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Audit Committee

5th Report, 2004 (Session 2)

Scottish Enterprise: special audit examination

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SP Paper 149

Session 2 (2004)

 

CONTENTS

REMIT AND MEMBERSHIP

THE REPORT

ANNEXE A - EXTRACT FROM THE MINUTES

Extract from the Minutes - 9th Meeting 2003 (Session 2)

Extract from the Minutes - 1st Meeting 2004 (Session 2)

Extract from the Minutes - 2nd Meeting 2004 (Session 2)

Extract from the Minutes - 4th Meeting 2004 (Session 2)

Extract from the Minutes - 9th Meeting 2004 (Session 2)

ANNEXE B - ORAL EVIDENCE AND ASSOCIATED WRITTEN EVIDENCE

WRITTEN EVIDENCE

Submission from Scottish Enterprise, January 2004

2nd Meeting 2004 (Session 2), 20 January 2004

ORAL EVIDENCE

Dr Robert Crawford, Chief Executive, Scottish Enterprise

Mr Iain Carmichael, Senior Director, Finance, Scottish Enterprise

Mr Charlie Woods, Senior Director, Knowledge Management, Scottish Enterprise

SUPPLEMENTARY WRITTEN EVIDENCE

Letter from Jack Perry, Chief Executive, Scottish Enterprise to the Clerk

 

Audit Committee

Remit and membership

Remit:

1. The remit of the Audit Committee is to consider and report on-

(a) any accounts laid before the Parliament;

(b) any report laid before or made to the Parliament by the Auditor General for Scotland; and

(c) any other document laid before the Parliament concerning financial control, accounting and auditing in relation to public expenditure.

2. No member of the Scottish Executive or junior Scottish Minister may be a member of the Committee and no member who represents a political party which is represented in the Scottish Executive may be convener of the Committee.

(Standing Orders of the Scottish Parliament, Rule 6.7)

Membership:

Mr Brian Monteith (Convener)

Rhona Brankin

Susan Deacon

Robin Harper

Margaret Jamieson

George Lyon

Mr Kenny MacAskill (Deputy Convener)

Committee Clerking Team:

Clerk to the Committee

Shelagh McKinlay

Senior Assistant Clerk

Joanna Hardy

Assistant Clerk

Christine Lambourne

Audit Committee

5th Report, 2004 (Session 2)

Scottish Enterprise: special audit examination

The Committee reports to the Parliament as follows-

INTRODUCTION

1. This report sets out the Committee's findings in relation to the Auditor General for Scotland's report entitled "Scottish Enterprise: special audit examination".

Evidence

2. The Committee held an oral evidence session on 20 January 2004. The following witnesses gave oral evidence to the inquiry: Dr Robert Crawford, Chief Executive; Mr Iain Carmichael, Senior Director, Finance; Mr Charlie Woods, Senior Director, Knowledge Management, Scottish Enterprise.

3. Written evidence received by the Committee can be found at Annexe B.

Issues examined

4. In his report the Auditor General for Scotland (AGS) sets out the circumstances which prompted Audit Scotland's examination of Scottish Enterprise (SEn). During February and March 2003 a number of reports appeared in the media concerning the performance of SEn. These attracted significant attention and led to a Member of the Scottish Parliament suggesting that the AGS undertake an investigation into the management of SEn. There were five broad areas of concern:

· The extent to which SEn was on-course to achieve its performance targets for 2002/03;

· SEn's performance in managing major projects which were seen to be critical to its success in furthering the development of Scotland's economy;

· Whether SEn failed to claim £32 million EU funding to which it may have been entitled;

· SEn's use of external consultants to help develop its operations; and

· The number of staff employed in "customer relations", in particular SEn's Public Relations Department.

5. The AGS asked Audit Scotland as appointed auditor of Scottish Enterprise to examine these concerns and to consider whether any wider issues arose.1 The content of the AGS report is therefore restricted to the five areas outlined above. The AGS makes clear that his report is "not a comprehensive review of the management and performance of SEn."2

6. Since this Committee's remit is to consider and report on reports of the AGS, it follows that the evidence it considered also related to these specific areas of concern and not the performance of SEn as a whole. The Committee considers that it is very important to place any more detailed findings and recommendations which follow in this report in that context.

7. The AGS report also records that the auditors did not review in detail SEn's systems for collecting and reporting performance information. The Committee notes the AGS's intention to consider including a detailed review of SEn's performance management and accountability arrangements in his forward programme of performance audit examination.3 The auditors are also to keep under review developments in respect of a number of other areas including: the management of the Pacific Quay project; the creation of Intermediary Technology Institutes (ITIs); the Business Transformation Project (BTP); and SEn's compliance with its 19 point action plan. 4

8. That said, there were some areas where the Committee felt that the content of the AGS report and the evidence submitted by SEn did indicate that systems and processes may benefit from review and the Committee has made recommendations accordingly.

9. After considering the AGS report and in particular noting that the allegations reported to the AGS were either unfounded or represented only partial information, the Committee decided to focus its interest on three key areas:

· Targets and performance monitoring;

· The management of major projects; and

· The use of external consultants.

FINDINGS AND RECOMMENDATIONS

10. The Committee's main findings and recommendations are set out at Appendix A.

GENERAL ISSUES

AGS Report and SEn's Response

11. The Committee welcomes the AGS report which has injected some much needed objectivity into the important public debate on the performance of Scottish Enterprise.

12. The Committee also welcomes the positive response to the AGS report made by Scotish Enterprise - both in relation to its detailed action plan and in the candid evidence of senior management when giving evidence to the Committee.

Issues of Risk

Evidence on Risk

13. Scottish Enterprise faces a demanding task in balancing its role as Scotland's major economic development agency with its duties and responsibilities as a public body for the proper stewardship of public funds provided to it. This is particularly apparent in relation to SEn's promotion of and investment in innovative partnership projects which carry a high degree of risk.

