might produce opportunity savings from elsewhere and were advised that ISD were looking at the impact on GP work, which would be less, and at hospital outpatient departments, where attendances might not be required if best use is made of optometry on the high street.

6.5.116 We doubt whether there is much headroom in this budget. Indeed, free eye checks are likely to increase the pressures.

Miscellaneous Services

Research Support

6.5.117 This programme was established in 1988 to improve control over the research spend in NHS Scotland. It covers the NHSS costs incurred in hosting research. This is primarily the salary and related costs of the consultants in NHSS undertaking research into defined and agreed projects. It also supports (in part) research carried out by external bodies such as charities and NDPBs like the Medical Research Council. Planned programme expenditure in 2007-08 is £47.6m.

6.5.118 Like many other programmes and funds in the SE, this acts as a seed corn fund to attract other cash into the NHSS. It has been estimated that every £1 of support through this fund generates £6 of direct research funding through charities and other research organisations.

6.5.119 This spending contributes towards continued advances in medicine, leading ultimately to improved services for patients. It also provides an incentive to leading medical practitioners to remain (or to relocate) in Scotland, improving the overall quality of economic output.

6.5.120 There is no specific PA commitment relating to Research Support, but there is an obligation on the SEHD, in terms of a UK-wide Concordat, to meet the indirect costs of supporting high quality research funded by their research partners. These funds also meet the Ministerial commitment for Scotland's participation in the UK Clinical Research Collaboration.

6.5.121 Grouping resources under a central budget heading ensures that funds are properly targeted towards UK/ NHSS agreed areas of therapeutic research. Quality of output is ensured by the requirement that programmes demonstrate congruence with overall research policy and that research undertaken is subjected to thorough peer review.

6.5.122 The bulk of this funding is dispersed to NHS Boards and accounted for in the overall level of remuneration received by consultants and the other medical staff supporting the research programmes. We note that there is considerable competition for funding, with research applications amounting to nearly five times the budget available.

6.5.123 In theory, the whole of this budget represents headroom. However, as the vast bulk goes in contributions to NHS Boards to enable them to pay the overall salaries of their consultants, removing this source of funding would simply force NHS Boards to look elsewhere for money to cover their commitment to consultants. Given that there is competition for funding and that this represents 'value adding' spending, we believe that reductions in these programmes would not represent Best Value and we see no headroom in either.

Information Technology - Revenue

6.5.124 Productivity in the NHS needs to be improved, and effective use of IT is a recognised driver of it. It instils discipline in the creation and management of information and changes behaviour, particularly with regard to improvements in the level of customer service.

6.5.125 IT Revenue is a large programme. The budget in 2005-06 was £35.3m, with planned expenditure of £65.3m in 2006-07 and £100.3m in 2007-08. We concluded that the current IT revenue budget was at best a rough estimate. This resulted in funds being allocated that are well above what can be productively deployed within the current programme. Base revenue spending in NHSIT (including commitments to projects already underway) is estimated at around £40m for each of 2006-07 and 2007-08. This leaves potential headroom of £25m in 2006-07, as it is unlikely that properly scoped projects with an appropriate cost benefit analysis could be presented in time to incur any material spend in that period. We also believe that short term efforts should be focused on getting more from the current IT infrastructure and planned programme spend within the core budget of £40m, which lends support to the argument that there is further headroom of up to £60m in 2007-08.

6.5.126 IT investment in the NHS should be based on a clear strategy, which supports the objectives of Delivering for Health. There should be greater emphasis on best practice and the strategy should take account of leading examples from abroad.

NHS Central Register

6.5.127 The central register, an index synchronised with the CHI, is maintained at the cost of £1m per year. Almost all goes on people or people-related costs. A review was undertaken of this adjunct to NHSS three years ago, and the decision taken to retain it. The review team sees no headroom.

Glasgow Hostel

6.5.128 This programme aims to decommission large scale homeless hostels in Glasgow and replace them with a range of appropriate accommodation and support services. The budget is £5m a year.

6.5.129 The programme is relevant to the PA, but we understand performance is low. An independent evaluation of the Glasgow Homeless Partnership is currently being conducted by Stirling University. We were not persuaded this programme represents Best Value. Depending on the evaluation, the programme could be dropped for the next spending review, with savings of £5m a year (6.7.30).

Distinction Awards

6.5.130 Distinction Awards are a legacy of 1948 when Nye Bevan introduced them as an incentive for consultants to come into the NHS. There are two sets of awards covered by the programme.

6.5.131 Distinction Awards ( DAs) are paid to consultants with an international reputation. The assumption is that without these awards, consultants will go elsewhere and Scotland will lose leaders in particular areas of health. This element accounts for £19m of the budget. Most of the money is earmarked for consultants who have already received awards. It is paid annually and is pensionable.

6.5.132 There are Discretionary Points ( DPs). These are payments given to consultants for 'putting in good work every day'. One point is worth £3,000 a year, and there can be a maximum of eight points. Thus, those eligible can earn up to £24,000 on top of basic salary. The scheme is administered at Health Board level and we have the impression that, in some Boards at least, the scheme has become a 'buggin's turn'. This element accounts for £1m of the programme budget. Payments are made from the Boards' budgets.

6.5.133 Awards are recommended by the independent pay review body for doctors and dentists, and no Minister in the UK has rejected a recommendation from this body.

6.5.134 We are not impressed by the operation of this programme. We understand the view that the scheme is important as an incentive to retain consultants with an international reputation, but cannot understand why the scheme was not negotiated out, given the very substantial pay increases flowing from the consultants' contract.

6.5.135 The difficulty in disbanding the scheme is that it applies in other parts of the UK, and there appears to be a general reluctance to antagonise the BMA. We understand the budget is being frozen in Northern Ireland, and this may represent an opportunity for the Minister to raise the whole issue again with the other health Ministers. The scheme could be more readily disbanded if all four countries acted in unison.

6.5.136 We do not accept that the scheme is giving Best Value and, notwithstanding the views of those who support it, we feel that it should be closed down, providing headroom of approximately £20m a year.

Capital Investment

Background

6.5.137 The NHS capital budget has grown dramatically since 1997 (when it was £136m). The Draft Budget shows it rising to £532m in 2007-08. There is £13m in the CUP available for spending in 2007-08, and the net underspend for this financial year is £28m. The 2005-06 Autumn Budget Revision reduced the capital budget for that year from £425m down to £296m, principally due to a substantial capital to revenue switch of £118m.

6.5.138 SEHD has managed to ensure this high level of spending by running a brokerage system among Health Boards and between years, to ensure that potential overspends in one Board area are offset by underspends in another. The high levels of growth in capital spending in the NHS seem to have been driven at political level, rather than arising from a bottom up analysis of the NHS requirements on capital.

6.5.139 NHS Boards are to receive £321m in 2007-08, allocated broadly on Arbuthnott principles, but with adjustments for cross-boundary flows and the top-slicing of 10% for regional specialties. Other spend planned in 2007-08 relates to the following:

• £50m to improve medical equipment (in light of a critical report from Audit Scotland);
• £45m to improve primary care facilities and dental practices - to reflect some of the key challenges within the primary care estate and the implementation of the Kerr report in moving to more primary care based services;
• £40m of additional IT investment (over and above the £100m already identified in the IT Level 3 budget line) for e-health and the Picture Archiving and Communications System ( PACS); and
• £48m to cover elements of the new State Hospital at Carstairs and a number of major refurbishment programmes outside NHS Board allocations - e.g. the refurbishment of Dumfries and Galloway Royal Infirmary.

6.5.140 The flexibility of transferring funds between capital and revenue ends with effect from 1 April 2006. This will make it more difficult to spend the current level of capital budget.

Allocation to Ministerial Priorities and Performance Assessment

6.5.141 The only specific mention of capital or the NHS estate in the PA is to developing community health centres. In the latest Health Department Letter ( HDL) setting out the Ministers' Key Objectives, Targets and Performance Measures, there is no mention of the efficient use of capital. The Infrastructure Investment Plan, published in April 2005, sets out the Executive's investment strategy across a range of sectors with some reference to health

6.5.142 It is difficult to assess whether the NHS Capital Programme has performed well overall. Individual major projects do go to the Capital Investment Group and are approved at Outline Business Case ( OBC) and Full Business Case ( FBC) stage, with some Gateway Reviews undertaken. There is therefore a process in place to ensure that these large projects are delivering Best Value.

6.5.143 However, the nature of infrastructure spending in the NHS has changed dramatically since 1997. Major new build hospitals funded through revenue and PPP were the major focus of interest at first. Now, however, the emphasis is on refurbishing the existing estate. Work is beginning on the kind of new facilities which will be required to make the shift required in the Kerr Report from acute to primary care.

6.5.144 The capital budget to Boards has been allocated on an Arbuthnott formula basis since 2000-01 - previously it had been an application process. Given that the Arbuthnott formula is broadly population driven, it does not reflect the particular needs of the capital estate or necessarily areas of the greatest service re-configuration. With the abolition of Trusts, SEHD hope that the Boards can use their capital budgets more effectively across the NHS. The new Local Delivery Plans should feed into the Property Strategies, which will then drive Boards' capital plans. These will then be the subject of a Programme Initial Agreement between Health Boards and the SE. The Programme Initial Agreement ( PIA) will be a five year rolling capital plan. This process for monitoring Board's management of the NHS Estate is in its early stages, but we welcome the direction of travel.

Headroom

6.5.145 We see considerable headroom in the NHS Capital budget. We estimate this to be at least £60m, £130m and £150m in the three years of the spending review. There are a number of key reasons underlying our assumptions which would suggest that a level of £532m a year is unsustainable in the medium term:

• There is a considerable question mark over whether the Boards can afford the revenue costs of the level of capital expenditure envisaged in 2007-08.
• In 2007-08, there will no specific Partnership Agreement commitments outstanding.
• A number of PPP schemes are under development, but their costs should score against revenue.
• Legislation has passed through Parliament to allow NHSLIFT⁹ type projects - the hub initiative and these projects are also likely to score as revenue.
• The constraints on switching from capital to revenue will also affect the level it is sensible to budget for in coming years.

6.5.146 We recognise that there are a number of major schemes to be included in any future capital programme. A public commitment to £100m in public capital has already been given to support the new Queen Mother's Hospital in Glasgow. The capital costs of the State Hospital at Carstairs are now, we understand, estimated at £77m.

6.5.147 The following specific areas should be considered for potential headroom:

• a slowing down of directly funded investment in GP and Dental practices given the £65m invested this year and next;
• a reduction in the additional investment required on medical equipment, again given the £80m planned spend this year and next. SEHD should consider whether it should be funding the replacement of medical equipment itself, or whether this should come out of Boards' planned allocations, given the large increases in Boards' budgets between 2004-05 and 2007-08;
• the PACS system should be in place by 2008-09;
• only £12m is assumed as receipts from surplus assets in the Budget for 2007-08. This is an underestimate. We understand the actual figure is higher, and Boards should be encouraged to take a more aggressive approach to releasing surplus assets;
• £13m of additional funds earmarked for NHS Capital are in the CUP along with an underspend for this financial year of £28m; and
• a review of the method of allocating capital to NHS Boards, taking into account the developing thinking around Programme Initial Assessments. Property information in the NHS is comparatively weak, although action is being taken to address this. The SEHD should push to review Boards' property strategies based on a rigorous analysis of needs and the most efficient form of procurement. This would also identify the levels of expenditure likely to be classed as capital and revenue respectively, so that budgets can be prepared more accurately.

Other Health Services

Research

6.5.148 This programme covers direct grant funding to Scottish based research and development programmes. As with the Research Support Programme (6.5.117), this programme is heavily oversubscribed, by a factor of four. There is no headroom in this budget.

Welfare Foods

6.5.149 This programme has a budget of £11m in 2006-07 - reduced from a provisional budget of £15.5m to take account of actual spend. It is a UK-administered benefit, which SEHD is funding but does not control as it is demand-led. The programme was renamed 'Healthy Start'.

6.5.150 We were advised the programme makes a difference to those who benefit from it and it has a high political priority. We do not see any headroom.

Mental Health Act Implementation

6.5.151 This programme covers the implementation of the Mental Health Act. Together with the programmes for Mental Well-being and Mental Health Specific Grant, it relates to the PA commitment on improving community mental health. The three programmes are part of a national programme, launched in October 2001, which has ensured that robust infrastructures and ring-fenced funding streams have been established to eliminate stigma and discrimination, help prevent suicide and promote and support recovery. We were advised that collectively these programmes have high level Cabinet commitment because of the incidence of mental health problems in Scotland.

6.5.152 The budget in 2006-07 is £20.553m, broken down as follows:

• £4m for the new Mental Welfare Commission (a statutory body for patients subject to detention);
• £7.5m for the Mental Health Tribunal for Scotland ( MHTS), the main cost driver of which is the number of hearings (4,000 a year). These are 'demand led';
• £5m goes to Health Boards to support Mental Health Officer ( MHO) costs (there is also £13m in GAE for local authorities);
• £0.6m is earmarked for research, training, publications, etc;
• £0.5m is for the children and young people mental health framework, intended to assist local health, education and social services in planning and delivering integrated approaches to children and young people's mental health and well-being;
• £0.35m is for managed care networks, e.g. the Forensic Mental Health Managed Network. We understand this is to be reduced by £50,000 to create internal headroom as it is not spending £300,000 a year;
• £0.65m to other national initiatives - e.g. crisis pilots of direct relevance to the Partnership Agreement, such as improving mental health information, which is one of the weakest areas in the mental health; and
• £1m is unallocated. This is almost a reserve for the MHTS. If it is not spent, SEHD will ask the MHTS to hold it.

Planned expenditure in 2007-08 is £21.1m.

6.5.153 We appreciate the high priority given to this programme and see little headroom. We are doubtful whether the unallocated provision of £1m would be a recurrent saving, as the MHTS is still in its early stages and will need to bed down before an accurate budget can be produced.

Health Improvement

6.5.154 Health Improvement is the Level 2 programme description. However, there is also a Level 3 programme bearing the same name. We feel a better description of the Level 3 programme might be 'health improvement strategy', as there are other 'health improvement' programmes, such as drug misuse, blood borne viruses, flu prevention, tobacco and smoking and mental well-being. Furthermore, there are other Level 3 activities listed under other Level 2 programmes - e.g. NHS Health Scotland.

Health Improvement

6.5.155 Planned expenditure on this programme is £46m in 2007-08, and spending varies from project to project in different years. The programme is extremely diverse and has a whole range of very specific targets and aims. It is linked to a large number of other policies and contributes significantly to other policy areas - e.g. Education (Sure Start, Health Promoting Schools) and Closing the Opportunity Gap.

6.5.156 The principal performance measures which can demonstrate progress are Mortality Rate, Life Expectancy and Healthy Life Expectancy, and much of the measurement over time is carried out by NHS Health Scotland.

6.5.157 The Minister has said that health improvement is his highest priority. Although there may be some frustration at the speed of progress, we were impressed by the strong commitment of the officials in SEHD to tackling Scotland's poor health record.

6.5.158 In light of this, we see no headroom available if the budget is to achieve its objectives. We feel, though, that as projects come to the end of their life, some headroom could be created, perhaps to allow other initiatives to be funded.

6.5.159 We also see room for improving the link between the PA commitments and the budget and that there is a distinct lack of Net Present Value and/or Cost Benefit Analysis work in health improvement. We also feel that health improvement would benefit from the application of Best Value. Our comments under the NHS Health Scotland programme about consolidating health improvement work are relevant here.

Blood borne virus

6.5.160 This programme has a planned budget of £9.5m in 2007-08, mainly distributed to NHS Boards to assist in the prevention of blood-borne viruses, including HIV and Hepatitis C. We could not identify headroom.

Flu Prevention

6.5.161 The planned budget for this programme is £3.6m in 2007-08. We could not identify headroom.

Tobacco and Smoking

6.5.162 Of the £9.8m budget in 2005-06, £5m is allocated to the Boards for smoking cessation activities. Funds are also provided to NHS Health Scotland for smoking-related health promotion activity, funding for cessation research, miscellaneous pilots and other projects. £3m is also available to fund implementation of the smoke-free legislation, including funding to local authorities for enforcement and a contribution to research on the impact of the smoking ban.

