Hansard

This is the first systematic review of publicly funded major capital projects in Scotland. The scale of capital investment in Scotland's public sector is substantial, and it is growing. When we conducted the review, more than 100 major projects were in progress, with a programme value planned to reach £10.5 billion by 2011 as new projects come on stream.The Scottish Government, its agencies and non-departmental public bodies, and the national health service completed 43 projects in the five years up to March 2007. We looked at the performance of all of those in respect of costs, the time taken and the quality of what was specified.In addition, we looked at 15 current projects. I emphasise that the report provides a snapshot in time for those 15 projects. The Audit Scotland review took place between October 2007 and February 2008, and the projects will have moved on since then. For example, one of the projects reviewed was the Stirling-Alloa-Kincardine rail link, which as we all know is now fully operational.It is also worth commenting on the long gestation period for such major projects. Most projects took more than two years from initial approval to completion and, in some cases, the time was longer—some projects started before devolution. The guidance on how to estimate costs and on project management has evolved since then and some of the projects would be approached differently if they were being started now. We need to be aware of that context.I will highlight the report's main findings under three headings: the performance of completed projects; the performance of projects that are still in progress; and project management and governance issues.First, I will talk about the performance of completed projects. Any project has two key decision points. The first is when the project is given the go-ahead. The early cost and time estimates on which key decision makers base the initial project approval must be as accurate as possible. I shall return to that in a moment, because that is one of the report's main findings on the early stage in the life of projects. The second key decision point for any project is shortly before a contract is awarded. Once a contract is agreed, significant changes to a project are likely to be costly and disruptive and may threaten value for money.Exhibit 2 in the key messages summary and exhibit 5 on page 12 of the main report illustrate the main findings of that part of the work. They show that, in general, the achievement of cost and time targets improved significantly as projects progressed. Initial estimates of time and cost were often too optimistic, but the general picture is of improvement when contracts are awarded.Four fifths of projects were completed within 5 per cent of the contract price. The combined final cost for all completed projects—about £800 million—was just 1 per cent more than the combined contract price when the contracts were let.The project team did not analyse reasons for cost and time variances for all 43 projects, but it examined five completed projects in some detail. Exhibit 7 on page 13 shows three completed projects with large cost increases—they are marked with red traffic lights. Most cost increases are attributable to inaccurate cost estimates, but external factors contribute from time to time. One example of an unforeseeable external factor was the need for the scope of the Beatson oncology centre project to be changed to comply with new regulations on radioactive materials that were imposed after the London bombings in 2005.As I hinted, the main area of weak performance that the report highlights is the unreliability of initial forecasts at the project approval stage. Only about two fifths of all projects were completed within the costs that were estimated when the projects were initially approved. For 25 projects whose cost estimates were too low, the final cost was on average 39 per cent higher than the initial estimate. The risks will be clear to committee members: more projects will be started than can be afforded; and the rising costs that are encountered as projects are implemented will crowd out other highly desirable projects that are due to start later. Therefore, I have recommended that the Scottish Government and public bodies improve early cost estimating and planning.I will not talk about performance against time in the same detail. Suffice it to say that a similar picture of overoptimistic initial forecasts of timescales applies, but that estimates of the likely completion date when contracts are awarded are much more reliable. The phenomenon is equally evident in relation to time as it is to cost.There is good evidence that public bodies get the projects that they have specified. However, more could be done to assess the outcome of projects and to show the benefits to the public. For example, few projects reported using measures such as design quality or environmental performance. Almost half of projects had not been evaluated after completion to assess whether the benefits had been achieved and had justified the investment.I turn to projects that are in progress. Clearly, it is not possible to report on the results of projects that are in progress, because audit has perfect hindsight and imperfect foresight. Given that more than 100 projects, worth nearly £5 billion, are currently in progress, it would be impractical to examine every one. However, the project team did assess the progress of a sample of 15 on-going projects against the same criteria of time, cost and quality. Those projects had a combined estimated cost of almost £2 billion, which amounts to about 38 per cent of the combined value of all on-going projects. The team looked at at least one project in each of the main Scottish Government portfolios.As I mentioned, my report provides a snapshot, and the status of projects will have moved on since the time of the assessments. Nine of the projects that we examined had reached the main contract stage and three have subsequently done so. Given that they have reached that stage, there should be an increase in the certainty of the cost estimates that are now being applied. However, four of the current projects had significant increases in project costs before reaching the contract stage.The two projects affected by the largest increases were both transport projects. The first is the project to complete the M74 in Glasgow. At the time of our report, the latest cost estimate was £692 million. The second was the £85 million Stirling-Alloa-Kincardine rail link. The cost of both of those projects has more than doubled since the original project approval and both have been significantly delayed. Given the size and importance of those projects, we have included a more detailed summary of the progress of each between pages 22 and 24 of the report. We did not carry out a full, detailed audit of those specific projects, but the team did sufficient work to provide a high-level picture of the history of both projects for the committee's information. Both projects are now the responsibility of Transport Scotland, but I emphasise that both projects predate the establishment of Transport Scotland, which came into existence in 2006. Transport Scotland inherited the projects. It immediately assumed responsibility for the M74 project when it was established, and it took on the Stirling-Alloa-Kincardine rail link in August 2007.I turn finally to project management and governance. Good project management and governance are essential to deliver projects to cost, time and quality. Although room for improvement exists in some areas, the general conclusion in the report is positive. Overall, project management and the governance of individual projects are broadly effective. We give examples in the report of the Scottish Prison Service and Transport Scotland completing large and ambitious programmes within the contract costs.However, in general, there is a need for improvement in the early stages of a project and, in particular, as I have said, in the early cost and time estimating. The report also highlights the scope to improve project appraisals and to ensure that good quality business cases are prepared for every project.One of the issues that we touch on is competition. The report highlights difficulties in attracting competition in some projects, despite a sound approach being taken in most cases. That is due in part to increasing national and international demand for contractors. Projects are also experiencing higher levels of inflation in construction costs, which reflects the high demand for construction services. The current market means that there is a risk that suppliers might be less willing to compete for capital projects. Looking ahead, I think that there might be risks if the public sector does not adjust to those changing market conditions.The Scottish Government has been taking steps to strengthen the strategic oversight and control of the capital programme, which is a commitment that it inherited from the previous Administration. I encourage the Scottish Government to continue to strengthen leadership, co-ordination and management of investment programmes throughout Scotland. One of the significant benefits of that is that it would help the Scottish Government to ensure that its investment programme as a whole is properly matched to the capacity of the market to deliver projects, so that competition is achieved.I make a number of recommendations throughout the report, which are brought together on page 5 of the key messages and repeated on page 4 of the main report. Most of those are intended to reinforce existing good practice and are directed at the Scottish Government and public bodies in general.In addition, we have done a lot of detailed work behind that, and Audit Scotland is publishing on its website a more detailed good-practice checklist that will, we hope, help public bodies to identify whether any action is needed to improve the management and governance of any current major projects.I hope that the report is a useful contribution to public reporting on the performance of major capital projects. There is a requirement for regular and consistent public performance reporting in such a large and important area of public spending. It is interesting and significant that the report is the first to bring all the information together. As ever, my colleagues and I are happy to answer any questions that the committee may have.