14. In his evidence to the Committee Dr Crawford made it clear that he saw the ability to take "judiciously analysed" (Col 303) risks as being essential in pursuing SEn's economic development mission. This is particularly apparent where SEn is seeking to tackle infrastructure issues which it considers the market is failing to address; major projects such as Project ATLAS, Pacific Quay and ITIs are examples of this.

15. For example, in relation to Project ATLAS, Dr Crawford stated "I believe passionately that - subject to the sensible risk analysis that we have undertaken - development agencies should be undertaking works such as project ATLAS; if not I do not know why they exist." (Col 300)

Encouraging Innovation

16. In evidence to the Committee Dr Crawford expressed concern that increased centralisation and more documentation, introduced in order to help demonstrate SEn's effectiveness, could lead to greater bureaucracy and a risk averse culture. He stated "One thing that worries me about what has happened in the past 12 months is that we might repress people's enthusiasm for doing the unusual or the innovative and make them more averse to risk. If that happens the country will be the poorer." (Col 297)

17. The Committee does not wish to see innovation or radical thinking stifled. It is therefore important to point out that this should not be the inevitable result of increased scrutiny and robust internal management processes. Indeed, proper risk assessment should aid bold decision making by enabling managers to take difficult decisions with a higher degree of confidence that their actions can be justified.

18. When very large sums of public money are spent it is right and proper that the case for investment decisions is robust in itself, rigorously documented and subject to appropriate scrutiny.

19. It is the proper role of this Committee and public auditors to hold to account public servants who take significant investment decisions and to ensure that systems are in place to assess and manage the risks present.

Organisational Change

20. The Committee notes that in addition to pursuing a demanding set of business objectives, in recent years staff in SEn have dealt with the pressure of instituting and managing significant organisational change. The Committee recognises the considerable challenges which SEn is facing in reshaping and focusing the organisation and notes the progress that has been made in this regard.

TARGETS AND PEFORMANCE MONITORING

21. The AGS report records a number of concerns expressed by the auditors in relation to SEn's setting of performance targets and about its monitoring and reporting of performance. These concerns were:

· That targets were not sufficiently "stretching", given that they were significantly exceeded over a period of years;5

· That the number of targets reported as being achieved were subject to change some time after the year end;6

· That some network targets are subjective in nature and allow scope for differing interpretations as to the extent to which they are achieved;7 and

· That SEn does not collate information on the cost of achieving individual network targets.8

22. In evidence to the Committee SEn stated that they believed their targets to be stretching and challenging and also gave evidence that the late reporting of the achievement of targets was due both to verification procedures and the fact that some targets are only deliverable toward year end. 9 (Cols 291-293)

23. The Committee notes SEn's evidence on this point. However, the Committee considers that if the purpose of targets is to help drive improved performance, it is difficult to see how this can be achieved by setting targets which are routinely exceeded by a significant margin. It is also difficult to view targets as challenging when the planned contributions of Local Enterprise Companies (LECs) and SEN business units exceed those targets.10 The fact that a high proportion of targets are being exceeded by a significant amount arguably indicates that the balance between targets being challenging and achievable is not yet right.

24. In relation to the late reporting of the achievement of targets, the Committee considers that, even where targets are achieved late in the year, provisional reports compiled as late as May should be better able to predict final outcomes. In addition where a final outturn (e.g. the delivery of a project) is not to be achieved until the tail end of the year, SEn is still spending money throughout the year and there is therefore a case for establishing monitoring systems to better manage performance against interim targets and outputs.

25. Furthermore since reported performance was changed after the year end as a result of the verification process, it follows that the performance monitoring systems were recording unreliable outturn during the year.

26. The auditors did not review in detail the systems for collecting and reporting performance information. Consequently the AGS indicated in his report that he would consider including a detailed review of SEn's performance management and accountability arrangements in his forward work programme of audit examinations. 11

27. The Committee would support any decision by the AGS to conduct a more detailed review at some point in the future. In the interim, the Committee recommends that SEn review its performance management arrangements to ensure that targets are driving improved performance and that performance is being reported accurately and promptly.

MANAGEMENT OF MAJOR PROGRAMMES

28. The Committee considered evidence on SEn's management of major projects particularly Project ATLAS; the Pacific Quay development; and ITIs. The Committee also considered evidence on SEn's practice in relation to applications for EU monies.

29. The AGS report states that "while some projects had been subject to challenge or delay, or had failed to achieve job targets, SEn is making progress in a number of key areas."12 The AGS report also records that auditors are to keep the progress of these major projects under review. 13

30. The Committee has considered the progress of these projects at a point in their development when it is too early to say whether each will achieve the full benefits predicted.

31. Important elements of each project remain to be resolved; the question of state aid compliance in relation to Project ATLAS; the achievement of sufficient new jobs at Pacific Quay and the first piece of research successfully commissioned under ITIs.

32. These projects are complex and in some crucial respects their success is dependent on factors which SEn can influence but not wholly control. The complexity of these projects and the significant levels of public funds involved means that they will continue to require very careful monitoring and management. The Committee supports the proposal that the auditors continue to keep progress on major projects under review.

EU Funding

33. A key concern reported to the AGS was that SEn failed to claim £32 million EU funding to which it may have been entitled. Given that the claim was widely reported in the media the Committee considers that it is very important to note that the auditors concluded that this claim was unfounded.

34. The AGS report records that "it is to SEn's credit" that it undertook an internal review of its processes for securing EU funding. The AGS report goes on to note that SEn has taken action to secure improvements in this area.14 The Committee welcomes this action and recommends that, after an appropriate period, SEn conduct a review to ensure that the improved procedures are resulting in increased compliance, efficiency and effectiveness.

USE OF CONSULTANTS

35. The Committee considered evidence on SEn's arrangements for the appointment and monitoring of consultants. In particular the Committee questioned SEn on information in the AGS report relating to: the benefits of its Business Transformation Project (BTP); the value for money provided by outsourcing as opposed to using in-house staff; the lack of information on consultancy spend provided to the SEn Board; the way in which consultancy contracts were managed and documented; and the role of the newly created Strategic Procurement Hub.