6.5.163 The budget for 2006-07 will rise to £11.8m and for 2007-08 to £13.8m. We are not certain whether these increases of 20.4% and 17.0% will afford headroom. Budget increases of £2m in each year represent additional activity to support increased demand for smoking cessation services. Implementation of the new legislation will account for these increases. We are reluctant to suggest headroom in what to date has been a successful programme.

Mental Well-being

6.5.164 The budget is £5.9m in 2005-06, broken down as follows:

• £3.1m to local authorities as contributions to community health partnerships, mainly for suicide prevention (Each council gets £60,000, plus a population uplift.);
• £2m on levering MWB activity from other agencies - e.g. Communities Scotland;
• £0.5m on research and evaluation;
• £0.3m on communications; and
• £0.2m on programme management (conferences, etc).

Planned expenditure will rise to £9.3m in 2006-07 and £9.5m in 2007-08.

6.5.165 Feedback from councils on this programme is good. Most will spend their full allocation by the end of the next cycle. If they do not, the money will be returned into a central pot or will be redistributed. Each council now has two trained suicide Anti Social Investigations Support Team ( ASIST) posts.

6.5.166 The Executive target is to reduce suicide rates by 20% by 2013. The programme will not itself deliver this target. It depends on other agencies. The programme will be reviewed in 2007 after five years of operation. However, all the target hits show that the policy is working. Indeed, other governments are following Scotland's lead in mental health.

6.5.167 We believe it will be difficult for Ministers to reduce this budget and that there is unlikely to be scope for headroom.

Sexual Health

6.5.168 The bulk of this budget of £5m is allocated to the Health Boards to improve frontline provision. We could not identify any headroom.

Drugs Misuse

6.5.169 Drug Misuse funding has been transferred to the Justice Department for 2006-07.

Community Care

Scottish Commission for the Regulation of Care

6.5.170 The Commission was set up in 2002 with the general duty of furthering improvement in the quality of care services provided in Scotland. It is funded through regulatory fees (£11.3m in 2006-07) and grant from the Scottish Executive (£17m, with Health, Education, Development and Justice Departments all contributing). The policy intention is that the Commission should be self funding from 2006-07 onwards. The Commission is not referred to in the PA, having pre-dated it.

6.5.171 The Commission's key target is to carry out inspections at certain frequencies. It has met its target in each of the four years of its existence. There have been some criticisms of inconsistency in approach to inspections across the organisation, but the Commission is aware of this and has produced guidance for staff on both consistency and interpretation of the Act.

6.5.172 Headroom is likely to arise only if there is a reduction in regulatory activity - e.g. in housing support or care homes. This would be very much a political consideration. It is difficult to quantify the amount that would be available. £1m might be achievable but only after consultation with a wide range of stakeholders. We have not made allowance for headroom.

Mental Health Specific Grant

6.5.173 MHSG is a long running programme. The annual budget is £14m (70%) with councils contributing about £6m each year. Current administration arrangements have been in place since 1991. The budget is administered by local authorities for specific community- based mental health projects - e.g. drop-in centres, education and employment schemes, training, support and development workers, carer and advocacy support, befriending schemes, rehabilitation services, etc. About 400 organisations benefit. The scheme is to move to a three year cycle in line with Scottish Executive and local authority budget processes.

6.5.174 The budget has not been uplifted for inflation since 2003, but we were advised that there would be significant disruption if it were reduced or abolished, and that this would lead to considerable protest from councils and MSPs.

6.5.175 As some councils are more robust in the evaluation of projects than others, we found it difficult to get a feel for whether any headroom was likely. However, the programme has already been reviewed, positively by the previous Minister for Health and it is supported by Parliament's Health Committee. We suspect therefore that there is no headroom available.

6.6 ENTERPRISE AND LIFELONG LEARNING

Background

6.6.1 This portfolio's primary role is focused on Scotland's economy. It will spend over £2.8bn in the final year of the current Spending Review (2007-08), with the bulk (£2bn) on further and higher education.

6.6.2 We met with the Deputy First Minister and Minister for Enterprise and Lifelong Learning, his Deputy Minister and the Head of Enterprise, Transport and Lifelong Learning Department. We interviewed ten Group or Divisional Heads, covering 21 out of 31 budget lines (98.6% of the budget). All wholeheartedly welcomed our scrutiny and promptly responded to requests for supporting information. We also met with the Chief Executives of the Scottish Further and Higher Education Funding Council, the Students Awards Agency for Scotland and Scottish Enterprise as well as representatives of Audit Scotland

6.6.3 The Department's programmes contribute significantly to the four cross-cutting themes, above all to the Executive's top priority - growing the economy. From our short interaction with their senior staff, we were struck by the relish with which they faced such responsibility and the esprit de corps exhibited in the Department.

6.6.4 Excluding local government, the Department's budget is the biggest after the Health Department and is readily broken into blocks of related expenditure - Further and Higher Education (£1.9bn); Enterprise Agencies (£570m); Regional Selective Assistance and European Structural Funds (£190m); and other ELL budgets (£143m).

Key Findings

6.6.5 ELLD and the Scottish Funding Council for Higher and Further Education should strive to secure value for money in the procurement of places and, more generally, from the financial assistance given by the Executive to Higher Education Institutions and Further Education Colleges.

6.6.6 ELLD should ensure that Ministerial direction to Scottish Enterprise ( SEn) and Highlands and Islands Enterprise ( HIE) clearly specifies their roles in strengthening Scotland's economy, their priorities, their principal clients, objectives and targets and the performance management framework to be applied. This should include a model to measure their impact on the economy.

6.6.7 The strategic role of ELLD and the delivery roles of SEn and HIE should be clearly delineated in the division of responsibilities and budgets assigned by the Minister to them.

6.6.8 We concluded there is potential headroom of £127.4m if all our recommendations and assumptions were to be accepted. Several recommendations invite the SE to review current arrangements to verify our findings. Table 16 summarises the range of financial consequences of our recommendations including headroom which our recommendations point to as achievable.

Table 16

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

Programmes

Scottish Further and Higher Education and associated expenditure

6.6.9 As the largest budget in the Department, FE and HE expenditure merited a proportionate allocation of our time, not only in extending interviews beyond SE budget holders to the Executive Agency and NDPBs, but in study and background research on the historical and constitutional position of HE/ FE and the relationship between the various administering bodies. Time constraints ensured that we remain relative novices, but our experience of organisation and public service enabled us to pose questions of the effectiveness of the spend, some on matters which have been debated endlessly before we entered this arena!

6.6.10 We ingenuously thought that a Minister with £2bn of public money to distribute to Scottish colleges and HEIs would have a more direct say in not only how many places he could buy, but also what kind of places - and where and at what price. However the constitutional position and the principle of academic freedom have created a complex array of intermediaries and lines of accountability leading from Further Education Colleges and/or Higher Education Institutions through to the Funding Council, from there through ELLD to Ministers and to the Scottish Parliament, with additional agencies such as the Student Awards Agency for Scotland and the Student Loan Company. We were left with the question - 'does it have to be this way?' A review of the governance process might point to a much simpler structure which still protects the principle of academic freedom.

6.6.11 In such an historical and constitutional context, we perhaps should have appreciated that Ministers and their officials have to tread warily. But the challenge presented to the Scottish colleges and the Higher Education Institutions both by ELLD and via the SFHEFC seems to us somewhat genteel. The public purse contributed 70% of college income in 2004-05 and made additional grant in aid of £38m available to colleges to secure their financial position. What does it get in return? Progress with mergers and collaboration seems dictated from the bottom up and painfully slow. Mergers are not a universal remedy, but the potential for shared services in procurement, HR, financial administration, etc must be substantial and capable of being on an all Scotland basis. We were given details of the progress of the Ministerial review of Scotland's Colleges announced in June 2005 and due to report in February 2007. It will examine the strategic future of FE over the next ten to 20 years. While surprised that only now is the optimum size of FE in Scotland being considered, we nevertheless welcome the review and trust that it will not be a pretext for inaction on collaboration and sharing of back office functions, etc.

6.6.12 Similarly, we urge the Funding Council to adopt a more aggressive procurement role for the purchase of student places across HEIs and FECs to secure reduced costs for the same or improved quality of student performance. The construction by ELLD of this significant budget was described as essentially incremental year after year. We understand the funding mechanism for FE and HE uses average 'price'. This will produce some incentive to colleges to bring their costs down to the average. However, only by using actual costs and prices will institutions be encouraged to drive down course costs. This suggestion should not be seen as a cheapest only option. The Funding Council should adopt a quality framework in its procurement process which will be presided over by HMIE and its supervision of the quality of college output. We also believe this can be achieved within the terms of the legislation limiting Ministers' powers over HEIs.

6.6.13 The SP Audit Committee made recommendations following the Auditor General for Scotland's reports on the financial, etc performance of the FE sector. Some related to unit costs and prices. Although the proportion of HEIs' income from the Funding Council is less in the older universities, and overall less than in the FE sector (40% to 60%), it still obtains a substantial contribution from the public purse. The SFHEFC has initiated some research into HE unit costs. We would recommend that this be extended so that the fullest information is available to the Funding Council of the pattern of costs of the HEIs.

6.6.14 Colleges remain the main providers of HNC and HND courses and deliver over 20% of HE in Scotland ( SFC Higher Education in Scotland: Second Update Report - December 2005) at considerably less cost than in HEIs. We understand the cost differential could be as much as £2,700 for an HND in business studies in a Scottish college as against £4,000 in a university. We believe that the Minister should be able to direct procurement to the sector best able to deliver value for the public purse. We are of the view that this would not transgress the statutory provisions prohibiting discrimination against or in favour of a particular institution or college.

6.6.15 A more radical change would be to fund a three year degree course rather than the traditional Scottish four year degree. The arguments for and against the change are complex, and it is doubted by some whether in the time period in which education is funded in a lifelong learning regime, the public purse would benefit. The Scottish system is nearer to the European model, but the advancement and promotion of the Advanced Higher would point to the three year (English) system.

6.6.16 We realise the impact such changes might have on the tertiary education system, but believe that the benefit to the public purse is such that they need to be examined with an open mind.

6.6.17 The evidence we heard from SAAS pointed to an organisation which is customer focused, proficient in the delivery of student awards, embracing the ethos of continuous improvement and with capacity to expand its operations to the benefit of other parts of the FE and schools sectors. In particular, we consider that the potential for savings in the processing of Education Maintenance Allowances by SAAS instead of FECs/local education authorities (at no additional cost) should be explored along with the Agency's ability to undertake the work of the Students Loans Company in Scotland.

6.6.18 In summary, we recommend that:

• the Funding Council adopt a more aggressive procurement role for the purchase of student places across Further and Higher Education to secure reduced costs for the same or improved quality of student performance;
• the Funding Council should move to a method using actual prices instead of average prices in distributing funds to the Scottish Colleges and the HEIs, within a quality framework;
• the Funding Council should carry out a full review of HEI costs;
• the Funding Council should procure HND/ HNC from the FE sector and not the universities so long as the current course price differentials obtain;
• in the procurement of funded places in degree courses, further consideration should be given to the merits of three as against four year degree courses being funded initially to establish if over time savings could be achieved to the public purse;
• the Ministerial review of Scotland's colleges should examine the benefits of a shared service centre for FECs and, if necessary, extend the remit to include the advantages of such a centre for HEIs or FECs/ HEIs combined.

Scotland's Enterprise Agencies and the Economy

6.6.19 Scotland has not one, but two Enterprise Agencies (with a total combined spend approaching £570m in 2007-08) and a central department ( ETLLD) with an international arm reporting jointly to the Head of the Department and to the CE of one of the agencies and through them to the Minister. ETLLD combines policy formulation and development and strategic direction with elements of service delivery.

6.6.20 The evaluation of performance, particularly the contribution of such agencies to the economy, is difficult to fathom. Some of those interviewed conceded that direct evidence of a causal connection is beyond reach. Some might ask why they are there. It would be too glib to suggest making headroom of the £570m. All developed countries have one such agency and we were pointed to only one country (Canada) investigating a model to measure the impact on the economy.

6.6.21 But targets and measures are there aplenty. Smart Successful Scotland provides them, and all are tracked and annually reported on by a Joint Performance Committee composed of the two agencies and the Department. The agencies differ in the extent of their roles and in their perception by the public and media. HIE is seen as instrumental in the continuing Highlands and Islands economic success story, but SEn continues to battle against press, etc criticism. Audit Scotland points to the need for solid evaluation at a higher level and drawn to the centre of SEn, yet its reports do not back claims of a failure to perform to its targets. Perhaps what is crucially missing is a consensus among government, business large and small, and other stakeholders as to the role and job to be done by the agency and agreement on objectives and targets and a belief in the plausibility at least of impact on the economy.

6.6.22 We met representatives of Audit Scotland and were made aware of the conclusions they were reaching with regard to an update report on the performance of SEn (published on 16 March 2006). We were also made aware, in our earlier interviews with representatives of ELLD and SEn, of the agency's financial position at that time and were subsequently reassured as to the extent and unique nature of the present circumstances.

6.6.23 In that context we have noted the continuing success of SEn's Business Transformation Project. The SE should determine the destination of whatever savings are achieved, and our recommendation at 6.6.25 ensures that will happen.

6.6.24 We realise that a merger of the two agencies into one all-Scotland Economic Delivery Agent, while logical, may not be welcomed or indeed be practicable, although it would solve the predicaments caused by all-Scotland activity carried out through one of the two agencies - e.g. Scottish Development International, Careers Scotland, etc. It should also deliver economies and efficiencies a single agency would bring.

6.6.25 Until the time is right for such a move and the continuing fragility of parts of the Highland economy is strengthened, a number of measures can be considered and in particular, we would recommend:

• while some work has begun on rationalisation of all back office services, a full shared services model should be adopted and implemented in both agencies for back office functions such as procurement, finance, HR, communications, etc;
• implicit in the above suggestion is an assumption that business efficiencies and sharing of back office functions have already been maximised within each of the agencies and their LECs;
• clarity of purpose and division of responsibility would be enhanced if work which appears to us to be delivery is transferred to one or both of the Agencies from ELLD. We refer in particular to Regional Selective Assistance, and Innovation and Support; and
• the Business Transformation Project of Scottish Enterprise continues to deliver significant savings of £9.3m (£5.3m cash and £4m time releasing) which have been identified by Scottish Enterprise and should be baselined.

Regional Selective Assistance and European Structural Funds

6.6.26 Total combined spend will be over £190m by 2007-08. A downward graph is anticipated following the European Union's expansion and the EU Budget decision taken in December 2005. Both categories remain a significant resource to business ( RSA) and to public agencies, etc ( ESF). Both are EU directed ( ESF is ring-fenced) and both present limited room for improvement except in processing and delivery of programmes. The changes to the scope and funding map of Scotland and challenges presented by the EU Budget decisions are still being assessed.

6.6.27 We see a clear overlap in the roles of ELLD and SEn or HIE in the administration and delivery of RSA and question why such service delivery should remain with the strategic and policy formulation orientated ELLD, notwithstanding its record in this field.

6.6.28 We acknowledge the greater complexity and scope of ESF in improving Scotland's environmental, cultural, social as well as economic infrastructure and the greater range of public, private and voluntary sector partners involved in the adjudication of claims and the distribution of European Structural Funds.

6.6.29 We recommend that the delivery of the RSA programmes should be transferred to the Enterprise Agencies to achieve clarity of purpose, efficiencies, and synergies with other business support schemes administered by Scottish Enterprise and Highlands and Islands Enterprise.

Other ELL - Energy Projects and Broadband.

6.6.30 Total combined spend by 2007-08 will be £58m. Both programmes follow a UK direction, but the ELLD team exhibited enthusiasm and a determination to imprint a Scottish dimension on the programmes. Delays caused by time involved in getting EU state aid approvals and getting the balance of the energy programmes right for Scotland has left potential for savings, particularly the marine energy projects (£6m budget in 2007-08) where no commitments had been made known to us as at 15 March 2006. Contractual commitments entered into subsequently may use up such headroom but the Department should seek to avoid legacy spend into SR07.