Business Transformation

36. In evidence to the Committee SEn set out the impact of the BTP on the organisation. SEn estimate that the project will reduce the number of staff employed in the network and lead to cost savings and productivity improvements totalling around £200 million by 2006. (Col 308)

37. Dr Crawford stated that £79 million of benefits had been realised to date and that the SEn staff "headcount" had reduced by over 500, (Cols 309-310) with 75 full time equivalent posts directly attributable to Business Transformation solutions and the others "indirectly" attributable to the project.15 Business Transformation had also seen a streamlining of corporate identities within the network and was driving the introduction of wider information sharing such as a new customer relationship management system. (Col 308)

38. The Committee considers that, in general terms, projects which bring efficiencies of this magnitude while maintaining or improving performance are to be commended. According to the evidence provided by SEn the results gained to date from the BTP are promising.

39. However, the project remains at an early stage and it will be some time before it becomes clear whether projected savings are achieved and what continued level of investment may be justified. The Committee therefore supports the proposal that the auditors undertake a further review of the use of consultants and contractors as part of a future examination of the Business Transformation Project. 16

Processes for Engaging Consultants and Controlling and Monitoring Expenditure.

40. The auditors undertook a review of 10 sample consultancy contracts to identify whether SEn procedures met both internal guidance and accepted best practice. 17

41. The auditors had concerns about the process for awarding the main consultancy contract for the BTP (to date SEn has paid £10.6 million under the contract with the final projected value being £11.9 million) and also highlighted other issues such as a lack of contract documentation and three instances where SEn could not demonstrate that it had formally justified its decision to award contracts without exposure to competition. 18

42. The Committee considers that the way in which SEn dealt with the appointment and monitoring of consultants in the past had a number of deficiencies and did not represent good practice.

43. However the Committee acknowledges that progress has been made with the introduction of SEn's action plan to improve compliance with a range of financial and audit procedures. The Committee notes and supports the proposal in the AGS report that the auditors return to the issue of the procedures for the appointment and monitoring of consultants in the future.

Information on Consultant Spend Supplied to the SEn Board

44. The Committee welcomes SEn's commitment to introduce regular reporting of aggregate consultant/contractor spend to the SEn Board. The Committee recommends that this be put in place as soon as possible.

Strategic Procurement Hub

45. SEn also gave evidence on the creation of the Strategic Procurement Hub (SPH) which will cover expenditure over £100k and is designed to bring in better procurement expertise and achieve savings.

46. The SPH is in its infancy and it will be some time before its success can be properly evaluated. While the Committee welcomes the SPH's aims of increasing efficiency in the award of contracts, SEn must guard against its streamlined procedures undermining competitive pressures because the market is not fully tested on an ongoing basis. The Committee therefore recommends that SEn keep the operation of the Strategic Procurement Hub under review to ensure that this approach is continuing to secure competitive prices.

Use of Consultants: Value for Money

47. The Committee considered evidence from SEn on its use of consultants, including the range of reasons for seeking consultancy input.19 The Committee wishes to emphasise that the use of consultants by public sector organisations can be not just appropriate but beneficial. As the SEn submission points out, consultants can be extremely helpful where specialist knowledge is not available in-house or where sufficient internal staff resources are not available to ensure that a project can meet important deadlines. However, it is essential that any decision to appoint consultants should be carefully evaluated and properly documented.

48. Dr Crawford stated in evidence to the Committee that SEn is "trying to outsource everything that is outsourceable" and that it is moving towards "core competencies." (Cols 310 and 311) Should SEn continue this trend under its new Chief Executive and Chairman, it is clear that SEn will continue to use consultancy and contracting services to a fairly high degree. This makes the need for robust procedures particularly important for SEn. The Committee therefore recommends that SEn ensure that appropriate and proportionate arrangements are in place to ensure that consultancy services are providing value for money.

49. In evidence SEn representatives set out the circumstances under which consultants are used rather than in-house staff.20 (Cols 310-312) It is not clear from this evidence how detailed an understanding SEn has of the relative costs of and value for money provided by consultants/contractors and in-house staff.

50. The Committee supports the AGS conclusion that SEn should "consider carefully the costs and benefits of further staff reductions if there is a risk that a move to externally sourced services might involve higher costs." 21

SUMMARY

51. The AGS report and the Committee's consideration of the auditors' findings has enabled aspects of SEn's performance to be examined as part of a clearly defined public scrutiny process. The Committee considers that such scrutiny was needed given the significant public debate on how SEn was pursuing its objectives. The Committee welcomes the positive response made to the AGS report by SEn - both in relation to its detailed action plan and in the candid evidence of senior management when giving evidence to the Committee.

52. The Committee considers that it is important to note that the audit found that the allegations reported to the AGS were either unfounded or represented only partial information.

53. While there will be occasions when such "reactive" work is taken forward in response to publicly voiced concerns, the normal relationship between the auditor and audited body is of course based on a more planned programme of audit. Areas where SEn's performance would benefit from further examination or review have been set out in the AGS report and these proposals are supported by the Committee.

54. A theme which emerged in evidence was the need for SEn to find an effective balance between fostering a "can-do" culture and a willingness to take judiciously analysed risks with ensuring that the control systems and procedures for documentation expected of a public organisation are in place.

55. In recent years SEn has undergone significant organisational change which to some degree has aimed to better achieve this balance. The new Chairman and Chief Executive now have the opportunity to build on the progress made to date and address the issues highlighted in the AGS and Committee reports.