6.6.31 The Broadband Pathfinder project has committed £90m (£13m a year over seven years from 2006-07) to ensure suppliers invest in the necessary infrastructure to provide scalable bandwidth in the Highlands and Islands and the south of Scotland. Its funding genesis (£90m) appears to be End Year Flexibility, and while the programme relationship to the PA seems unclear, we have noted the strong case made for the programme in A Framework for Economic Development in Scotland.

6.6.32 We were advised that the Broadband Pathfinder Project has been committed, but were aware that the first spend will not be until 2006-7 and onwards. An opportunity therefore exists to review the initial costings from which the budget was fixed. With the advances made by the telecoms companies in remote areas, we believe that one-off savings can be achieved in procurement costs and/or reinvested in connecting up as many additional public sites as possible. We understand that the procurement process is now entering the final negotiating stage with the final bidders and we would urge ELLD to maximise the benefits to the public purse of this project.

6.6.33 We have also noted that across all Other ELL Programmes £22m was transferred to the CUP in both Autumn and Spring Budget revisions which suggests that there is evidence of headroom in these budgets.

6.6.34 We recommend:

• that further consideration be given to utilising the potential headroom which exists in the Other ELL budgets; and
• that the Executive revisits the costings for the Broadband Pathfinder Project with a view to maximising savings in procurement costs for reinvestment in the project.

Other ELL - Innovation Support

6.6.35 We met the Innovation Support team and were struck by their enthusiasm. We heard of significant success in providing early funding to, e.g. OPTOS with its recent Stock Exchange Flotation. Nevertheless, we question the location of such a team in ELLD - the strategists - and not in the Enterprise body as the delivery agents. We were made aware of plans to join the administration of this programme and RSA Scotland, but to retain both within ELLD. In our opinion, this will reinforce the confusion of roles of ELLD and the Enterprise Agencies we highlighted at 6.6.21-5.

6.6.36 We recommend that the SE addresses the overlap apparent in the location of this programme in ELLD and consider its transfer to the Enterprise Agency.

Other ELL - Education Maintenance Allowances, Determined to Succeed and ILA Scotland.

6.6.37 Total combined spend in 2007-08 will exceed £84m. They are all relatively new (or in the case of ILA Scotland, resurrected) programmes. Nevertheless, we have some suggestions for improvement.

6.6.38 The Students Awards Agency has a good record in administering awards to students and apparently has capacity to absorb the work involved in Educational Maintenance Allowances. We appreciate this expenditure is outwith DEL, but we believe it will release savings to the Funding Council and local authorities.

6.6.39 The financial consequences of universal programmes and benefits feature elsewhere in the report (5.6.3, 6.5.108 and 6.8.25-6). The universal ICT offer ( ILA100) seems questionable for the same reason and also in regard to its likely impact on the end user. We were also made aware of the current spend patterns in the ILA programmes which would indicate that a significant saving could be realised.

6.6.40 We recommend:

• that consideration be given to the transfer of responsibility for the administration of Education Maintenance Allowances to the Students Awards Agency for Scotland.
• that consideration be given to a review of ILA Scotland with a view to securing savings; that a 50% reduction be targeted in line with current spend patterns; and that consideration be given to the revised programmes being administered by SufI (learndirect).

Other ELL - SufI(learndirect), Research, Royal Society of Edinburgh, SQA Accreditation Unit, Scottish Credit and Qualifications Framework, Beattie Inclusiveness, Scottish Union Learning Fund, Sector Skills Councils, Business Gateway International Trade, HQ and Training Grants, Science Centres, Reserve and Miscellaneous.

6.6.41 Total combined spend in the remainder of the ELL budget lines listed will amount to almost £25m (out of a total for Other ELL of £143.5m) in 2007-08.

6.6.42 We heard mention of a possible link between the Royal Society of Edinburgh and the Science Centres. Aside from any decision on that suggestion, there remains a question of the effectiveness of the spend in supporting RSE and the Scottish Union Learning Fund which together amounts to £2.1m.

6.6.43 Elsewhere in this report concerns have been raised over micro management (3.4), and examples we found here are HQ and Training Grants and Miscellaneous (combined spend of £2.2m). We believe that the Executive should explore the potential for withdrawing from such activity with commensurate savings.

6.6.44 With the CUP arrangements, the ELL reserve of £1.1m is superfluous. This budget line can be deleted.

6.6.45 We were made aware of arguments to support a restructuring within SEn, so that Careers Scotland would operate independently as one of the largest NDPBs. If such a transfer is pursued we would urge consideration should also be given to extending the new organisation to include the Scottish University for Industry (learndirect) and ILA Scotland as related organisations and budget lines.

6.6.46 We recommend:

• that the effectiveness of the spend on Royal Society of Edinburgh and the Scottish Union Learning Fund be examined;
• that the potential for withdrawing from continual commitment to HQ and training Grants and the Miscellaneous budget lines amounting to £2.2m be explored;
• that the ELL reserve of £1.1m be removed; and
• that the Scottish Executive, having decided to separate Careers Scotland from Scottish Enterprise and make it a NDPB, should consider extending the new body to encompass SUfI (learndirect) and ILA Scotland as a coherent combination of services.

Summary of Recommendations

Further and Higher Education

6.6.47 The Funding Council should adopt a more aggressive procurement role for the purchase of student places across Further and Higher Education to secure reduced costs for the same or improved quality of student performance

6.6.48 The Funding Council in distributing funds to the Scottish Colleges and the HEIs should move to a method using actual prices instead of average prices within a quality framework

6.6.49 The Funding Council should carry out a full review of HEI costs.

6.6.50 The Funding Council should procure HND/ HNC from the FE sector and not the universities so long as the current course price differentials obtain.

6.6.51 In the procurement of funded places in degree courses, further consideration should be given to the merits of 3 as against 4 year degree courses being funded initially to establish if over time savings could be achieved to the public purse.

6.6.52 The ministerial review of Scotland's colleges should examine the benefits of a shared service Centre for FECs and if necessary their remit extended to include the advantages of such a Centre for HEIs or FECs/ HEIs combined.

Scotland's Enterprise Agencies and the Economy

6.6.53 While some work has begun on rationalisation of all back office services, a full shared services model should be adopted and implemented in both Agencies for back office functions such as procurement, finance, HR, communications etc

6.6.54 Implicit in 8.1 is an assumption that business efficiencies and sharing of back office functions have already been maximised within each of the Agencies and their LECs - if not it should be accomplished as soon as possible.

6.6.55 Clarity of purpose and of division of responsibility would be enhanced if work which is "delivery" is transferred to one or both of the Agencies from ELLD. We refer in particular to Regional Selective Assistance and Innovation and Support.

6.6.56 The significant savings of £9.3m (£5.3m cash and £4m time releasing) which the Business Transformation Project of Scottish Enterprise continues to deliver should be baselined.

Regional Selective Assistance and European Structural Funds

6.6.57 Delivery of the RSA programmes should be transferred to the Enterprise Companies to achieve clarity of purpose, efficiencies, and synergies with other business support schemes administered by SEn/ HIE.

Other ELL-Energy Projects and Broadband

6.6.58 Further consideration should be given to utilising the potential headroom which exists in the Other ELL budgets.

6.6.59 The Executive should revisit the costings for the Broadband Pathfinder Project with a view to maximising savings in procurement costs and/or for reinvestment in the project.

Other ELL- Innovation Support

6.6.60 The Executive should address the overlap apparent in the location of this programme in ELLD and consider its transfer to the Enterprise Company.

Other ELL- Education Maintenance Allowances, Determined to Succeed and ILA Scotland

6.6.61 Consideration should be given to the transfer of responsibility for the administration of Education Maintenance Allowances to the Students Awards Agency for Scotland.

6.6.62 A review of ILA Scotland should be undertaken and a 50% reduction be targeted in line with current spend patterns.

Other ELL

6.6.63 The effectiveness of the spend on Royal Society of Edinburgh and the Scottish Union Learning Fund should be examined;

6.6.64 The potential for withdrawing from continual commitment to HQ and Training Grants and the Miscellaneous budget lines amounting to £2.2m be explored;

6.6.65 That the ELL reserve of £1.1m be removed;

6.6.66 That the Scottish Executive, having decided to separate Careers Scotland from Scottish Enterprise and make it a NDPB, should consider extending the new body to encompass SUfI (learndirect) and ILA Scotland as a coherent combination of services.

6.7 COMMUNITIES

Background

6.7.1 The 2007-08 total of planned spending for the Communities Portfolio is over £1.3bn. This ranges from grants for social housing projects and regeneration to payments to local authorities for a variety of support services under Supporting People.

6.7.2 We interviewed the Minister, Head of Department and 16 senior civil servants responsible for the 24 budgets in the Communities portfolio.

Key Findings

6.7.3 We recognise developments in the Communities portfolio. Significant improvements to Scottish communities will emerge from the work evidenced in the Regeneration statement and from the new Housing Act. We also recognise that a number of budget efficiencies have already been factored into Communities funding leading up to the 2007 Spending Review. We were advised some regeneration budgets could be rationalised, but would not necessarily create savings. In our experience, merging budgets invariably creates opportunities to challenge overhead costs in administration, processing and auditing as well as identifying possible duplication of operational effort (4.3.11).

6.7.4 We sensed a portfolio under financial pressure because of the demand led nature of Communities activities. The challenge is to manage commitments in a future where funding has a potentially flat line.

6.7.5 The commitment to achieve the objectives set out in the PA is unquestionable from the highest level in Communities. We think a greater focus on priorities is needed. Everything is accorded equal priority. When we questioned this, we were advised that to do otherwise would dilute the impact. We believe this approach is unsustainable. Unless significant prioritisation happens early, the commitments building in the Communities portfolio will put excessive pressure on the budget, particularly for Spending Review 2007.

6.7.6 The roles of the Department and Communities Scotland need greater focus. We were advised of the aim to split policy/strategy ( SE) and operations (Communities Scotland), but were not convinced that all policy and strategy rests with the Scottish Executive; neither are we convinced that all operations are left with Communities Scotland.

6.7.7 Table 17 lists our view on headroom.

Table 17

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

Programmes

Affordable Housing Investment Programme (£463.2m)

6.7.8 The PA commitment to provide additional social rented housing led to a target of 21,500 new dwellings by 2007-08 (16,700 of which would be for rent). We raised the prospect of lower funding and asked what preparedness was in place. We were disappointed that our discussions revealed this was considered an open-ended commitment.

6.7.9 Given the priority accorded to social housing and homelessness in the PA, continuation of funding at this level needs confirmation at the highest level. We would have expected more detailed consideration of alternative options to create even more social rented housing, such as public/private partnerships or additional borrowing by Councils and other Registered Social Landlords. We acknowledge current work on housing need through other mechanisms like bulk housing procurement, additional private capital, expansion of low cost home ownership and preparatory work on public/private partnership options. Presently, all construction of housing for rent is carried out by housing associations who receive capital grant from this budget. To increase the number of houses in the social rented sector, local authorities and other registered social landlords could be encouraged to construct housing for rent by providing a modest grant perhaps equivalent to the difference between the average selling price of a house and the average construction price of a terraced house. If this grant were paid as support for borrowing rather than a capital sum, the Executive would have the option of making cash savings in this budget or increasing the supply of rented houses. At current prices, an annual grant of £10m paid as an annuity would enable more than 4,500 houses to be provided by local authorities. We recommend this option be considered.

6.7.10 This grant would be a modest financial inducement if no houses were sold but, more importantly, local authorities would incur no financial penalty in the event of continuing sales. This option would achieve considerable savings compared with the present capital grant arrangement, as capital grant would be replaced by a much reduced annual sum: a rule of thumb measurement would be 90% of capital sums. Put another way, £408m of borrowing support could sustain capital investment of £5bn. Although a challenge, we suggest an initial target saving of 10% (£40.8m per year) which could either be treated as an efficiency saving or recycled on an annual basis to support additional capital investment in socially rented housing of £500m. The Executive's ongoing budget would need to contain this provision to support any capital investment.

6.7.11 We acknowledge here and reiterate the point made in the Justice section of our report (6.1.18) relating to the shift in measurement from capital to revenue of such proposals, but believe the opportunities presented by such a change (in terms of potential to increase house numbers) justifies further consideration (4.3.17).

Supporting People (£383.6m)

6.7.12 This budget funds Councils to provide services to enable and encourage individuals to remain in their own homes and to fund, for example, sheltered housing warden services and homecare. The initial growth in funding, then subsequent retrenchment, was acknowledged by the SE as a difficulty for Councils. The SE considered it had little option in pulling back funding, given the circumstances of rapid growth. There are lessons from the way this budget has been managed down over the current spending review. This cut (by Treasury) was managed by requiring all Scottish councils to cut their expenditure. In so doing, all of the implementation issues were dealt with by councils who bore the brunt of criticism. Contrast this with the lack of consideration of the potential for reduction in other Communities budgets, often directly managed by the Executive.

6.7.13 This illustrates an important issue for the SE. The more it micromanages activity, the greater its ownership of issues. Against a lower or flat expenditure forecast, the more difficult it will be to achieve reductions without considerable criticism. We understand the need for the Executive to retain a central capacity to review activities and of Ministers desire to demonstrate response to political issues. There is an argument however, that budgets presently micromanaged in the Communities portfolio by civil servants should be transferred to implementation organisations such as Communities Scotland, local authorities and the voluntary sector. This includes Homelessness/Rough Sleepers Initiative, Reprovisioning Glasgow Hostels, Urban Land Fund, Derelict Land Fund, Urban Regeneration Company Pathfinders, Equalities, Adult Literacies and Voluntary Issues.

Modernising Private Sector Housing (£92.5m)

6.7.14 The new Housing Act addresses a range of outstanding issues in relation to private sector housing. This budget enables Councils to provide grants to individuals for improvement of their private dwellings including alterations and adaptations for people with disabilities.

6.7.15 Exceptionally, councils receive 100% cash support for the grants which they award. We recommend the continuation of 100% grants for physical improvements related to people's disabilities (which ultimately avoids additional expenditure in the Health budget and presently takes up to 20% of current funds). We see no reason for the continuation of general grants to individuals. If Councils considered general private sector grants to be a priority, they could fund these using the prudential framework. As an alternative, some of the Modernising Private Sector Housing Budget could be directed to and managed by local authorities acting as community banks - lending and recycling repayments at relatively low interest rates.

6.7.16 Moving to a recycling system would enable a phased reduction of these grants with the opportunity for discontinuation after the next spending review, although the volume of expenditure on private sector housing improvements could be sustained via the recycled funds in local authorities.

6.7.17 The net effect of this strategy could release up to £74m (80% of the 2007-08 budget) on a progressive basis at the end of the 2007 Spending Review over a four year period with results feeding into subsequent SRs.

Central Heating Programme/Warm Deal (£45.8m)

6.7.18 We asked budget holders when this grant would stop, i.e. would the objectives of this fund be met when all the houses of older people without central heating are brought up to standard. We were surprised to learn that this programme will move on to include replacement of older central heating systems. The concern now must be where will this policy go, beyond older system replacement.

6.7.19 This is a good example of 'policy creep', where initial and laudable objectives of ensuring that homes for older people have the benefit of a central heating system move on to a new set of objectives before a full assessment of the effectiveness of the initial policy.

6.7.20 We think this unsustainable longer term, and a thorough examination should be carried out to clarify ongoing need and thereby the amount of funding required. (We are clear that records show the amount of work carried out but we could find no clear assessment of the work/numbers or funding needed.)

6.7.21 The results of this examination should be fed into the next spending review, providing scope for efficiencies and reduction in the scale of this budget.

Gypsies/Travelling People/Housing and Voluntary Sector Grants (£3.4m)

6.7.22 This is a small budget, and we believe rationalisation is preferable. A single point in the Executive is needed to deal with all voluntary grants.

6.7.23 We now understand that the Voluntary Issues budget is transferring to the Social Inclusion Budget and believe the Housing and Voluntary Sector Grants budget should also transfer there.

6.7.24 The extent to which administration savings are achievable from rationalisation should then be assessed.

Implementation of Housing Task Force/Rough Sleepers Initiative (£21.2m)

6.7.25 This budget provides funds to address homelessness throughout Scotland and supports provision of homelessness services. Local government also receives support for homelessness through Grant Aided Expenditure. Despite this, councils are absorbing additional bed and breakfast/short tenancy accommodation costs as a result of the laudable aim to eradicate homelessness.

6.7.26 We recognise everyone is working to the PA commitment to ensure that all unintentionally homeless people are entitled to permanent accommodation by 2012. The target is a major challenge and the extent to which this target will be achieved will depend on, among other things, changes to council and housing association letting procedures and the absolute increase in the number of dwellings available.

6.7.27 From the earliest stages of the homelessness legislation, local authorities emphasised that many authorities could only meet the requirement by significantly increasing the availability of social rented housing or by reducing access to social rented housing for other waiting list applicants.

6.7.28 An increase in housing stock of 21,500 by 2007-08 will not match the reduction in supply as a result of Right to Buy. Over the past three years, 37,000 houses have been lost to the social rented sector through Right to Buy. Despite investment in new housing, there will be a reduction in supply of all housing to address social needs, including homelessness. One third of all local authority rented properties and 12% of other Registered Social Landlords properties already go to homeless people, causing tension with others seeking socially rented housing. We understand the complexity of achieving the homelessness policy objective. If we make three reasonable assumptions: that the Right to Buy provisions remain; the 21,500 target is achieved and the proportion of rented properties allocated to homeless people increases, then it is still not clear that the objective will be met.

6.7.29 A thorough review should be carried out to create an implementation plan properly sized and costed with related performance measures for the homelessness strategy, including the potential for prudential borrowing by local authorities.

Reprovisioning of Glasgow Hostels (£15.0m)

6.7.30 This is not a one-off capital funding budget, but an ongoing amount to meet costs associated with closing Glasgow's older hostels and building and running new ones. The figure of £15m is included through to 2007-2008.

6.7.31 Once the initial re-provisioning objective is achieved, this budget should be merged with Supporting People, and the revised total allocated in accordance with established processes.

6.7.32 In our experience, it is not unreasonable to set a target efficiency of 10% (£1.5m per year) from the merger of this fund with the Supporting People Budget (6.5.129).

Mortgage to Rent (£5.5m)

6.7.33 This budget is recently established to help individuals stay in their homes in times of financial pressure and, as a consequence, not become homeless and a burden on the wider budget. It is too early to assess the effectiveness of this programme.

Regeneration Budgets:
Community Regeneration Fund (£112.7m)
Wider Role Urban Land Fund (£12.0m)
Vacant and Derelict Land Fund (£12.2m)
Urban Regeneration Company Pathfinders (£11.0m)
Other Area Based Initiatives (£7.0m)
Community Engagement (£6.1m)
Community Learning and Development/Social Economy/Social Investment Scotland (£1.9m)

6.7.34 These budgets total over £160m for year 2007-08 and cover similar areas of investment. We believe they should be amalgamated and managed as a single budget, a Social Regeneration Fund (with associated administrative savings).

6.7.35 We were not convinced of the need for separate funds for urban, derelict land and regeneration company pathfinders. We acknowledged that decisions to create these funds are policy/politically based. A wider discussion however, is needed on the principle of more individual or family based as opposed to area based initiatives. We are not arguing for the abandonment of geographically focused investments, as these relate to areas of multiple deprivation. We do believe, however, that a greater focus within these areas on individuals and families will pay greater dividends.

6.7.36 We believe there is scope for, and we strongly recommend the introduction of, Family Support Plans that would focus on the welfare, education, health and employment needs of individuals, with the resources of the SE, public sector agencies and councils targeted at delivering them. Although not a new idea, e.g. care workers are being deployed locally as part of the Employability Framework, we believe that there is a strong case for initiating several pathfinder projects to test the concept of Family Support Plans funded in the same way as present pathfinders for urban development companies. We also believe these pathfinder projects should be managed by Local Community Planning Partnerships, with detailed arrangements outlined in Regeneration Outcome Agreements.

6.7.37 A similar conclusion has already been reached in the Justice portfolio, where we recommend that ex-prisoners receive support through a Family Support Plan mechanism (6.1.35).

6.7.38 To reinforce the conclusions reached in the Education and Health portfolios, we recommend that the pathfinders also incorporate these services within the Family Support Planning Framework.

6.7.39 As lessons are learned from these proposed Pathfinders, and as work on Community Planning outcomes evolves, determining the respective roles of the Executive, Councils and other agencies, this change in emphasis from 'bricks and mortar' to a family based approach can be assessed.

6.7.40 We believe merging budgets is an opportunity to streamline bureaucracy and identify savings through elimination of administrative and operational duplication. We recommend the establishment of a working group to identify these savings andsuggest an efficiency target of 10% minimum be set (£16m per year). Any savings achieved beyond 10% could be considered as development funding for Family Support Plans.

Promoting Equality (£14.9m)
Adult Literacies (£1.9m)

6.7.41 The Equalities budget has grown from £1m in the first spending review to nearly £15m and now funds a variety of initiatives across all equality fronts.

6.7.42 At this stage, measurement of outcomes is not clear. This is both a grant-giving unit (e.g. to voluntary groups) and an advocate within the SE, through a combination of advice/ influence/improvement on equalities issues.

6.7.43 Having created this unit, it is not possible to halt the work or reduce the funding in the short term. This is another example however, of budget micromanagement by the Scottish Executive, with all of the associated difficulties for the Executive of any future curtailment of funding.

6.7.44 Again, on the basis that opportunities will be available from merged budgets, wesuggest a modest target of 5% for efficiencies (£0.8m for 2007-08).

Voluntary Issues (£15.3m)
Office of the Scottish Charity Regulator (£2.4m)

6.7.45 We were advised these budgets will transfer to the Social Inclusion budget and have also cross-referred this to the Housing and Voluntary Sector Grants budget as we believe they should all be consolidated into the Social Inclusion Budget.

6.7.46 Again, the experience of merged budgets suggests a target efficiency of 10% should be set for the merge budgets of Housing and Voluntary Sector Grants, Voluntary Issues and Social Inclusion (£4.6m for 2007-08).

Promoting Social Inclusion (£28.0m)
Working for Families (£15.0m)

6.7.47 These budgets cover a range of initiatives aimed at creating individual and community capacity.

6.7.48 There is a mixture of funding to councils and SE directly managed funds, ranging from money advice, encouragement to credit unions to childcare help.

6.7.49 We invited officials to consider the antisocial behaviour approach in Justice, where families are targeted, and we received a reasonable response, although the view was put to us that universal application of a 'family advocate' may not be wholly appropriate. It is somewhat early in the process to assess outcomes although we have reviewed the initial records of those assisted and the benefits which have been obtained.

6.7.50 We see this approach as reasonable and complementary to a rationalised Social Regeneration Fund and antisocial behaviour initiatives in the Justice Department.

6.7.51 This supports our earlier conclusion of the value of funding and development of Family Support Plans.

6.7.52 Longer term, there is a potential cross-portfolio benefit to this work, and we believe the management of Working For Families budget will be more readily achieved via councils than some of the micromanagement by the Executive evidenced in the use of the Promoting Social Inclusion budget.

Scottish Building Standards Agency and Planning and Development (£2.2m)

6.7.53 These budgets are for a specific necessary Agency and for introductory training leading in new legislation. The latter will stop when new planning legislation is operational, and the former needs to continue.

Communities Scotland (running costs - £25.1m)

6.7.54 We saw a professional approach at Communities Scotland. Senior officials there had a continuity of service and specific experience which can be lacking in the Department because of the career development process of regularly moving civil servants to other posts (4.4.4).

6.7.55 Communities Scotland employs 500 people across Scotland in housing and regeneration on behalf of the Executive and in a national housing regulatory role. Communities Scotland claims it provides standardised programme delivery on a national scale. SE agreed, when discussing social housing and regeneration budgets.

6.7.56 We tried to link the work of Department's Homelessness Task Force with that of Communities Scotland in the provision of homes for homeless people. We found the information we sought on the number of houses created/planned to combat homelessness had to be collated for us across Scotland by Communities Scotland.

6.7.57 The division of responsibilities between the Department and Communities Scotland often seems to be the result of a process, for which the reasons are not always immediately apparent, e.g. the assessment of homelessness strategies was led by the Scottish Executive while local Housing Strategies were assessed by Communities Scotland. The assessment process for the Local Housing Strategies was more transparent and rigorous and was carried out within a pre-set timescale of three months. The assessment of homelessness strategies on the other hand took ten months to complete and was far less systematic. The different responsibilities for assessment may be attributable to the division of expertise within the agencies, and to some extent, the political focus being placed on homelessness at that time. The different approaches nevertheless resulted in a lack of consistency and clarity for local authorities. We think clarification and combining of roles overdue.

6.7.58 In some ways, this was the most difficult budget to assess because we were not only examining the output from other budgets, such as provision of social housing, but also assessing the delivery effectiveness of Communities Scotland itself. The use of an executive agency like Communities Scotland to deliver policy objectives is better than using officials (who may specialise in policy development). It is not clear why some of these delivery functions could not be passed on to councils acting in their role as housing authorities.

6.7.59 To coincide with the commencement of the various legislative provisions, many and various time limited funding streams have been established. These have ranged from funding being paid directly as grant (e.g. Tenant Participation) or being paid dependent on the submission of a satisfactory outcome agreement (e.g. antisocial behaviour and homelessness). Each funding stream has been associated with different regulations for submitting claims and reporting progress. There is a lack of clarity on the split between the Executive and Communities Scotland in terms of approval of payment for the different funding streams. That process could be streamlined (and clarified) by one agency taking responsibility for the award and monitoring of all funding. The process could be made more effective if the SE considered the creation of a single funding stream for local government covering all aspects of regeneration and associated activities. In return, local government should (and we believe would) be happy to commit to accountability through the submission of regular monitoring reports, specifying clearly the outcomes being delivered with the funding provided.

6.7.60 The degree of confusion which exists in relation to the split of responsibilities would seem (on initial analysis) to make a case for reviewing role and responsibilities of Communities Scotland.

6.7.61 To eliminate micromanagement of investment programmes by the Department, we suggest transfer to Communities Scotland of Supporting People and Homelessness budgets.

6.7.62 Staff in Communities Scotland have more knowledge of implementation than is evident within the Development Department and provide a consistent form of contact for providers of social rented housing. Local offices, however, could effectively be merged with council housing functions as could the Communities Scotland strategic housing development funding role. This need not be a costly exercise, if done on a step by step basis by Communities Scotland geographic areas.

6.7.63 We would thereby create a more local delivery of local initiatives with local partners (housing associations and Councils) with a clear strategic role at the centre of the Executive and a more effective regulatory function in a re-focused Communities Scotland.

6.8 TRANSPORT

Background

6.8.1 This portfolio will account for £1.9bn of SE expenditure in 2007-08, made up as follows:

• 47% on the road network;
• 26% on rail;
• 6% on concessionary fares;
• 3.5% on ferry services;
• 3.5% on bus services;
• 2 % on air services;
• 9% on support to other modes and general transport issues; and
• 3% to support local authority general aggregated expenditure.

6.8.2 Spend is broadly split to three different types of activity: large new projects to expand the rail and road network; maintenance of existing infrastructure; support to maintain existing or new services across different modes of transport.

6.8.3 The specific lines of expenditure are set out in Table 18.

Table 18

Source: Draft Budget 2006-07
Notes:
1. To be accounted for by the Transport Agency.
2. Responsibility to be shared between the core Department and the Transport Agency (see Table 8.08).

Does the portfolio spend link to Ministerial priorities - i.e. links to the Partnership Agreement?

6.8.4 The portfolio has very strong links to the PA, compared to other portfolios, partly because the PA is project driven. In 2007-08, over 75% of planned spending has direct links with a PA commitment.

6.8.5 We found the PA focused strongly on developing new projects and initiatives, rather than the management of 'core business'. The new road projects had their genesis in the Strategic Roads Review of 1999, which had been developed using a clear set of priorities. The new rail projects provided a set of political commitments, which are being subject to individual value for money tests, rather than the result of a strategic review of the network with a view taken on the programme as a whole. Maximising the benefits of existing infrastructure and capacity in the road and rail network - making our existing assets work harder for us - did not feature. We would encourage the Transport Strategy to address this.

6.8.6 Since the PA, the Scottish Executive published in 2004, Scotland's Transport Future which set the overall objective for the Scottish Executive: 'Our overall aim is to promote economic growth, social inclusion, health and protection of our environment through a safe, integrated, effective and efficient transport system.'

6.8.7 Further, it provided a clear view of the role of the SE: 'We have a vital leadership role. The levers that will help achieve our transport objectives include legislation, investment, the duty of Best Value, influence, planning policy, standard-setting, demand management and joint working.'

Portfolio issues

6.8.8 Transport investment is a long term activity. Over 20% of spending in 2007-08 will be delivering PA commitments set out in the Programme for Government in 1999. Those projects will not, in the main, be completed until 2010-11.

6.8.9 Contracts elsewhere in the portfolio also cover long periods of time. We found that some £661m - a third of the budget - will already be contractually committed and therefore locked-in for 2008-09, year one of SR07.

6.8.10 The new agency, Transport Scotland ( TS), has now been established, and the Department is developing the new national Transport Strategy. It will provide the policy framework for SR07. This should be a comprehensive look at transport requirements and should provide a clear set of strategic priorities, rather than just an amalgam of legacy projects.

6.8.11 The Transport Strategy develops a clear set of priority projects across all modes of transport, so that any slippage/underspends can be effectively managed. Under current arrangements (4.3.8), and unless subject to the threshold to be reported to Parliament, any underspends (mostly due to delays/slippage) are retained within the Department through end-year flexibility. The potential underspends in Transport can be very significant, if a large capital project is postponed, e.g. M74. While much of the M74 spending was put in the CUP, some was used to bring forward a project to fill the gap, the A68. This had fallen below the initial cut-off and was, in fact, not the highest priority of the second order projects.

6.8.12 To ensure Best Value, Ministers should be able to identify the additional strategic benefits of undertaking any scheme, which is not the next highly ranked for economic value. Comparison of potential benefits across portfolios would be better if a formal challenge function were created (4.3.1-8).

6.8.13 Generally, we found areas in the SE where the prevalent attitude is to avoid underspending, and report any only when unavoidable (4.4.6). This is not good financial management. This is not necessarily the case in Transport. They have made use of the CUP and end-year flexibility and actively managed individual projects to ensure that the portfolio as a whole is not underspending. Clear methodologies exist for assessing value for money at individual project level: STAG and GRIP are examples. We have not tested how far these are implemented in practice. The Gateway Review process, we have been told, is widely used on transport projects. We welcome this. We would stress the importance of keeping value for money under review as projects progress from outline phase through to completion, so that decisions on whether to proceed can be taken in the light of revised costings.

6.8.14 Assessing value for money at a programme level would strengthen processes. We welcome Transport Scotland's new initiative to develop mechanisms to allow a comparison between different modes of travel to address a particular problem (4.3.10).

6.8.15 We did not have the time to explore individual project delivery - but we do see some slippage on a number of schemes. The Department should look at whether their project management arrangements could be tightened on the larger, more complex projects.

Key Findings and Headroom

6.8.16 Being a broadly capital programme, headroom could easily be created by cancelling projects which have not yet been committed, but this could mean the breach of Ministerial commitments in the PA. Table 19 shows the areas where we see potential headroom.

Table 19

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

6.8.17 Our general findings are:

• given the long term nature of Transport projects and service contracts - a significant proportion of spend is already committed for the next spending review period;
• to ensure Best Value, Ministers should be able to identify the additional strategic benefits of undertaking any scheme, even if it is not the next ranked project for economic value;
• at a project level, value for money - in line with good practice - should be kept under review as schemes develop and in the light of revised costings. The Key Stage Review process demonstrates our thinking in this area;
• we support the work being done to develop the assessment of value for money at programme level; and
• the Department should try to tighten project management arrangements on the larger, more complex projects.