Appendix A

FINDINGS AND RECOMMENDATIONS

INTRODUCTION

Issues examined

· After considering the AGS report and in particular noting that the allegations reported to the AGS were either unfounded or represented only partial information, the Committee decided to focus its interest on three key areas:

· Targets and performance monitoring;

· The management of major projects; and

· The use of external consultants. (Para 9)

GENERAL ISSUES

AGS Report and SEn's Response

· The Committee welcomes the positive response to the AGS report made by SEn - both in relation to its detailed action plan and in the candid evidence of senior management when giving evidence to the Committee. (Para 12)

Organisational Change

· The Committee recognises the considerable challenges which SEn is facing in reshaping and focusing the organisation and notes the progress that has been made in this regard. (Para 20)

TARGETS AND PERFORMANCE MONITORING

· The Committee recommends that SEn review its performance management arrangements to ensure that targets are driving improved performance and that performance is being reported accurately and promptly. (Para 27)

MANAGEMENT OF MAJOR PROGRAMMES

· The Committee supports the proposal that the auditors continue to keep progress on major projects under review. (Para 32)

EU Funding

· A key concern reported to the AGS was that SEn failed to claim £32 million EU funding to which it may have been entitled. Given that the claim was widely reported in the media the Committee considers that it is very important to note that the auditors concluded that this claim was unfounded. (Para 33)

· The AGS report records that "it is to SEn's credit" that it undertook an internal review of its processes for securing EU funding. The AGS report goes on to note that SEn has taken action to secure improvements in this area.22 The Committee welcomes this action and recommends that, after an appropriate period, SEn conduct a review to ensure that the improved procedures are resulting in increased compliance, efficiency and effectiveness. (Para 34)

USE OF CONSULTANTS

Business Transformation

· The Committee supports the proposal that the auditors undertake a further review of the use of consultants and contractors as part of a future examination of the Business Transformation Project. 23 (Para 39)

Processes for Engaging Consultants and Controlling and Monitoring Expenditure

· The Committee considers that the way in which SEn dealt with the appointment and monitoring of consultants in the past had a number of deficiencies and did not represent good practice. (Para 42)

· The Committee notes and supports the proposal in the AGS report that the auditors return to the issue of the procedures for the appointment and monitoring of consultants in the future. (Para 43)

Information on Consultant Spend Supplied to the SEn Board

· The Committee welcomes SEn's commitment to introduce regular reporting of aggregate consultant/contractor spend to the SEn Board. The Committee recommends that this be put in place as soon as possible. (Para 44)

Strategic Procurement Hub

· The Committee recommends that SEn keep the operation of the Strategic Procurement Hub under review to ensure that this approach is continuing to secure competitive prices. (Para 46)

Use of Consultants: Value for Money

· The Committee recommends that SEn ensure that appropriate and proportionate arrangements are in place to ensure that consultancy services are providing value for money. (Para 48)

· The Committee supports the AGS conclusion that SEn should "consider carefully the costs and benefits of further staff reductions if there is a risk that a move to externally sourced services might involve higher costs." (Para 50)

ANNEXE A

AUDIT COMMITTEE

EXTRACT FROM THE MINUTES

MINUTES

9th Meeting, Session 2 (2003)

Tuesday 9 December 2003

Members Present:

Rhona Brankin Susan Deacon

Robin Harper Margaret Jamieson

Mr Kenny MacAskill (Deputy Convener) Mr Brian Monteith (Convener)

Apologies were received from George Lyon.

The meeting opened in private at 9.31 am

Scottish Enterprise (in private): The Committee received a report by the Auditor General for Scotland (AGS) entitled `Scottish Enterprise: special review of operational practices' (AGS/2003/11).

Scottish Enterprise: The Committee received a briefing from the AGS on the report by the AGS entitled `Scottish Enterprise: special review of operational practices' (AGS/2003/11). The Committee agreed to take evidence from Scottish Enterprise on the report by the AGS and, following the evidence session, to consider whether further evidence was required.

Scottish Enterprise (in private): The Committee considered its approach to the report by the AGS entitled `Scottish Enterprise: special review of operational practices' (AGS/2003/11). The Committee agreed to invite Mr Robert Crawford, Chief Executive of Scottish Enterprise, and other representatives of Scottish Enterprise, as appropriate, to give evidence on the report.

AUDIT COMMITTEE

EXTRACT FROM THE MINUTES

MINUTES

1st Meeting, Session 2 (2004)

Tuesday 6 January 2004

Members Present:

Rhona Brankin Susan Deacon

Robin Harper Margaret Jamieson

George Lyon Mr Kenny MacAskill (Deputy Convener)

Mr Brian Monteith (Convener)

The meeting opened at 10.04 am

Scottish Enterprise (in private): The Committee considered arrangements for taking evidence on the report by the AGS entitled `Scottish Enterprise: special audit examination' (AGS/2003/11). The Committee agreed to request written evidence from Scottish Enterprise in advance of the evidence session scheduled for 20 January.

AUDIT COMMITTEE

EXTRACT FROM THE MINUTES

MINUTES

2nd Meeting, Session 2 (2004)

Tuesday 20 January 2004

Members Present:

Rhona Brankin Marlyn Glen (Committee Substitute)

Robin Harper Margaret Jamieson

George Lyon Mr Kenny MacAskill (Deputy Convener)

Mr Brian Monteith (Convener)

Apologies were received from Susan Deacon.

The meeting opened at 9.36 am

Scottish Enterprise: The Committee took evidence from -

Dr Robert Crawford, Chief Executive, Mr Iain Carmichael, Senior Director, Finance, Mr Charlie Woods, Senior Director, Knowledge Management, Scottish Enterprise

Scottish Enterprise (in private): The Committee considered the evidence taken on the report by the AGS entitled `Scottish Enterprise: special audit examination' (AGS/2003/11). The Committee agreed to write to Scottish Enterprise seeking further clarification on a number of issues and to consider a draft report at a future meeting.

AUDIT COMMITTEE

EXTRACT FROM THE MINUTES

MINUTES

4th Meeting, 2004 (Session 2)

Tuesday 2 March 2004

Members Present:

Rhona Brankin Susan Deacon

Robin Harper Margaret Jamieson

George Lyon Mr Kenny MacAskill (Deputy Convener)

Mr Brian Monteith (Convener)

The meeting opened in private at 9.36 am

Scottish Enterprise (in private): The Committee considered key issues emerging from the evidence taken on the report by the Auditor General for Scotland entitled `Scottish Enterprise: special audit examination' (AGS/2003/11). The Committee agreed to consider a draft report at a future meeting.