Programmes

Rail Services

6.8.18 The Scotrail franchise (£289m in 2007-08) is committed to 2011, so will provide no headroom.

Ferry Services

6.8.19 The Clyde and Hebrides ferry services (£32.6m in 2007-08) and the Northern Isles Ferry Services (£22.9m in 2007-08) have both been recently put out to tender for five to six year contracts - CalMac is the preferred bidder for the Northern Isles contract. These contracts will be signed before SR07 is completed, so spend will be locked for the next review period. Again, value for money should be monitored regularly through the procurement process and should be evaluated before contracts are signed.

6.8.20 Existing ferry services were developed to link with railheads. A wider review of ferry services would give the opportunity to create an infrastructure which better served the lifeline needs of communities and provided a contractual structure to support that.

Bus Services

6.8.21 The bus industry is expected to receive different lines of expenditure from the SE:

• some £57.2m in Bus Service Operators Grant in 2007-08. This a fuel duty rebate of 80% on ultra low sulphur diesel. It is part of a wider UK scheme introduced since the PA; and
• £6.5m to support the development of bus services where none currently exist.

6.8.22 The SE has assessed the impact of withdrawing BSOG as a 17% increase in fares (assuming full costs were passed to the consumer). Any headroom here would transfer the cost from the general taxpayer to the passenger. The Department for Transport administers the scheme on the SE's behalf and has undertaken studies on this grant. Options for reduction are to reduce the rate of duty paid or seek better targeting of the scheme.

6.8.23 The Bus Route Development Scheme aims to increase bus journeys by 5 million a year - a subsidy rate of 77p per journey. The SE is funding 25% of the overall costs. Passenger numbers for the 27 funded projects will be monitored. This will need to isolate the impact of concessionary fares. The funding is short-term, and therefore £6.5m could be available for re-allocation in SR07, subject to the evaluation of its effectiveness and Ministers' other priorities.

6.8.24 The Bus Users' Complaints Tribunal is a small budget line at £100k, and Ministers should consider incorporating this body in the new Transport Users Complaints Tribunal.

Concessionary Fares

6.8.25 A free national off-peak bus travel scheme for older and disabled people was introduced on 1 April 2006. An extension to the scheme to cover students is also in the PA. In total, £110m has been budgeted for these two schemes in 2007-08 and is now committed under a seven year agreement with the bus industry. If passenger journeys increase substantially - an 8% increase has been assumed, the SE is committed to expenditure of up to £159m. This difference will be transferred from local authorities at the 2006-07 Autumn Budget Revision. A further £3.2m is spent on administering the scheme. If passenger numbers rise substantially and require additional bus mileage, there would also be a knock-on effect on the Bus Service Operators Grant (see above).

6.8.26 Despite the debate on the pension age, concessionary travel has been granted at age 60. If Ministers wanted headroom in this area, it could be created by increasing the age of those eligible; delaying the introduction of concessionary travel for students; or re-negotiating the cost formula with the bus operators, under which they are given 73.6% of an adult single fare.

6.8.27 It is worth noting that a further £95m has been allocated through GAE to local authorities to cover existing local concessionary travel schemes, both bus and rail. GAE is not part of our remit, so we have not looked at this aspect of concessionary fares.

Air Services

Air Services - lifeline services

6.8.28 Lifeline air services will receive some £18m in support. Around £5m is used to fund the lifeline services to Campbeltown, Tiree and Barra. £13m has recently been committed to a scheme to support passengers from lifeline areas, in an effort to develop further services. We understand that recent tendering exercises will mean that the budget for 2007-08 will be fully committed.

Air Services - Highlands and Islands Airports Ltd

6.8.29 In 2007-08, £23.2m has been allocated to support HIAL. A five year review of HIAL is due soon - it should focus on performance and efficiency. The re-negotiation of the PFI contract has already released £2m from this budget line.

6.8.30 The SE is also planning to spend £6m in 2007-08 on the Integrated Ticketing and Smart Card scheme, which is not yet committed, leaving the funds available for re-allocation. The impact of stopping development of the smart card scheme would be that the SE and operators would have to rely on existing system. Management information to support performance monitoring of the scheme would be much weaker and the system would be less easy to use for the travelling public.

Other Public Transport

Integrated Transport Fund

6.8.31 This fund is allocated to local authorities for medium sized transport schemes - £57m for 2007-08. This programme includes the previously separate Public Transport Fund ( PTF). The successor arrangements for projects are being considered with the new Regional Transport Partnerships and local authorities. As no schemes have been committed yet beyond 2005-06, this is all headroom.

Major Public Transport Projects

6.8.32 There are eight major rail projects in the PA - three have already been signed. Cancelling the other five projects would give £1.6bn in headroom in the capital budget over a period to 2010-11 but would breach Ministerial commitments. In line with the PA commitment, Ministers should ensure that value for money is monitored closely as these schemes are developed.

Agency Development Fund/Agency Administration Costs

6.8.33 Some £10.8m has been set aside in 2007-08 to cover the costs of the Transport Agency. We have not examined this budget in detail as it is early stages for the agency. A Framework Agreement has been developed, and costs are to be benchmarked.

Road Safety

6.8.34 £2.1m is planned for Road Safety spending. Initiatives are monitored and show good economic outcomes for the expenditure occurred. There has been continuous improvement in reducing the number of road accidents in Scotland in recent years.

6.8.35 The advertising budget is centrally controlled (6.10.15-20). The prioritisation process centrally has led, we understand, to a reduction in the budget for road safety spend in recent years. Given the positive benefits regularly demonstrated by road safety advertising, we query the process of prioritisation with the SE's advertising spend and suggest that Ministers look at this again.

Transport Information

6.8.36 This £3m funding supports a web site, which provides travel information across a number of different travel modes (rather than simply road or rail). It is part of wider funding with other parties, and withdrawal could cause the scheme to fail. It has been evaluated, and the spend is proving effective, i.e. meeting objectives in multi-modal shift.

Rural Transport Measures

6.8.37 The Rural Public Passenger Transport Grant Scheme of £1m provides support to local authorities to buy additional bus services. Independent research shows that 90% of users consider that the services are vital to their local communities. Yet another scheme is in operation - Rural Community Transport Initiative at £7m and delivered by voluntary groups. This has been expanding each year and has been independently evaluated. Two further rural transport schemes are available - Demand Responsive Transport and the Rural Petrol Stations Grant Scheme. There is merit in reviewing the different grant schemes available to eliminate any duplication and reduce administration costs - there is also potential overlap with ERAD.

Cycling, Walking and Safer Routes

6.8.38 This budget is £15.5m in 2007-08 and covers both transport and health objectives. There also seems to be some cross-over with local authority programmes. It covers both capital - development of cycling routes - and revenue - funding of School Travel Co-ordinator posts. Some elements of the programme have been evaluated. The £5m development of a yellow bus scheme looks like an area for potential headroom. The pilot should have SMART targets and be fully monitored for effectiveness, before being implemented. This could be an area of cost pressure.

6.8.39 Increasing the number of cyclists so substantially could have a knock-on effect on the road safety budget.

British Waterways

6.8.40 The SE has allocated £11.4m to support British Waterways in Scotland. This is a UK wide organisation, from which Scotland benefits. Much of the spend is now committed through a commercial agreement, which is tied to bringing in commercial capital. In the medium term, there is a question over whether this budget should sit in Transport at all. Its objectives are more environmental and wider economic development. In England, British Waterways is the responsibility of DEFRA. This budget may sit more appropriately in ERAD.

Track Access Grants

6.8.41 The programme covers a Freight Track Access Grant to Network Rail of £1m. This could perhaps be rolled up in another programme on the rail side. There is little committed expenditure here, so available headroom.

Support to the Freight Industry

6.8.42 This budget is declining (to £14.9m in 2007-08) and has been significantly underspent because of the delay in developing a freight facility at Rosyth. It also provides support for driver training to the freight industry leading to a reduction in fuel used. Given existing fuel costs, it seems odd for the SE to fund this programme, when there is sufficient incentive on the road haulage industry to fund this training themselves.

Modal Shift and Strategy

6.8.43 This budget of £8.3m has only indirect links to the PA, but has heavy links to cross-cutting themes. This budget provides resource funding for the new Regional Transport Partnerships to enable delivery of capital projects within the Regional Transport Partnership budget line. There seems to be some overlap with the development of the Transport Agency budget.

Other Grants to Local Authorities and Regional Transport Partnerships

The Tay Bridge Grant

6.8.44 This grant is now subject to review as part of the wider Bridges Review, recently announced by Ministers. We have therefore no comment.

Piers and Harbours Grant

6.8.45 While this budget line of £7.5m targets different projects from the grants paid by ERAD to local authorities, this should be studied further to see whether any synergies and headroom could be created.

20mph Limits around Schools and Home Zones

6.8.46 This budget is £11.6m on a 90/10 split between the two elements of the programme. The 20mph programme was developed after a pilot, which was evaluated and demonstrated effectiveness. We suggest that the performance indicators for this element of the programme should be amended to cover the measurement of accidents in the areas concerned - rather than the number of schools covered. The programme should be monitored carefully - after £30m of spend over the last three years, the programme is just over two thirds of the way through the number of schools targeted to 2008. Therefore, this programme could become headroom in the next spending review.

Regional Transport Partnership Capital Funding/Strathclyde Passenger Transport Grant

6.8.47 This fund is used for SPTE projects and will be available to the RTPs. It totals £46m, of which £11m is on schemes already committed and £35m remains as yet unallocated. SMART targets should be developed for this expenditure and an overarching assessment of programme expenditure undertaken.

Motorways and Trunk Roads

PPP Payments

6.8.48 There is no scope for headroom in the PPP payments budget. Spend is £42m in 2007-08 and is locked-in over the next spending review period.

Motorway and Trunk Road Maintenance

6.8.49 The Motorway and Trunk Road Maintenance programme of £117.5m is contracted out and current contract runs to 2011. Rates are set in the contracts, but not overall spend. The Department has estimated that essential maintenance would amount to some £50m a year, giving an indication of spend which is locked-in for the next spending review.

Motorway and Trunk Roads Capital Programme

6.8.50 The Motorway and Trunk Roads capital construction programme is set at £125m in 2007-08, and £40m is allocated to Road Improvements. There would be some headroom in these programmes if all slippage/underspend were not simply allocated to another project, e.g. A68 - although we appreciate that that would make the programme harder to manage. This budget line is relatively flexible, as it is entirely within Ministers' gift whether to proceed with further projects in the Strategic Road Review, or new ones developed as part of the Transport Strategy.

6.8.51 There is a further programme of £6.1m for motorways and trunk road expenditure, which contains a rather odd mix of individual spending programmes. These appear to be mostly support costs, on which there was limited information for us to assess in the time available. This budget line should be looked at in more detail and could perhaps be re-allocated to the major spending programmes.

6.9 ENVIRONMENT AND RURAL DEVELOPMENT

Background

6.9.1 This Portfolio accounts for approx £1.3bn in 2007-08 divided into 10 level 2 budgets (including Forestry Commission Scotland) and 64 level 3 budgets for ERAD and four for Forestry Commission Scotland.

6.9.2 At most interviews we were either given supplementary information or directed to further information sources. There is a great deal of information and data about all the budget lines in this portfolio. Yet it did not give us a coherent nor comprehensive view of the overall aims. This is an example of the general issue raised at 4.2.8 because the budget was not built up around a set of clear outcomes such as those recently published by the Department and sent to stakeholders (see Box 11). All the budgets have performance targets and indicators. While few of these could be linked directly to the PA or Building a Better Scotland ( BABS) commitments, Ministers have published a series of strategies embracing the PA commitments in more comprehensive statements of policy. Much of the information was focused on measuring activity or inputs and few related to outcomes. We have therefore limited our commentary on performance issues to exceptions from this general finding.

Key Findings

6.9.3 Key points about the portfolio budget (figures from Draft Budget 2006-07 pages 137-149) are:

• The total is relatively stable around £1.3bn with no recent major growth or changes.
• Approximately £350m is for CAP and outwith our remit as it is AME.
• EU spending requires match funding by the member state, so approximately £100m is effectively committed to the EU programmes. Nearly 30% of the budget is therefore effectively determined externally.
• The major capital spending programmes are in Water (c. £180m available for borrowing consents) and Waste (c. £130m for a mixture of revenue and capital expenditure). The Waste budget is an example of the general issue of classifying expenditure raised at 3.4 and 4.3.12. Much of the current waste expenditure is revenue spend for SE (as grants), but it supports major council infrastructure projects that are classified as capital.
• Some of the other budgets have elements of capital that bring the total to c. £400m or approx 35% of the budget. One possible way of creating short-term headroom would be greater use of PPPs in procuring major infrastructure projects, although this would mean long term lock-in (4.3.17).
• Research-related spending amounts to c. £150m or 12% of the budget, including support for two agencies and five research institutes, but excluding any research commissioned by ERAD sponsored bodies, e.g. SNH and research for the Environment Group.
• Of the total £1.3bn, approximately £520m (45%) goes to 15 sponsored bodies or agencies.
• Again, of the total £1.3bn, approximately £720m related to 35 grant schemes (now being consolidated). This includes various EU schemes but excludes any schemes operated by any of the agencies.

6.9.4 This portfolio and the delivery Department are subject to many tensions including:

6.9.5 'Old v New' - There have been and continue to be significant changes in the thinking about policies within this portfolio. In particular, there is a shift away from subsidising agricultural production to incentivising sustainable land management and rural development. This has required new and amended delivery mechanisms. Some are already in place, others (for implementation from 2007) are outlined in current consultations, and old grant schemes are being closed. The Department recognises this needs to be done in an orderly way. It is also seeking to change its culture from sponsor of specific industries towards a more modern, integrated approach to achieving public value.

6.9.6 'National v EU' - A significant proportion of the spend (around 40% in SR04) is either driven or determined by EU requirements, usually set out in Directives translated into Scottish legislation or applied as a result of experience with European audit and enforcement. We found evidence that Ministers and officials recognise the need to balance the priorities of EU with those of the SE. We are less clear that the correct balance has yet been found. The Department is currently trying to devise a rural development package, in which European funding has been unexpectedly reduced, using already budgeted resources rather than looking to bid for more domestic funds in compensation. This will be a litmus test for the new approach.

6.9.7 With the accession of new Member States to the EU, the levels of spend available in Scotland will decrease over time (especially Structural Funds, less so CAP). There will be strong pressure for additional funds from the SE to compensate. We understand the Department is advising land managers that they should use the current CAP period to review their farming and other operations, and make themselves ready for the likelihood of further reductions in support for rural development after 2013.

6.9.8 'Policy v Operational' - Over half of ERAD officials are involved in service delivery or processing payments. Several ERAD sponsored agencies also engage in regulation and grant payments. This raises concerns about value for money especially the number of relatively small grant schemes and the links between policy and operational staff. We welcome the phasing out of several small grant schemes and proposals in a current consultation to merge eight further small grant schemes into three (Land Management Contracts, Tiers 2 and 3 and LEADER+). There is also what might be termed a 'sub-tension' here between regulation and development. A recent reorganisation has the aim of separating policy development work from regulatory and delivery functions. This meets some of the general concerns raised in 4.4.4 and should create potential for efficiency savings (4.3.11).

6.9.9 'Strategy v Delivery' - This portfolio is a good example of the 'crowded landscape' (4.3.11). We found varied experience and skills in this area that again raise issues of value for money and consistency. The 'On the Ground' project launched last year is designed to create a single virtual delivery agency from the Department's agricultural offices, Scottish Natural Heritage ( SNH), Scottish Environment Protection Agency) ( SEPA), the Deer Commission, the Crofters Commission and the Forestry Commission for Scotland. This should make it easier for customers to do business with the Department, make sure that staff in all parts of the family operate with a wider perspective and deliver some administration savings in the long term (although set up costs will be needed in the short term).

6.9.10 'Outcomes v Inputs' - In the past, many of the strategic aims within this portfolio did not translate readily into SMART targets (Box 11). The tendency was to focus on what was easiest to measure leading to an emphasis on inputs. The new approach underpinning the Department's latest business planning is to focus more on outcomes and establishing the best way of delivering current policy objectives.

Box 11

6.9.11 'External v Internal' - Much of the portfolio is subject to major external influences that can counter (or even derail) policies or decisions. While extreme examples such as BSE or Foot and Mouth Disease are over, a significant animal disease crisis such as the arrival of Bird Flu could well divert many staff away from planned activities.

6.9.12 The Department recognises these tensions and is in a process of restructuring partly to deal better with them. We encourage the Department to seek an effective balance in the various tensions in taking forward their work.

6.9.13 In terms of our work, the combination of the above factors and the current restructuring have added some complexity if only because of increased uncertainty. Equally, we believe the restructuring provides a chance to integrate and consolidate across many of the Departments functions and budgets. That should yield some headroom, albeit on variable timescales.

6.9.14 The Department is currently consulting on the next Scotland Rural Development Plan for the period 2007-13. We see this as a chance to clarify aims, set clear priorities and give clear direction to the Department that could yield efficiency savings while increasing impacts and providing clearer outcomes. We would encourage Ministers and the Department to use this process to engage widely across all the portfolio's issues and also engage with the other portfolios to ensure cross-cutting or cross-portfolio priorities and issues are properly addressed.

Headroom

Table 20

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

6.9.15 We found little immediate headroom in this portfolio.

6.9.16 Scottish Water is the major source of immediate headroom in 2007-08. Scottish Water's base delivery plan suggests that they will require £51m in 2007-08 against a baseline of £182.8m. Lower borrowing is a direct result of less investment in the first year of the 2006-10 regulatory period. These funds will, therefore, be required later in the regulatory period as may funds held over from the 2002-06 period. Mutualisation of Scottish Water could release £180m in the medium term, and some of the smaller budgets could yield up to £30m from the outset of the next spending review period. Any mutualisation would be the subject of primary legislation in the Scottish Parliament. There will, however, be a significant extra demand in the next Spending Review period if Scotland is to meet its obligations under European Directives requiring a reduction in waste going to landfill.

6.9.17 These features highlight some of the difficulties as well as the opportunities to create 'headroom'. The EU influence is significant and affects national spend. The evidence we found shows that significant efforts to maximise the synergies between EU and national spend have only recently begun. We believe there must be some scope to create headroom and reallocate funds to SE priorities from the streamlining of the EU payments and would recommend that should be a specified aim of the current development of the next Scottish Rural Development Programme, for example through applying domestic modulation of the Single Farm Payment.

6.9.18 The number and variety of small budgets and grant schemes also offer scope to create headroom and improve value for money (of both grants and administration). We would encourage the Department to extend its approach of streamlining of EU funding streams to all parts of the portfolio, with targets for savings and improved value for money. Rolling up a number of grants schemes into Land Management Contracts is a step in the right direction. We would also suggest that grant administration costs are benchmarked against external bodies and understand that this is part of a recently commissioned external contract.

6.9.19 We question whether it is good value for money to spend around 12% of the budget on research and related activity. It is not clear to us whether the Department is funding a slice of science in its own right (which ought to be a job for the Scottish Funding Council) or is working on the basis that its policy requires this amount of research investment. The position is complicated, we acknowledge, by the dependent relationship of the four science institutes and (to an extent) the Scottish Agricultural College.

6.9.20 Finally, at a general level, we found evidence of overlap and duplication in some of the newer, smaller programmes and grant schemes. Our concerns here extend beyond this portfolio and we believe there could be scope for some headroom from reviewing the spending on cross-portfolio issues - especially on rural communities and infrastructure such as transport (bus schemes, cycle routes), tourism, culture and sport (access to the countryside) and health (healthy outdoor pursuits).

Programmes

Water

6.9.21 This comprises 2 level 3 budgets:

6.9.22 The Scottish Water ( SW) budget covers the borrowing required to meet the delivery of its capital programme. The capital programme is derived from the statement of Ministerial priorities (Quality and Standards 3) set out in February 2005. Most of the capital programme responds to EU legislation in relation to drinking water and the environment. Compliance with standards is monitored by Scottish Water's independent quality regulators, the Drinking Water Quality Regulator and the Scottish Environment Protection Agency. The level of borrowing required is a function of the Strategic Review of Charges 2006-10 - the final determination published by the Water Industry Commission for Scotland, the Scottish Water independent economic regulator on 30 November 2005.

6.9.23 The PA contains general commitments to implement the Water Environment and Water Services Act, to maintain SW in public ownership, support it to meet public health standards and other wider environmental statements. The size of the budget for water is a function of the political desire to keep water in the public sector and the regulatory settlement which determines the levels of funds required to deliver Ministerial objectives.

6.9.24 The evidence suggests that independent economic regulation which makes use of external benchmarking with the private sector to set the charges and borrowing for Scottish Water will deliver SE Ministers' objectives at the lowest reasonable cost. We would encourage the SE to look at the wider relevance of the model beyond Scottish Water, especially in other areas of the public sector where there is significant commercial or business activity in delivering service. The final determination of charges makes clear that, based on the current statement of Ministerial objectives, the Department has £150m headroom over the 2006-10 period of the regulatory settlement. The spread over each of these years is dependent on Scottish Water's investment planning in relation to the current investment programme for 2006-10 and any left over from the previous regulatory period. This illustrates a general problem of different cycles (5.4), as the headroom spans two spending reviews.

6.9.25 Part of the reason for Scottish Water delivering significant year on year improvements in efficiency (operational costs are now £140m less than they were in 2001-02 - a 40% reduction in four years) is that management has been incentivised to do so through the structure of a non-negotiable regulatory settlement with clear delivery targets and remuneration packages. This reflects a wider issue we have identified throughout the SE in terms of managing its finances (4.4).

6.9.26 Further headroom could be created, if Scottish Water were mutualised, leaving some £180m a year of capital funding to be allocated to other priorities. Any mutualisation would require primary legislation through the Scottish Parliament. We suggest that Ministers consider the options for achieving this and assess the value for money impact. As part of that, they would need to consider the risk that sale proceeds might not be enough to cover the debt - currently £2.5 billion - and the balance would presumably fall to be funded through the Scottish Executive budget.

Natural Heritage

6.9.27 This comprises 2 level 3 budgets:

6.9.28 Both budgets are legacy spending with few direct links to the PA. SNH spending has a strong EU influence. Both are largely revenue spending, mainly on staff and related costs. The various grant schemes run by SNH are generally committed for two to three years ahead.

6.9.29 Scope for headroom is most likely to arise from efficiency gains, for example through the 'On the Ground' initiative and rationalising the backroom/common services of these NDPBs with other ERAD sponsored bodies.

6.9.30 We found no strong evidence to explain the rationale or purpose for establishing the national parks authorities as separate bodies. We advise that this matter be resolved before any further parks are designated and that these NDPBs be included in any review of the 'crowded landscape' (4.3.11).

Environment Protection

6.9.31 This comprises 7 level 3 budgets:

6.9.32 We found few of these budgets were related directly to specific PA commitments or priorities, although most contributed to a number of high profile PA targets in relation to waste, litter and flytipping. Some represent legacy spend with EU influence like SEPA, others represent longer term policies developed since devolution and continuing under the present SE such as Flood Prevention. All have a range of performance measures of variable quality and relevance.

6.9.33 We could see little scope for headroom in SEPA's budget except through any efficiencies. If EU legislation continues its present trend then SEPA is more likely to be a spending pressure.

6.9.34 The most fruitful area for any headroom is likely to be in the capital budgets in the Strategic Waste Fund and Waste Initiatives. Both, however, have significant political commitment, much of it driven by the need to comply with EU Directives, and contractual commitments are building up as schemes are approved. Our view is that waste projects may be subject to significant slippage during the next spending review. We cannot estimate that now and recommend these programmes be monitored carefully. The use of PPP is being considered to deliver a number of these projects, but we understand that this was anticipated and taken into account when the budget for this programme was originally decided.

6.9.35 Flood Prevention and Coast Protection has the potential to become a major spending pressure in future. Work is being undertaken to evaluate the types of schemes likely to be most effective in reducing flood risk and maximising impact by concentrating on reducing the number of properties affected by that risk. A programme is in place to develop more precise maps of flood risk areas. We encourage this type of work, as it improves the effectiveness of policy development and will target resources to maximum effect. We were also encouraged that the Department was working closely with the insurance industry.

6.9.36 The SE is developing a more sustainable approach to flood risk management that will allow different approaches to flood alleviation, such as wetland creation and natural flood attenuation, to be considered for grant funding along with the more traditional major capital flood prevention schemes. All of this will help to reduce pressure in this area. We would urge Ministers to take a rigorous look at value for money of proposed schemes - projects are 80% SE funded and can be in excess of £100m. We understand at least one major scheme of that order is likely soon. Such major investment, should deliver significant environmental and economic gain.

6.9.37 Finally, we highlight that some of these programmes are under £1m, yet have separate level 3 budgets (5.7).

Research and Sustainable Action

6.9.38 This comprises 4 level 3 budgets:

6.9.39 None of these budgets is directly linked to the PA or BABS, although all the activity is well attuned to the main aims and policies. £3m of the Sustainable Action Fund is directly funded through the Aggregates Levy, half of which is spent on projects in areas affected by aggregates extraction. This is currently under review by HM Treasury and might end. Ministers have asked that a review be carried out of grant schemes in the environmental justice and regeneration area to establish more clearly the focus of the Environmental Justice Fund.

6.9.40 We see these budgets as the 'cutting edge' of new policy developments to promote ideas of sustainability through practical examples. Without comment on the success of this approach, we note considerable overlap with other areas of spend, included in other portfolios. We suggest the need for this work be reviewed in relation to cross-cutting issues and funding streams as we see some scope for headroom.

6.9.41 This is an area where policy development work does not require significant funded programmes to make a difference. It is cross-cutting in nature, using its base in ERAD to influence the work of other Departments, and funding other bodies to influence from outside the Executive.

6.9.42 We would also raise the question why £0.4m is allocated to a research budget within a portfolio that has significant spending elsewhere on research and related activity. With proper co-ordination these budgets could be integrated elsewhere and might yield up to £1.4m headroom.

Rural Development

6.9.43 This comprises 21 level 3 budgets, shown in Table 21.

Table 21

Notes:
1. The Plans assume a rate of Modulation of EUCAP Support on-farm payments of 10 per cent by 2007.
2. The 2005-06 Budget allocations reflect Ministers' decisions earlier this year on their priorities for the use of Modulation and match funding resources which, at the conclusion of SR 2004, were shown as being temporarily held for the Rural Stewardship Scheme. The final Budget for 2006-07 will reflect the latest estimates of requirements to meet the priorities now agreed, while the figures above remain those in the SR 2004 settlement.
3. Items marked * include that element of funding by the EU directly. Items marked # show only the DEL element of funding for measures where the EU contribution will come from modulation of CAP payments. Gross provision for payments under the Land Management Contracts and Rural Stewardship Schemes in 2005-06, taking account of contributions to come from modulation, is therefore some £28.7m higher than the DEL only figures above.
4. "Other" expenditure in 2002-03 and 2003-04 includes spending under the time limited Pig Ongoers Scheme.
5. The total here for 2005-06 is £31,000 higher than the Budget approved by the Parliament for the year. This reflects the re-classification of that sum of AME expenditure, in relation to EU Bee Health spending, which appeared in previous plans in the CAP Support Level 2.

6.9.44 The first, obvious comment on these budgets is the number, scale and diversity included in this single level 2 budget. The biggest is Less Favoured Areas Support at £61m and the smallest is support to the Scottish Agricultural Organisation Society at £0.325m. The functions covered range from 'general' subsidy like LFAS to very specific matters such as the Habitat Creation Scheme (£0.359m). This makes it very hard to see a coherent aim or purpose in the level 2 budget.

6.9.45 We are aware that six of the 21 are to be rolled up into Land Management Contracts, which is welcome, and a further two schemes are now closed. Others will close during the course of 2006 and, if replaced, will form part of Land Management Contracts. We were advised that a review of the effectiveness of these budgets is to be undertaken, but will not report until next year. We suggest this should be tackled urgently, so that its findings can inform the next spending review and the allocation of EU monies for the next budget round. We were advised that c. £100m will remain 'uncommitted' over the next six year EU cycle and have shown this as headroom. We would strongly recommend that any review should streamline the whole grant system to provide greater focus on clear outcomes set by the new Scotland Rural Development Plan, consistent with the overall outcomes for the Department. A second aim should be to identify headroom by ensuring resources are better targeted and achieve value for money.

6.9.46 A second, general comment is the importance of EU funding to some of these budgets (approx £28.7m above the DELs). Our view is that the EU funds could be accessed with lower levels of match funding, thus freeing up resources for SE priorities. This factor should also be considered in the current review and development of the Plan.

6.9.47 Most of the budgets are legacy spending, albeit most can also point to high level PA commitments, with limited lock-in as they are mostly annual. There is therefore potential for headroom in most of the lines, not only through streamlining and efficiency savings, but also through defining clear outcomes. There are varying levels of political commitment to these budgets - for example, to retain 'a grant scheme for crofting counties' - yet the outcome of that scheme is not clearly set out, and there are overlaps with other grant streams. Again, we highlight the importance of the new Rural Development Plan as a means to identify agreed outcomes for rural Scotland and create flexibility in the means of delivering them to all farmers and land managers - including crofters. In looking at the potential of economic development, the Department's approach should be co-ordinated with investment in transport, in particular, which can make rural areas more accessible and therefore more open to economic diversification.

Agricultural and Biological Science And Other Agricultural Services

6.9.48 This comprises 13 level 3 budgets shown in Table 22.

Table 22

Note:
1. The provision shown for SASA reflects the allocation in 2004-05 of some £16m towards the costs of the Agency's re-location to a new site and, in 2005-06, assumed receipts of £16m from the disposal of its current site. Increases in the baseline from 2006-07 are largely attributable to increased costs of depreciation for the new SASA building.

6.9.49 These budgets include most of the research and related activity for the Department. None has a direct link to PA/ BABs, and the Department views them as 'supporting' policy development and implementation. Ministerial support for the research work funded at the four Institutes plus the Scottish Agricultural College was given in 2005 through the approval and publication of a five year plan 'Strategic Research For SEERAD' ¹⁰. We see this as an example of priorities being revised or established outwith the PA/ BABS framework (5.4). We understand the new Chief Scientific Adviser is tasked with developing a strategy which integrates all the Department's investment in science and research - both direct investment and that made by NDPBs and executive agencies. We were advised of a number of significant constraints on achieving early reductions in any of these budgets ('lock-in') and that the strategy will provide the assurances on value for money and need we think necessary.

6.9.50 We think the Department is taking the correct approach of shifting funding from the Institutes to the programmes they deliver. This will focus the work on what is needed. We see potential for headroom in these budgets by adopting a more challenging approach to commissioning research and accelerating the integration of the main research institutes into Scotland's Higher and Further Education sector. We recognise that this has been under discussion for five years, including two separate reviews. In the short term, the HEIs are not interested in integrating all of the institutes.

6.9.51 We question whether three small NDPBs (Royal Botanic Garden Edinburgh, Deer Commission and Crofters Commission) need to be freestanding bodies and suggest consideration be given to transferring the functions to relevant agencies or bodies. We also recommend a review of the Flexible Fund for Research, so that individual policy areas take responsibility for funding the research needed to provide evidence to underpin their advice to Ministers. It is hard to understand why a separate fund exists. We have, therefore, shown this as headroom.

6.9.52 Overall, we could not specify a total figure for headroom in these budgets, especially as five year contracts for the long term research have just been signed. We think it reasonable that the Department should be asked to review these budgets in the light of the comments above, focusing on headroom through greater integration and focus on agreed outcomes.

Fisheries

6.9.53 This comprises four level 3 budgets:

6.9.54 These budgets are largely driven by external factors especially the EU. In effect SEERAD, through these budgets, implements the Common Fisheries Policy and the support and regulation of the aquaculture industry. Other external factors include commodity prices (fish and fuel), marine and Health and Safety legislation. Most of the spend is therefore legacy and locked in. There are several specific PA/ BABS commitments on fisheries and aquaculture and a range of Ministerial commitments. There are now comprehensive strategy documents on sea fisheries, inshore fisheries, aquaculture and the coastal and marine environment. Both agencies have well developed performance indicators and monitoring systems.