AUDIT COMMITTEE

EXTRACT FROM THE MINUTES

MINUTES

9th Meeting, 2004 (Session 2)

Tuesday 27 April 2004

Members Present:

Rhona Brankin Susan Deacon

Robin Harper Margaret Jamieson

Mr Kenny MacAskill (Deputy Convener) Mr Brian Monteith (Convener)

Apologies were received from George Lyon.

The meeting opened at 9.11 am

Scottish Enterprise (in private): The Committee considered a draft report on the report by the Auditor General for Scotland entitled `Scottish Enterprise: special audit examination' (AGS/2003/11). The report, as amended, was agreed to.

ANNEXE B

WRITTEN EVIDENCE

SUBMISSION FROM SCOTTISH ENTERPRISE

Introduction

This paper has been prepared in response to the Audit Committee's letter of 8th January 2004, requesting that Scottish Enterprise (SE) submit written evidence in advance of its oral evidence session on 20th January 2004. The Committee has requested that SE provide a response under four headings: responding to the audit findings; performance management arrangements; major projects; and arrangements for the appointment and monitoring of consultants.

We look forward to answering any further questions the Committee may have at its meeting on 20th January 2004.

Responding to the audit findings

What action is both planned and underway in response to the recommendations in the Auditor General's report?

As the Auditor General recognised, SE had already put in place an action plan (Annex 1) to address some of the procedural issues which subsequently emerged from his review. The following is a summary of the actions being addressed by SE in response to the Auditor General for Scotland's (AGS) report of December 2003.

Recommendation 1: The revised procedures proposed to ensure maximum take up of EU funding will be fully implemented and monitored.

Scotland Europa is responsible for co-ordinating network European funding activities. A dedicated resource has been appointed to provide technical EU funding support to SE Business Units. Scotland Europa works closely with European co-ordinators across the LEC network in order to take forward European funding activities.

A European Systems and Procedures manual has been prepared and published on the SE intranet. This manual has been in existence for some time and will be continuously reviewed and revised in light of organisational changes.

Scotland Europa and the network European representatives have, and will continue, to undertake a review of operating plans relating to SE Business Units and the LEC network to identify EU funding opportunities.

EU funding has been integrated within the Gateway appraisal processes in order to ensure opportunities are identified at an early stage and applications are progressed. Gateway is the network's project development, approval and implementation process. This process is applicable to all LEC and Business Unit projects which meet the relevant criteria. Projects are reviewed at key decision points in their life cycle, before and after approval with the objectives of providing a consistent approach to improved planning, risk assessment, project appraisal and management. Scotland Europa provides technical input to projects submitted via the Gateway process. Scotland Europa is currently making recommendations to strengthen EU funding within local appraisal processes for those projects which fall below the Gateway thresholds.

Scotland Europa is closely tied into the network Productisation process to ensure EU funding opportunities are identified and project applications are taking forward.

A project tracker system has been established to monitor EU approvals across the network. Quarterly progress reports are provided to the senior director, International Operations.

Recommendation 2: Steps will be taken to improve the classification and reporting of expenditure on consultants and contractors.

SE's Corporate Management Team (CMT) will receive a monthly report from its Finance Department on commitments made on consultancies/contractors (based on Purchase Orders raised), by business unit/project/supplier. This will be reviewed and verified by CMT members against prescribed definitions of classifications.

Quarterly reports on expenditure levels and any identified material breaches of procedures will be provided to the network Audit Committee and CMT.

In light of the Auditor General's remarks, SE's Board (which at its own request was not routinely provided with management information on consultant/contractor spend) has now agreed to reinstate them but in a form which provides useful information and justifies their production. We are currently looking at how this can be achieved.

Recommendation 3: The measures to address the reported deficiencies in relation to audit trails, project management and compliance with procedures for the appointment and control over payments to consultants and contractors will be implemented and monitored to ensure the intended improvements are realised.

SE established the Strategic Procurement Hub (SPH) in summer 2003, with responsibility for managing all material procurement. The SPH has recently completed a major exercise to establish framework agreements with around 700 consultancies which means that by the end of January 2004, the majority of consultancy spend will be covered by 2 framework agreements. In effect this means that >80% of all consultancy spend will be European Union/SE policy compliant. This will relate to consultancy spend at any level. The few contracts which fall outwith the frameworks will require to be justified to the SPH as to why the contracted suppliers cannot deliver what is requested.

SE has developed and is implementing an action plan to increase awareness, and underline the importance, of strong project management and compliance with procedures. This plan has been agreed by the network Audit Committee and CMT and is currently being outlined to all staff at presentation sessions lead by senior members of SE's Finance Team. It has been agreed by CMT that attendance at these sessions is mandatory for all SE staff.

From January 2004, any exclusions from tendering of contracts over £10k will require to be endorsed by the relevant CMT member and formally approved by the senior director, Finance.

From January 2004, any extension to any contract, without re-tendering, over 10% of the original approved value will need to be endorsed by the relevant CMT member and approved by the senior director, Finance.

An integrated revised procedure for appointing consultants/contractors is to be written which incorporates the above and other recent improvements. The revised procedure, including these measures, will be highlighted to staff from January 2004 (on SE's intranet through New Today - a daily update of key developments across the network; an all staff email from the chief executive/senior director Finance, and at network briefing sessions with staff by CMT members).

A standard template/checklist will be designed, to be included on all project files and to be completed and signed by the relevant senior project manager, confirming that all procedural compliance is complete and audit trails with appropriate documentation held on project files. This places accountability, correctly and unambiguously, with project managers.

Quarterly internal audit sample reviews will be carried out on compliance with the agreed published policies and procedures, and the results reported to the network Audit Committee (see recommendation 2 above). The Audit reviews will follow normal auditing sampling procedures and therefore will represent a random sample of the contracts commissioned during the relevant period.

It is proposed that all SE staff will have a specific target in their performance contract relating to the awareness, understanding and compliance of the revised financial and project management procedures.

Recommendation 4: Steps will be taken to ensure the management information system provides accurate projections of performance against targets.

For the current operating year, 2003/04, all performance management information has been reviewed. The protocols for using the management information systems have also been reviewed and the responsibilities for every project manager to implement them will be re-enforced, as well as the need for business unit head authorisation of all management information. This will be emphasised during January for the next (period 10) performance reports and will support the year end analysis of performance, prior to the preparation of the annual report.

Improvements for 2004/05 will be addressed with the detailed planning work that the network undertakes. This will be enhanced with improvements to the templates for defining performance measures and specific guidance on the development of accurate projections, along with further training on their application. This will be backed up with detailed analysis comparing proposals with actual performance figures from previous years, with follow up action to address any potential weaknesses. Again, the enhanced management arrangements introduced (above) during the current year will be retained for future years.

Recommendation 5: Measures will be taken to ensure that there is an adequate audit trail to support reported performance.

The current guidance on management information requires adequate audit trails. Compliance with this is being re-enforced through: awareness raising with business unit heads; training workshops with key staff across the network that support the planning process; and, detailed guidance on the nature of audit evidence required for each performance measure.

Recommendation 6: Consideration will be given to identifying budgeted and actual costs associated with key performance targets.

A specific action on this recommendation will be to ensure that the costs associated with the achievement of specific key targets will feature in relevant parts of the network evaluation plan to enable suitable comparisons to be made.

More generally, analysis is currently available for the budgeted and actual costs for the twelve priority themes for A Smart, Successful Scotland, the network's landmark and other major projects and the total resources spent on the achievement of each of performance targets. However, the achievement of network's performance targets is usually based on the aggregation of the contribution of individual business units. Given the network nature of SE and the fact that individual Local Enterprise Companies develop projects based on local economic and local delivery arrangements, the nature of specific projects tends to vary between business units. As a result, the costs associated with establishing direct comparisons between the contributions made to network targets by individual business units can outweigh the benefits. Consideration will be given to the costs and benefits of developing a more standardised approach to project classification, and we intend to discuss this issue in more depth with Audit Scotland at an early date.

Performance management arrangements

How does SEn ensure that its targets are challenging but achievable?

The challenge in setting annual targets comes from the top down elements of our planning process, in particular:

· the ambitions of Ministers as set out in A Smart, Successful Scotland and its associated measurement framework, which is the strategic starting point of SE planning

· the role of the non executive Board members in developing SE's strategy and agreeing the Operating Plan developed by SE executives to deliver the strategy

· the role of the Scottish Executive in agreeing the plan.

The bottom up part of the planning process helps ensure they are achievable. This includes the contribution of business units in preparing their plans and that of individuals with operational experience on the groups advising the Corporate Management Team of SE in the development of the Operating Plan. The operational planning process is an iterative one, which allows a balance to be struck between being sufficiently challenging yet ensuring plans are achievable.

To set the answer to this question in context it is important to appreciate that SE's annual targets are one part of our performance management framework. This includes:

· The Smart, Successful Scotland measurement framework. This tracks Scotland's economic performance in a number of key indicators (e.g. business investment in R&D) against the aspiration to be in the top quartile of OECD performance over the long term. This is indeed a challenging ambition, to which SE makes a contribution alongside customers and partners

· Annual operating targets. These address things that can be measured in-year, that are directly attributable to the actions of SE and which will make a contribution to the achievement of longer term objectives. They tend to relate to those elements of our business that are relatively high volume. They measure a contribution to our strategic objectives and are not the end in themselves. A key challenge here is to use targets to encourage actions across the network that help achieve the strategic intent of Ministers. This was a point emphasised in the recent House of Commons report the use of targets in the public sector24.

· Progress made against major strategic projects that will help achieve a Smart, Successful Scotland, such as the Intermediary Technology Institutes and the Co-investment Fund

· Annual surveys of customer, partner and employee satisfaction and associated targets

· The evaluation of projects and programmes following a period of operation.

Any judgement of overall performance needs to be made in the context of all parts of this framework.

Our annual targets are made challenging but achievable through a combination of approaches. As a starting point we use previous years' performance to guide future activity. However, we also look at targets and major projects as a coherent portfolio for the year in question, which make a contribution to the challenging aspirations of all parts of SSS. This portfolio has to be balanced against the overall resources that are available to us. For this reason we try to look at our plan as a package, rather than focus too much attention on any single measure in isolation.

We only aim to intervene where there is manifest market failure and where our intervention will cause things to happen that wouldn't otherwise occur or would happen slower or to a lower quality. This is extremely challenging and requires us to have regard to the markets in which we operate and changing conditions within them. For example, the impact of the global downturn in stockmarkets on raising capital for high growth/high risk start ups. It also causes us to apply the lessons of evaluation studies in the way and which we plan our business. For example, the review of the business birth rate initiative by Fraser of Allander.

We do not see performance management as simply a quantitative exercise, we are also concerned about the quality of our interventions - customer survey and evaluation evidence helps here.

This may mean that we will not increase quantitative targets by as much as might appear possible in order to give business units the room to improve the quality of our intervention. For example, in support of start ups with high growth potential may require intensive support in difficult to measure areas if the company is to realise its growth potential. Again judgement has to be exercised to arriving at the right balance to achieve the desired outcome in the longer term.

We are always looking to develop measures and targets that better reflect the ambitions of A Smart, Successful Scotland, emerging strategic priorities and new initiatives. Their development will be undertaken by expert practitioners within the network, sometimes with external support, to ensure that we can understand how what we measure in the short term will contribute to long term success. We then use this understanding to inform targets, although where we have no direct operational experience this can make it harder to choose an appropriate target.

We aim to ensure that the contribution to the network's targets made by each part of the network is realistically stretching. There is a strong degree of challenge through the management of the network to ensure that business units aim to optimise their contribution to network targets. This is a key part of the iterative planning process, as strategic intent is converted into detailed operating plans. The introduction of senior directors of operations to CMT has given this added focus.