6.9.55 We see little scope for headroom in these budgets other than through efficiency gains, although they may be offset by rising costs from external factors (especially for SFPA).

Forestry

6.9.56 There are two level 2 budgets that deal with Forestry with eleven level 3 budgets as follows:

Forestry Commission Scotland

Forest Enterprise Scotland

6.9.57 We take these together as they are all concerned with the same broad policy agenda and outputs and feed in to a number of the Department's broad outcomes.

6.9.58 To some degree these budgets represent ERAD (and even the SE) in miniature. They are subject to considerable changes, tensions and external influences. There is a mix of social, environmental and commercial factors, and there is a real mix of short and long term considerations in developing and implementing policies.

6.9.59 Forestry activities are about more than planting and managing forests. Both the Commission and Enterprise have been increasingly involved in wider social (access) and environmental issues in recent years. This has changed the nature of their activities and is reflected in some of the budget lines. These wider activities mean that both agencies can point to a range of PA/ BABS commitments to which they contribute directly. Like most other budget lines however, the nature of that contribution is hard to evidence, although there is a great deal of information and data about their performance relative to specific tasks and projects.

6.9.60 We see little scope to create headroom easily, although the cost of capital charges might be reduced by the Commission's proposal to recycle their estate by disposing of commercial forests (where the public benefits are low) and investing in more marginal areas (where the public value is high), where there is less productive potential. There is considerable lock-in through policy, statutory and contractual commitments, so the main sources of short term headroom are likely to be through efficiency gains or accounting classification. The latter point relates to the cost of capital charges and depreciation which create a perverse incentive for the agencies to cut maintenance of their estates to reduce the charges. There is also a perverse effect of the policy to increase access to the estates as this increases maintenance costs. We understand that the accounting treatment for Forestry Commission and Enterprise mean that disposal of estate may not yield 'real' headroom, but we have noted the possibility.

6.9.61 We would note that the arrangements for managing forestry seem to work well and might provide a model on which to base one or two agencies integrating most of the heritage and environment functions of this portfolio.

Conclusions

6.9.62 This portfolio and Department are facing a lot of changes, tensions and external pressures (especially from EU). We found much review and restructuring activity trying to deal with those factors and commend the efforts of Ministers and officials trying to redesign the organisation while continuing to deliver services.

6.9.63 Inevitably the changes, tensions and pressures are not uniform across either the portfolio or the Department and the next crisis or distraction is usually too close and untimely. We would therefore encourage Ministers and officials to continue their efforts and seek to achieve greater consistency in their approach across both the Department and wider SE.

6.9.64 We think greater cohesion would be achieved if there were a clear set of outcomes agreed at Cabinet level for the development of rural Scotland. It should cover all relevant investments including support to land managers, rural communities, transport, fisheries, affordable housing and economic development under EU Structural and other funds. The new Rural Scotland Development Plan provides the obvious chance to build a consensus. This might allow the next administration to 'hit the ground running' in 2007 on rural development in a joined-up way.

6.9.65 The plan should focus on outcomes, with clear measurable targets and realistic timescales ( SMART). The PA commitments were laudable, but did not translate easily into targets suitable for Departmental business planning. For example, what is meant by words like 'prosperity' or 'sustainable'? Such concepts need to be fleshed out in ways that permit meaningful measurement over time.

6.9.66 We were also surprised that none of our evidence on wider, strategic targets dealt with population or jobs dispersal. The demographics of most of Scotland's rural areas represent a major challenge to public policy and services for the future. We understand the wider work preparing for spending review 2007 will cover this issue and would recommend that it be included in the process of developing the Rural Scotland Development Plan.

6.9.67 Similarly, jobs dispersal offers one way of dealing with the challenges of rural development. In a portfolio and Department with staff spread throughout Scotland, there is an opportunity to develop awareness and understanding of the issues. The relocation of Scottish Natural Heritage and part of the Crofters Commission is a start, but further progress requires a comprehensive approach by all public agencies.

6.9.68 We have pointed to a large number of areas where we are not satisfied there is robust evidence to demonstrate that the budgets are a good fit to SE priorities as set out in the PA and BABS. The general nature of the PA and BABS, plus the agreement to new or revised strategies or initiatives makes it hard to establish a clear picture of what the SE is trying to achieve across this portfolio. The new set of outcomes which the Department has adopted as a management measure represents a good start. Even so, there is a lingering doubt that some of the justification for some legacy spending is post hoc rationalisation. All of this reinforces the need for a challenge function.

6.9.69 Our strong view is that the clear statement of purpose along the lines set out in the ten outcomes statement, and capable of informing Departmental Business Plans should provide this portfolio with a new focus, allow considerable streamlining of budgets and agencies, and yield much greater headroom and more effective policy outcomes over the next three to five years.

6.10 FINANCE AND PUBLIC SERVICE REFORM

Background

6.10.1 The total in this portfolio (F& PSR) in 2007-08 is £10.374bn. However, Local Government Revenue (£8.527bn), the bulk of Local Government Capital (£0.347bn) and the majority of the spend of the Scottish Public Pensions Agency (£1.429bn) were outside our remit.

6.10.2 In the time available, we were able to review only in broad terms the remaining parts of F& PSR. We interviewed the budget holders of the Modernising Government Fund ( MGF)/ Efficient Government Fund ( EGF) and the Cities Growth Fund, International Relations and Advertising and Marketing Development (see Table 23).

Table 23

Source: Draft Budget 2006-07

Headroom

6.10.3 Table 24 shows the headroom we found. Much of this is not strictly evidence based, and we recommend that each of the areas should be subject to further discussion within the SE to confirm the potential headroom.

Table 24

* Key to headroom
1. Potential headroom for SR07, using 2007-08 figures.
2. Areas for review that might yield potential headroom, where an estimate or top limit can be given.
3. Areas of potential where more work is required before any estimates can be made.

6.10.4 We recommend:

• increased control over public money spent in the media (Advertising and Marketing Development);
• improving Best Value by a more co-ordinated approach to the communication of SE policies and initiatives (Advertising/ MD, International Relations);
• either ensure effective use of EGF or discontinue the programme and create headroom of up to £26m;
• considering discontinuing the Cities Growth Fund at the end of its present cycle of 2007-08 and create headroom of £42m;
• benchmarking the Scottish Public Pensions Agency ( SPPA) to determine if it is delivering Best Value;
• continuing to look for savings in each of the smaller programmes; and
• d oing a review of the number of departments in the SE undertaking research and the amount of funding set aside in 2006-07 for such research.

Programmes

Local Government Boundary Commission ( LGBC) (£0.5m)

6.10.5 This budget covers the administrative running costs of the LGBC for Scotland. As the expenditure is for a well established and defined Statutory Committee, we concluded that headroom was likely to be negligible. We are aware of the fluctuating workload. However, expenditure in 2004-05 was only 50% of budget, indicating that potential does exist to save around £0.2m if the 2004-05 expenditure is a true indicator of the cost of this operation.

Office of the Chief Statistician ( OCS) (£2.0m)

6.10.6 This budget funds the development of the evidence base, including Scottish contributions to UK surveys. We noted OCS underspent its budget for 2004-05 which was the driver behind the reduction in resources allocated for 2005-06 and beyond. Nevertheless, we took the view that the search for further headroom should continue and recommend a further target of £0.2m, or 10% of 2005-06 projected spend, be agreed.

International Relations (£9.5m)

6.10.7 The function of this budget is to advance Scotland's place in Europe and the wider world by maximising Scotland's influence within the EU, building mutually beneficial links with other countries and regions, promoting Scotland abroad, attracting fresh talent to live and work in Scotland and to encourage and support Scotland's contribution to international development.

6.10.8 This is discretionary expenditure (i.e. not statutorily or contractually committed), and so an argument could be advanced that 100% of the budget represented headroom. We do not think this would be sensible, practical or acceptable, given that improved international relations are a central element in many parts of the PA (particularly in respect of growing the economy by improving the visibility of the Scotland 'brand'). We noted only around 70% of the budget for 2004-05 was spent. We were advised the full budget will be spent in 2005-06, but this remains one area where discretion can be applied year on year. Headroom could be created, and we suggest that this could amount to £2.75m if expenditure in 2006-07 and beyond were held at the 2004-05 level. However, the preferred route may be to maintain the spending at the level of 2005-06 and seek to ensure that appropriately demanding Best Value tests are applied to each project as funds are committed.

6.10.9 We felt better co-ordination is required in terms of 'branding' Scotland, one of the core reasons for this spend. We felt there is a danger of brand confusion and/or dilution unless other parts of the public sector charged with Scotland's image promotion (including VisitScotland, Scottish Development International ( SDI) and the Foreign and Commonwealth Office ( FCO), Historic Scotland and Scottish Enterprise) were brought under some form of common leadership or control. We also believe that efficiencies could be delivered from a more centralised approach to 'brand control' in Scotland and the consolidation of relevant budgets.

Standards Commission (£0.4m)

6.10.10 The purpose of this budget is to oversee the observance of Codes of Conduct for councillors and members of public bodies and to investigate and hold hearings over alleged breaches of the Codes. We did not identify any headroom.

Digital Inclusion (£0.1m)

6.10.11 The purpose of this programme is to ensure more equal, effective and beneficial access for all people to digital technologies and web facilities. The funds support and encourage use of digital technologies and the web by the public, private and voluntary sectors to improve quality of life and deliver new opportunities for disadvantaged individuals and communities. The sums enable pilot studies to be carried out. We felt it is not likely that any headroom would be identified.

Miscellaneous Committees (£1.0m)

6.10.12 This spending covers a miscellany of minor budgets, each of which, on its own, would be regarded as relatively small given the overall scale of the review. Spending includes commitments in respect of dog fouling, local government finance review, Scottish Local Authority Remuneration Committee, election pilots, Local Government Political Restrictions Exemptions Adjudicator ( LGPREA), Renewing Local Democracy ( RLD) Working Groups, Association of Scottish Community Councils, Response Handling and FCSD research.

6.10.13 It is difficult to see where, if at all, headroom of any significance could be created from this amalgam of programmes. However, figures received from the Finance Team for projected expenditure across this range of programmes for 2004-05 indicate that many programmes spent less than 50% of their budgets. The amounts involved are small, but the principle of seeking headroom in all aspects of the SE budget needs to apply here as in the major areas of spend such as Health, Education, Transport and other departments. We, therefore, recommend that headroom of 10% (£0.1m) be created in these budgets for 2006-07 and beyond.

COPFS Inspectorate (£0.4m)

6.10.14 This aim of this programme is to make recommendations that will result in clear and measurable improvements in the Crown Office and Procurator Fiscal Service ( COPFS), making it more accountable and enhancing public confidence. We did not identify any headroom.

Advertising (£8.7m) and Marketing Development (£2.0m)

6.10.15 The purpose of this budget is to enable the SE to communicate key information to the Scottish public. The Advertising and Marketing Development budgets are closely linked and have been grouped for our purposes. The Advertising budget is used mainly for the purchase of advertising media (television and radio) and for the creation and production of advertising material. The Marketing Development line funds the provision of services such as PR and web work undertaken in support of Executive advertising. These are designed to extend the reach and effectiveness of campaigns.

6.10.16 Until about three years ago, individual departments determined how much they spent on advertising. The SE Advertising team merely implemented individual department programmes. The budget is now flat lined, and the team is not allowed to exceed budget, which forces competition within the SE for use of the available funds, allowing a form of Best Value assessment to be carried out on the programmes presented each year. Considerable improvements have resulted in terms of prioritisation and focus of spending and the value obtained from the purchase of media time/space.

6.10.17 We noted that spending by SE is low in comparison to the £200m spent by the UK Central Office of Information. A simple application of the Barnett formula would suggest that the current SE budget could be doubled, although we were not given the impression that this was likely to happen in SR07.

6.10.18 We recognise this central budget does not capture the total public sector spend on advertising. Campaigns continue to be funded by individual departments through arm's length bodies, either from revenue budgets or from other sources (e.g. the Proceeds of Crime fund being deployed to promote the Crimestoppers campaign). We think this could amount to between 20% and 30% of the centralised advertising/marketing budget of £10m.

6.10.19 Consideration needs to be given to tighter control over public money spent in the media, and whether value for money could be improved by a more co-ordinated and centrally controlled approach to purchase of media time/space for the communication of SE and individual departmental policies and initiatives.

6.10.20 Progress has been made in terms of centralising media buying, and we believe further value for money could be extracted from the media sector by a more co-ordinated and disciplined procurement approach. This would create headroom which could either be re-invested in this area by getting more for the same spend, or used by Ministers in other areas. We suggest a target of £0.5m.

Improvement Service (£1.3m)

6.10.21 The purpose of the Improvement Service is to work with Scottish councils, their partners and stakeholders to improve the efficiency, quality and accountability of local public services across Scotland. It is a company limited by guarantee in which the partners are the SE, Convention of Scottish Local Authorities ( COSLA) and the Society of Local Authority Chief Executives ( SOLACE). The core grant from the Scottish Executive sets the twin challenges of returning more than that value back to public services, and identifying and developing complementary resource streams over time.

6.10.22 We considered this was another example of a small, ring-fenced area of expenditure, while worthy in its objective. We were unable to identify any potential headroom, but the progress of this programme and the spending against that budgeted should be closely monitored to determine its effectiveness. We felt there was a potential linkage between this programme and the EGF which, if appropriate, should be developed.

Modernising / Efficient Government Fund (£26.3m)

6.10.23 The MGF started in 2000, with a view to providing seed corn, quasi venture capital funding to projects designed to modernise the manner in which government services were delivered to its client base. It allowed ideas to be tried out on a pilot scale, and for their suitability for roll out to a wider population to be assessed. In all, some 44 projects received funding. Responsibility for projects suitable for roll-out was passed on to the appropriate local authorities.

6.10.24 The MGF is now being consolidated with the EGF. The EGF started in October 2004 and was intended to provide similar seed corn funding to projects with clear potential for national (rather than just local) roll-out. The SE Draft Budget for 2006-07 claims that this fund 'will promote efficiency improvements across the public sector, particularly in savings on 'back office' functions. The Fund (£25.5m in 2006-07) will be particularly effective where some pump-priming is required on a 'spend to save' basis'.

6.10.25 Bids for funding have been received from a wide variety of organisations, including NDPBs, NHS, local authorities, emergency services and the education sector. We understand the EGF has yet to award funding to any project, and that the view has been expressed that the qualification criteria for funding are overly complex.

6.10.26 We understand revised criteria are now being developed. However, the EGF is most unlikely to spend its budget for 2006-07. There also appears to be reluctance in some parts of the public sector to commit resource to a project appraisal process that is unproven. We believe there is a choice to be made with regard to EGF:

• put some real effort in to identify and make quick, real efficiencies; or
• accept that, for whatever reason, this funding is not required and that other 'spend to save' initiatives in the public sector will deliver the efficiencies targets.

6.10.27 We have shown the EGF as potential headroom, but accept that Ministers may well choose to increase efforts to use the fund on efficiency projects.

Cities Growth Fund (£42.0m)

6.10.28 The Cities Growth Fund was launched in 2003 in response to the recommendations of the independent Cities Review team and compelling evidence of historic under-investment in city infrastructure. It aims to provide the six city-based local authorities with a dedicated source of capital investment funding. Funds are there to back each city's ten-year City-Vision programme, fulfilling a specific PA commitment to 'realise the potential of our great cities' as drivers of long-term economic growth. In addition, the funding is intended to provide a flexible, targeted means of recognising the local expenditure pressures that are caused by economic growth and - specifically - as an alternative to introducing a scheme to allow local authorities to retain growth in Non-Domestic Rate Income.

6.10.29 A number of projects have been backed and successfully commissioned through this fund. However, the core purpose of the fund is to address under-investment in city infrastructures. As such, it must be directed towards projects that create sustainable, most likely tangible assets. We found evidence to suggest that several projects backed by the fund were transient and could not be said to have created any lasting asset. We were advised that expenditure on a number of projects could more appropriately be classed as revenue rather than capital.