The role of our Board of non executive directors in scrutinising and challenging the portfolio of targets and key projects proposed by the executive directors in the network Operating Plan, to ensure they are sufficiently robust, should not be underestimated. They include highly experienced figures from business, academia and the public sector. There is also a further element of challenge when the plan has to be agreed with the Scottish Executive. It is also important to appreciate that a number of targets are directly set by the Scottish Executive. For example, the number of Modern Apprentices in training.

We would welcome the opportunity to learn from greater external comparison and benchmarking. SE is widely regarded by other agencies as a leading practioner both of economic development itself, and also in the field of performance management. While we are using the OECD countries as a benchmark in the overall economic performance part of our measurement framework, we have yet to find other organisations which we feel will provide appropriate benchmarks for our annual measures. This is in part due to the range of functions carried out by SE, the relative maturity of obvious comparators (such as the English RDAs) and the different economic and political environments of other international economic development agencies. We are, however, working ever more closely with the English RDAs (a number of whom have approached SE to learn from our approach to performance management) and this will include looking for benchmarking opportunities with them.

Major Projects

What is the current position regarding the EU's consideration of whether Project ATLAS represents state-aid?

SE initially contacted the European Commission in September 2001 as we recognised that our support for Project ATLAS could be construed as state-aid. The project reached the stage of a final bidder in November 2002 and in the early part of 2003 it was considered to be sufficiently detailed to allow the Commission to review its state aid status more formally.

The project was formally notified to the Commission in May 2003 for a ruling on State Aid issues in order to eliminate any doubt. During that time it has become evident that the Commission view this case as one that will set a precedent in the area of publicly funded broadband infrastructure. The Commission have pointed this out at an event on the use of European funds on 26th Nov 2003. The European Commission have not yet ruled on ATLAS and their decision is eagerly awaited.

Arrangements for the appointment and monitoring of consultants

What is SEn's general policy on the use of consultants?

When the concept of the SE network was originally devised it was intended that the network would be an enabling organisation that worked in partnership with others. In particular it was envisaged that the private sector would be used, wherever possible, to deliver the network's services. Since its inception on 1 April 1991, the network has kept its delivery mechanisms under review to identify services that could be contracted-out. In addition, the operational focus of the network has broadened considerably since 1991, and now includes activity in areas such as skills development, Investors In People, E-business, academic commercialisation, all-age careers guidance etc, and this in turn has necessitated the development of appropriate delivery strategies.

In this context, consultants are commissioned by the network for a variety of purposes. These include, for example, the provision of professional information, advice or market intelligence and/or to offer a professional opinion, assessment or evaluation in order to assist the SE network to develop and refine projects, programmes and initiatives.

Consultancy commissions within the network can be divided into two types, technical and non-technical. Technical consultants are commissioned to provide specialist advice for, to express an opinion and/or render an assessment of specific projects, programmes and initiatives. Examples of such work would include: land and property valuations; legal, accountancy and taxation advice sought in relation to specific projects and company investigations for potential investment or grant assistance. The network has moved progressively towards contracting-out these types of services. Non-technical consultants are engaged by the network to undertake studies of a strategic nature aimed at identifying areas of development opportunity and to assist in setting development policies. They also play a vital role in providing greater objectivity in the evaluation of projects and programmes.

What are the circumstances under which Scottish Enterprise uses consultants and contractors instead of in-house staff?

Consultants are normally commissioned by the network for two main reasons, either there is a lack of "in-house" expertise in the area under consideration, or insufficient in-house staff resources with the necessary expertise are available to allow projects, programmes and initiatives to be developed in a timeous manner. In both of these circumstances, the consultant is expected to provide the network with an impartial and independent perspective. They also play a vital role in providing greater objectivity in the evaluation of projects and programmes. The key consideration in opting to use consultants is value for money. In many cases the expertise is specialised, or project specific and it would be inappropriate, and potentially more costly, to employ a permanent staff member given the short term nature of the requirement. The context within which they are appointed is the network's contribution to A Smart, Successful Scotland and the achievement of its Operating Plan targets. They also play a vital role in providing greater objectivity in the evaluation of projects and programmes.

Scottish Enterprise

January 2004

Insert OR

SUPPLEMENTARY WRITTEN EVIDENCE

LETTER FROM JACK PERRY, CHIEF EXECUTIVE, SCOTTISH ENTERPRISE TO THE CLERK

Further to your letter of 30 January, I am pleased to provide the following additional information which the Committee requested following Scottish Enterprise's (SE) oral evidence session on 20 January:

Pacific Quay: Number of jobs created

The current jobs total is 299 at the end of 2002. The majority of these are associated with the Glasgow Science Centre. The main increase in job creation is forecast when the site begins to be developed from 2005 onwards. We still expect to achieve the original jobs target against revised timescales.

Pacific Quay: Finnieston Bridge planning issues

Discussions on the planning and procurement of Finnieston Bridge date back to 1995 when initial consideration was given to potential crossing locations in the vicinity of Pacific Quay. This work was supplemented by further desk studies on the preferred location and a comparison of statutory approval routes.

Glasgow City Council were consulted throughout the early stages of the project and, in 1996, were formally invited to assist in managing the planning, design and procurement of the bridge. The Council subsequently produced a Stage One Feasibility Study (December 1997), which recommended that the project should be progressed on the basis of a 'fixed' option and should be procured via a Design and Build route.

The second stage of the Feasibility Study, completed in June 1998, focused on a series of technical options at the preferred location including, horizontal and vertical geometry, scope of the bridge works and linkages to the existing road network. Following further discussion with Glasgow City Council, the preferred route and bridge alignment were agreed and the project proceeded on this basis.

Further consideration was then given to the potential statutory approval routes; a Parliamentary Order or the Roads (Scotland) Act 1984, which also required the promotion of a planning application. Although either option would provide the necessary statutory consents for the project, it was agreed to promote the consents via the Roads (Scotland) Act, as the timescales for this route could be more clearly defined at the outset and this would assist greatly in developing a forward programme for the project.