6.10.30 Funding is committed to the end of 2007-08, by which time the Fund will have been in operation for five years. Closing the Fund in 2007-08 would create headroom of £42m.

Scottish Public Pensions Agency (£13.2m)

6.10.31 This budget is mainly for the administration of the pension schemes for the members and beneficiaries for the Scottish Teachers and NHSS pension schemes. The Agency also provides support to the Scottish Legal Aid Board, Scottish Parliament and other small schemes as well as supporting Ministers on pension policy matters devolved to Scotland.

6.10.32 This unit administers the pensions for a large number of public sector employees in Scotland. There must be efficiencies that can be gained and headroom created by either (a) outsourcing the provision of non-core elements of this service to specialist providers or (b) having the unit administer the remainder of the public sector pensions in Scotland.

6.10.33 In the time available, we were unable to review the unit costs of the SPPA. Notwithstanding the inherent difficulties in obtaining comparable benchmarking data, we recommend a benchmarking exercise is undertaken using both public and private sector comparators. In addition, there could be benefits if SPPA were to establish closer links or even merge with another public sector pension agency (e.g. Strathclyde Pension Fund).

6.10.34 Without such a benchmarking exercise, we cannot assess potential headroom for this budget. We noted that the increase budgeted for 2006-07 is driven in part by the agreed spend on new computer systems and in part by the broader pension reform agenda which requires the agency to introduce a number of business changes over the next two years.

6.11 THE SCOTTISH EXECUTIVE ADMINISTRATION AND ASSOCIATED DEPARTMENTS

Background

6.11.1 The budget for the Scottish Executive and Associated Departments amounts to £263.68m in 2007-08. It covers the costs of running the core administration of the SE which are staffing and associated costs - accommodation and training. The portfolio includes the General Register Office for Scotland ( GROS), the National Archives of Scotland ( NAS) and the Registers of Scotland ( ROS). The budget does not cover the running costs of NDPBs and Executive Agencies, which are met by the relevant programme budgets.

Key Findings

6.11.2 The SE's core administration and its wider administration (agencies, NDPBs, regulators/ regulatory bodies, public corporations, etc.) and local government should be proportionate, affordable and efficient.

6.11.3 The SE's administration costs should be benchmarked against comparable European models and those of sovereign countries with similar populations.

6.11.4 Administration costs should be allocated to programme expenditure, should be open to challenge and should be able to demonstrate Best Value.

Headroom

6.11.5 Any estimate of headroom in the Administration budget arising from this review or flowing from the portfolio recommendations depends on the likelihood of their implementation. It also has to be set against short term implementation costs and their impact on delivery agencies, NDPBs and local councils. Accordingly, no firm estimate is ventured here other than to designate what could indeed be considerable, as simply 'potential'.

The Core Administration - Numbers, Costs and Comparisons

6.11.6 The Administration budget in 2007-08 will amount to £235m, comprising staff salary costs (£163m), accommodation (£20m), other office costs (including minor Information and Communication Technology ( ICT) projects - £30m), training (£3m), and capital charges (£20m). Capital of £6m for ICT capital projects and £3m for other capital - mainly accommodation project work - will be available.

6.11.7 The number of staff in post ( FTE) at 1 April 2005 was 4,413. The Finance Committee of the Scottish Parliament reported on the administration and staffing of the Scottish Executive in 2005 and received evidence from the Permanent Secretary that between 1999-00 and 2003-04, total ( FTE) staff numbers within core Executive departments increased from 3,367 to 4,411, an increase of 1,044 (31%) to meet the pressures of devolution. Since 2003-04, core staff numbers have been stable.

6.11.8 Departmental comparisons of the administration budget in staff and non-staff costs and of total administration and programme expenditure and staff numbers were supplied. We were also given details of the staffing of all bodies funded by the Scottish Executive - public corporations, Scottish Executive Agencies, Non-Departmental Public Bodies, NHS Scotland and local government in Scotland. The core SE civil service amounts to about 1.07% of the total.

6.11.9 Financial targets have been set for this budget through the commitment by Ministers to keep SE administrative costs at least 25% lower than comparable Whitehall costs. The SE has also set a flat line budget throughout the spending review period, forcing efficiency savings of at least 2.5% through absorbing the costs of pay awards and other inflationary pressures. Efficiency savings in the Administration budget of £1.5m, £7.4m and £8.4m in 2005-06, 2006-07 and 2007-08 have been identified in Common Agricultural Policy ( CAP) reform, Procurement, the HR Reform programme, electronic Records Data Management ( e-RDM) and in non-staff costs and better staff deployment. Further potential savings have been found or are being sought in departmental and corporate budgets of £0.1m in 2005-06, £4.3m in 2006-07 and £7.9m in 2007-08 cumulatively. Delivery of all such savings will enable the SE to live within the flat cash resource allocation. The Administration is also subject to other targets relating to taking full advantage of developments in information technology and to ensuring the diversity of the organisation - targets for women in senior positions, for staff from ethnic minority groups and for staff with disabilities in the workforce.

6.11.10 The SE has responded well to the significant demands of devolution in the period 1999-2004 while absorbing almost a third more staff. That is now in the past. The organisation is facing new challenges, including working within tighter budgets and facing greater scrutiny of core administration costs.

6.11.11 To maintain confidence and credibility, the SE should consider benchmarking its costs and staff numbers not only against Whitehall but with comparable European models, for example, the German Länder or Spain's autonomous regional governments and with sovereign countries with a similar population (Denmark, Finland, Norway, Slovakia, Croatia, Ireland and New Zealand).

6.11.12 The process for distributing the administration cost allocation from the Management Group to Heads of Department and from them to Group and Division Heads is understood, but accounting for such expenditure against budget lines, initiatives, pilots, etc does not appear to have been developed at all (4.3.12-18). In the absence of such information, it is difficult to be sure that the administrative effort is being properly applied to the Executive's priorities or whether it has been efficiently or properly directed.

6.11.13 Ministers have set an expenditure target on administration costs by reference to comparable UK Government costs. It may be worthwhile examining whether a cap, upper limit or target could be fixed by reference to Scotland's Gross Domestic Product to gain public and business confidence in the Executive. The Office of the Chief Economic Adviser could undertake a feasibility study.

6.11.14 We recommend that:

• the SE considers benchmarking its costs (core and wider administration and programme), not only against comparable UK Government costs but with comparable European models and sovereign countries with a similar population;
• the administrative costs of delivering the various policy initiatives, etc should be identified and set against the budget lines, should be open to challenge and should be able to demonstrate best value; and
• that a feasibility study be undertaken by the Office of the Chief Economic Adviser on whether a cap, upper limit or target could be set on the core and wider administrative costs of the Executive by reference to Scotland's Gross Domestic Product.

The Departments, Staff Numbers, Skills Mix and Portfolio Issues

6.11.15 The Departments - Development, Education, Enterprise Transport and Lifelong Learning, Environment and Rural Affairs, Finance and Central Services, Health, Justice, Legal and Parliamentary Services and the Office of the Permanent Secretary - which together comprise the core Executive Administration vary widely in their staffing complements (from 193 in Legal and Parliamentary Services to 1,072 in Environment and Rural Affairs), which in turn reflect the different structures and relationships with their delivery agencies - some retaining elements of service delivery within the core and others such as Education with delivery totally devolved to local education authorities, etc. We were supplied with data on departmental budget allocations, staff numbers, departmental comparisons of budget expenditure in staff and non-staff costs and of total administration and programme expenditure and staff numbers. These, in turn, reflected the variety of delivery mechanisms the department had to rely on to implement their policy initiatives - agencies, NDPBs, local authorities, etc.

6.11.16 The main report highlights general issues such as micro-management, cross portfolio working, financial and project management skills and efficiency gains through shared service centres, etc. Many of the options listed in the other portfolio chapters, if implemented, will impact on administration costs, to differing degrees, through simplified processes and possible staff reductions. We have not been able to estimate the impact or cost on the Administration budget of these choices. Conclusive findings on whether the overall numbers of staff employed at the core of the Executive (or indeed the wider Executive) or in each department are 'right' is beyond our remit and certainly can be resolved within our time frame. Much depends on going behind the figures and examining the work being done, does it need to be done or be done in that way or by that group, etc.

6.11.17 We have also been referred to the Official Record of Scottish Parliament Committees where specific employee groups have been the subject of debate or questions, for example, media or press officers, the numbers of HR staff across the wider Executive, the amount of research work being commissioned, etc. We accept the principle behind such recruitment, whether it is the need for the Executive to communicate its message to the public, or the need for evidence-based policy evaluation or for good staff relations and management or whatever. But are the numbers right? It may well depend on the outcome - is the public persuaded to give up smoking, drive more safely or is the research timeous and of a quality to influence future policy decisions? As for the number of corporate or support staff, a determined drive towards shared service centres across the Scottish public sector will deal with the optimum numbers of HR and other professional or corporate staff.

6.11.18 We recommend that the Permanent Secretary considers the report's findings with regard to staffing numbers and skills and requirement for particular professional and corporate groups and reviews the demands of the next spending review period and the numbers and skills required to deliver the Executive's programme.

The Office of the Permanent Secretary - Ministerial Support and Corporate Services

6.11.19 The Permanent Secretary's Office provides cabinet and ministerial support, change and corporate services, analytical services and a performance and innovation unit. It has one of the largest staff complements (841.5 FTE as at 1 April 2006), explained by inclusion of certain corporate services personnel, namely Human Resources, Information and Communication Technology and Facilities and Estates Services which together number over 600 FTE staff. Corporate budgets are managed by the Office of the Permanent Secretary and amounted to £38m in 2005-06. The expenditure relates mainly to the core Executive and HQ buildings.

6.11.20 The Communications and Information Services Division of the Office provides IT support and is currently involved in a number of significant projects which will contribute to the achievement of the efficiency targets and the flat cash allocation throughout the current spending review, for example the e- HR reform programme, the electronics Records Data Management and the SCOTS projects.

6.11.21 The modernisation of the human resources corporate system through the e-HR project is planned to deliver recurrent savings of £0.5m and has seen significant reductions in FTE numbers down to 165 and further reductions are planned.

6.11.22 The Facilities and Estates Services Division has implemented an accommodation strategy for the post devolution period (2002 onwards) to rationalise the estate (mainly in Edinburgh), which has reduced the overall size of that estate by nearly 10% while simultaneously meeting demands for growth. We are advised that offices are now being used highly efficiently: average per person occupancy is 15.3 sq.m down from 24.3 sq.m at the outset and less than the average 16 sq.m identified in an all UK benchmarking exercise. Extracts from reports to the Management Group on Accommodation from October 2004 to February 2006 reveal a continuing drive to maximise space utilisation in Edinburgh through open plan, modular layouts and wave-desking. We assume that in implementing the Executive's policy on the dispersal of offices, agencies and NDPBs from Edinburgh, these benchmark occupancy levels are adopted and costs are factored in-particularly where city centre costs are significantly higher than elsewhere.

6.11.23 On the wider question of a strategic asset management strategy of the Executive's whole estate and taking a holistic view of managing the estate, the same papers contain references to the aim to reduce the four HQ buildings in Edinburgh to three, to future accommodation strategy in Edinburgh and Glasgow, and to ERAD's 'On the Ground' project to co-locate Executive and Agency offices serving the rural community.

6.11.24 We appreciate that Agency and NDPB buildings are not part of this budget, but our experience of visits to newly relocated bodies and our understanding of the Efficient Government drive suggests that a holistic view of the management of the whole estate must entail an overview of all new leases or development being undertaken within the wider Executive and indeed across a wider range of public bodies. We were advised that that information is currently being gathered on the wider estate. We have noted reference to the Business Improvement Programme for facilities management of the estate, but would suggest that a strategic review of facilities management and the ownership of the estate be considered.

6.11.25 We recommend that:

• the Permanent Secretary benchmarks all corporate services across the Executive against public and private sector comparators as a routine process of the Management Group;
• the Permanent Secretary, as well as pursuing the aim to reduce the number of core/ HQ buildings in Edinburgh, should also review all office and other properties occupied by the wider Executive to ensure that a holistic view is being taken of the Executive's whole estate and that it is being managed so as to contribute to the Efficient Government drive; and
• the Permanent Secretary might also consider that facilities management and ownership of the estate are worthy of a strategic review.

The First Minister, Finance Minister and Principal Accountable Officer

6.11.26 In his submission of 19 January 2005 to the Finance Committee (when considering its contribution to the Westminster Public Administration Select Committee's Inquiry into Civil Service Effectiveness), the Permanent Secretary set out the constitutional position of the First Minister and the autonomy vested in him by Section 51(4) of the Scotland Act 1998 within the broad framework of values and systems covering the UK civil service as a whole. This allows the Executive to determine its own arrangements for the recruitment, reward, deployment, performance management and promotion of staff within the Executive. The Minister for Finance and Public Service Reform, with Cabinet Agreement, sets the overall budget for the Administration, sets the pay remit for 95% of Executive's staff (that of the Senior Civil Service is set by Cabinet Office Ministers for the UK), also the total capital budget for the Executive's estate and IT systems. It is then for the Permanent Secretary to manage the organisation and deploy staff to meet the requirements of Ministers and the support functions of the whole organisation. This reflects the constitutional position across all government that Ministers determine policy and budget and Permanent Secretaries are Principal Accountable Officers personally responsible to Parliament for managing the budget.

Associated Departments - GROS, ROS and NAS

6.11.27 The associated departments covered by this budget are the General Register Office for Scotland, Registers of Scotland and the National Archives of Scotland.

6.11.28 We understand the National Archives of Scotland will move to the Tourism, Culture and Sport portfolio to join the other National Institutions as announced in the Executive's response to the Cultural Commission's Report.

6.11.29 Registers of Scotland is a self-funding Executive Agency. We are advised that it recovers its costs and therefore does not impact on the Administration budget. RoS reduced its fees for information provision by 9% in 2005-06 and has submitted a proposal to reduce registration fees by 26%.

6.11.30 The General Register Office for Scotland's budget for 2007-08 will be £10.879m. Our research suggests an organisation intent on harnessing technology for the delivery of its responsibilities for the registration of births, marriage and deaths, for the population census and for completing (with NAS and the Court of the Lord Lyon) the successful Scottish Family History Service. The Office should maximise its income generation potential, not solely confined to its genealogy services but also generally. An increase in income can be expected.

6.11.31 We recommend:

• that Registers of Scotland continues to pursue cost reductions and efficiencies to reduce fees and so pass on the benefits to its customers; and
• that the General Register Office for Scotland should maximise its income generation potential and suggest that a target of between 5% and 10% should be set.

Summary of Recommendations

6.11.32 We recommend that:

• the Scottish Executive consider benchmarking its costs (core and wider administration and programme), not only against comparable UK government costs, but with comparable European models and sovereign countries with a similar population;
• the administrative costs of delivering the various policy initiatives, etc should be identified and set against the budget lines, should be open to challenge and should be able to demonstrate Best Value;
• that a feasibility study be undertaken by the Office of the Chief Economic Adviser on whether a cap, upper limit or target could be set on the core and wider administrative costs of the Executive by reference to Scotland's Gross Domestic Product;
• the Permanent Secretary considers the report's findings with regard to staffing numbers and skills and the requirement for particular professional and corporate groups and reviews the demands of the next spending review period and the numbers and skills required to deliver the Executive's programme;
• the Permanent Secretary benchmarks all corporate services across the Executive against public and private sector comparators as a routine process of the Management Group;
• the Permanent Secretary, as well as pursuing the aim to reduce the number of core/ HQ buildings in Edinburgh, should also review all office and other properties occupied by the wider Executive to ensure that a holistic view is being taken of the Executive's whole estate and that it is being managed so as to contribute to the Efficient Government drive;
• the Permanent Secretary might also consider if facilities management and ownership of the estate are worthy of a strategic review;
• that Registers of Scotland continue to pursue cost reductions and efficiencies to reduce fees and so pass on the benefits to its customers; and
• that the General Register Office for Scotland should maximise its income generation potential and suggest a target of between 5% and 10%.

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