This was a key issue, given the need to progress the bridge in parallel to other major private sector investments at Pacific Quay, notably the new BBC headquarters and the business park development. Consequently, in May 2000, the Road Orders were submitted to the Scottish Executive and a planning application was lodged with Glasgow City Council. Following a three year public consultation process, the consents were approved in January and July 2003 respectively.

Intermediary Technology Institutes (ITIs)

The timing for initial commissioning of scientific research by the ITIs was originally estimated by SE to occur in December 2003. A team of highly qualified, experienced CEOs were recruited and began reviewing the estimated schedules and start-up requirements in late July 2003. The ITI CEOs felt they needed to ensure robust technology and market analysis work was done prior to launching first research programmes. This work is underway and has involved the commissioning of extensive market research by the ITI's from November 2003.

The ITI's own start up plan was developed by the CEOs in discussions with SE and a revised operational time line was developed, based on their experience and more detailed understanding of the tasks involved. It is anticipated that the first research contracts will be placed by early summer 2004, following review of the technology and market research currently underway and after consultation with companies inside and outwith Scotland.

Business Transformation Project: Staff reduction

During the period April 2000 - July 2003, SE headcount (excluding Careers Scotland and non-core posts, e.g. Scottish Executive staff within International Operations) reduced by over 500 from 2003 to 1480. The total headcount reductions are attributable to Business Transformation, wider changes to the organisational structure and to the introduction of new ways of working (for which Business Transformation is a prime enabler).

Our current evaluations have identified circa 75 FTE post savings (net) as being directly attributable to Business Transformation solutions, however most of the remaining reduction can be indirectly attributed to, and would not have been achievable without, Business Transformation.

Strategic Procurement Hub

Framework agreements are being established by the Strategic Procurement Hub (SPH) to enable staff to select suppliers from a pre-tendered list for the provision of non-technical consultancy, technical consultancy and marketing related services. The purpose of the framework agreement is to create an approved group of suppliers who can be called upon as necessary to provide a given service as appropriate. One of the aims of establishing framework agreements was to reduce the supplier base from approximately 3,600 suppliers to around an estimated 1,200. This will enable better supplier performance management and quality assessment to be undertaken.

It is estimated that the framework agreements will cover around 80 per cent of spend in these categories, however, there will be an element of consultancy services that are specialised or unique and hence, not covered by the scope of these framework agreements. There are no guarantees that those suppliers which are successful will be given work, but the process will afford everyone who wishes to be considered for work the opportunity to put forward their credentials in a fair and equitable way under EU legislative direction.

The establishment of framework agreements through an OJEU (Official Journal of the European Communities European Union) tender process reduces the ongoing time requirements that would typically occur in a single tender process throughout the duration of the agreement (2 years in this instance). Within the framework agreements the need to undertake a formal procedure such as agreeing terms and conditions, posting OJEU notices etc. is removed and hence, the speed of appointment and efficiency gains in undertaking aspects of the process are beneficial.

Framework agreements also assist the organisation in addressing matters of aggregated spend - reducing the risk that spend under the tender thresholds across different business units may not be considered in an aggregated way and corporately could exceed tender thresholds.

It should be noted that, where consultancy services are procured by a customer or third party to SE the framework agreements will not be used, albeit part funding may be allocated from SE in the form of a direct contribution.

In the majority of circumstances the SPH deals with tender values over £100k.

In terms of the appointment of consultants and contractors, when the concept of the SE network was originally devised it was intended that the network would be an enabling organisation that worked in partnership with others. In particular it was envisaged that the private sector would be used, wherever possible, to deliver the network's services. In this context, consultants are commissioned by the network for a variety of purposes. These include, for example, the provision of professional information, advice or market intelligence and/or to offer a professional opinion, assessment or evaluation in order to assist the SE network to develop and refine projects, programmes and initiatives. A key consideration in opting to use consultants is value for money. While SE makes every effort to use its own staff to deliver its projects, sometimes the specialist advice and knowledge which is required is not available in-house.

In these circumstances SE looks outside the organisation to fill gaps in its knowledge or provide technical advice. These gaps exist because it either does not have the staff resource to support a particular project or the level of knowledge is so specialist that it does not exist within the organisation. In many cases the expertise is specialised, or project specific and it would be inappropriate, and potentially more costly to employ a permanent staff member given the short term nature of the requirement. Consultants/contractors also play a vital role in providing greater objectivity in the evaluation of projects and programmes. The context within which they are appointed is the network's contribution to A Smart, Successful Scotland and the achievement of its Operating Plan targets.

It is not the role of SPH to express a view of whether it is appropriate to appoint consultants or contractors for any given piece of work. This is a management decision and responsibility firmly lies with individual project managers in accordance with revised procedures.

I trust the above information addresses the issues raised by the Audit Committee and I look forward to the Committee's report in due course.

Jack Perry

Chief Executive

Scottish Enterprise

13 February 2004


FOOTNOTES

1 AGS report, "Scottish Enterprise: special audit examination" (AGS/2003/11) pages 2 and 3

2 AGS report, page 3, para 5

3 AGS report, page 14, para 50

4 AGS report, pages 15-16, paras 51-59

5 AGS report, pages 23 and 24, para 2.10

6 AGS report, pages 25 and 26, para 2.12 - 2.15

7 AGS report, page 26, para 2.14

8 AGS report, page 26 para 2.16

9 AGS report, page 25, para 2.11

10 AGS report, page 24, para

11 AGS report, page 14, para 50

12 AGS report, page 5, para 12

13 AGS report, page 15, paras 51-55

14 AGS report, page 33, para 3.30

15 SEn submission of 13 February

16 AGS report, page 16, para 58

17 AGS report, page 37, para 4.13

18 AGS report, pages 38 -43, paras 4.14 - 4.35

19 SEn submissions January and 13 February 2004 and Cols 310-312

20 SEn submission January 2004, page 9, para 41

21 AGS report, page 16, para 58

22

23 AGS report, page 16, para 58

24 House of Commons Public Administration Select Committee: `On Target? Government by Measurement', July 2003

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