╨╧рб▒с>■  ■                                                                                                                                                                                                                                                                                                                                                                                                                                                   ▄еhcр eАe!у'e&┤&┤┤&┤&┤&┤&┤&╚&╚&╚&╚&╚&╚& ╥& ╚&▐&1▄&▄&▄&▄&▄&▄&▄&▄&▄&▐&▐&▐&▐&▐&▐&'Xg'|▐&┤&▄&▄&▄&▄&▄&▐&▄&┤&┤&▄&▄&▄&▄&▄&▄&┤&▄&┤&▄&▄&P╢│ШЦ╞╚&╚&┤&┤&┤&┤&▄&▄&▄&▄&The Scottish Enterprise Overspend: Getting to the Roots of the Problem Margaret Cuthbert Jim Cuthbert June 2006 Scottish Enterprise has had a very public drubbing for overspending its budget for 2005-06, with a further overspend projected in existing plans for 2006-07. Alex Neil, convener of the Enterprise Committee raised the issue УHow can anyone have any confidence in an agency tasked with assisting the Scottish economy when they can't even control their own budget?" The agency admits to serious failings in its internal financial control systems, and has, apparently, set about remedying these. What has not been discussed are the mistakes made by the Scottish Executive in the whole affair. These Scottish Executive mistakes are ongoing and seriously curtail the work of economic development in Scotland. As made clear in the proceedings of the Enterprise Committee, a new system of project allocation was introduced throughout the Scottish Enterprise network without an adequate supporting financial control system. The new system was introduced to solve the recurrent problem of underspend by the agency and of too many projects being sanctioned in a rush at the end of financial years. The result of inadequate financial control has been a severe curtailment of some projects, and an overspend of around г34 million in 2005-06. The mistakes by Scottish Enterprise however come on top of an already existing failure by the Scottish Executive in the introduction of the system of government resource accounting and budgeting (RAB), as it applies to Scottish Enterprise: and this failure has long run implications. RAB is a system of managing government accounts to take in the full costs of carrying out government services: the accounts are presented to show not only the running costs of providing services, but the non-cash costs arising from items such as depreciation of equipment and the capital charge of using assets. When the Treasury introduced RAB, it did so in several stages in order to prevent major upsets. Government departments were required to prepare their accounts on a RAB basis in 2001-02: but, as the Treasury acknowledged that departments had no experience in measuring the non-cash items, these items were not accounted for within a strict departmental expenditure limit until 2003-04. This gave departments, such as the Scottish Executive, a chance to estimate non-cash items properly. The Treasury was emphatic that RAB should not disrupt actual cash plans Ц the new RAB accounting system should be neutral in its introduction. Scottish Enterprise, like all non-departmental public bodies, was required to present its accounts on a RAB basis from 2003-04. However, for these bodies, all items, including the non-cash items, were immediately under strict departmental expenditure limits. Unlike the introduction of RAB for government departments, there was no two-year period of grace given to gain experience, nor, once determined, was Scottish Enterprise allowed any flexibility in its non-cash estimate. Experience quickly showed that the amount which should have been allowed for under RAB for non-cash items was far too low: in 2005-06, for example, as Scottish Enterprise told the Enterprise Committee, the amount should have been г34 million, whereas only г9.6 million was allowed for by the Scottish Executive in its Budget statement. The problem did not become critical in the first two years of Scottish EnterpriseТs new RAB regime as compromises were reached with the Scottish Executive to get round the problem, partly by using the very underspends on its cash budget which the new system of 2005-06 at Scottish Enterprise was introduced to eradicate. In other words, had Scottish Enterprise not underspent on the cash part of its budget between 2002 and 2004, the introduction of RAB would have produced apparent overspend problems for it and curtailed its activities in those years. The problem did become critical in 2005-06 when Scottish Enterprise no longer underspent on cash. In England, the counterparts of the Scottish Executive and Scottish Enterprise are the Department of Trade and Industry and the Regional Development Authorities. In contrast to what happened in Scotland, the DTI unofficially monitored the non-cash items of the RDAs for two years before the due date of the introduction of RAB for the RDAs. By the end of the monitoring period the DTI and the RDAs were all reasonably content that the estimates were correct and it was these non-cash figures which were agreed with the Treasury when RAB was formally implemented for the RDAs. There are also differences in approach in the ongoing running of RAB. For example, RDAs must produce quarterly workbooks for the DTI showing their performance (in RAB terms): they have been given much more formal flexibility to switch from cash to non-cash should problems arise: their non-cash totals have risen through time, (unlike Scottish Enterprise): and finally, should shortfalls arise in one RDA, it can arrange with another RDA to use its surplus, paying back in the next year, and without paying interest. This gives a degree of flexibility to economic development agencies in England which is not available to Scottish Enterprise, the lack of which severely constrains Scottish Enterprise as it seeks to reposition its support to the Scottish economy and Scottish business. Overall, the stated intention of the Treasury in introducing RAB was that it should be neutral in its implementation: in other words, that it should not cause a short-term distortion of behaviour or operation, although in the longer term it was of course intended to have beneficial effects. Clearly this intention of short-term neutrality was severely breached in the handling of Scottish Enterprise by the Scottish Executive. The Minister announced in May that the Executive will help fund Scottish EnterpriseТs shortfall over the two years 2005/06 and 2006/07. However, this fails to address the long-term hole in Scottish EnterpriseТs budget caused by the inadequate provision made for non-cash items. Although the Minister has now acknowledged to the Enterprise Committee that the original estimate of non-cash items was too low, the MinisterТs statement entirely glosses over the failures of the Executive, as outlined above, in implementing RAB. As it was in no way intended, when the Treasury introduced RAB, that there should be any disruption to short-term operations, the Scottish Executive should go further than it has done, and should both adjust the non-cash budget for Scottish Enterprise and put in place the type of support and flexibility enjoyed by RDAs down south. The Scottish ExecutiveТs mistakes in the way they introduced RAB for Scottish Enterprise were by no means the only, or indeed the biggest, errors made by the Executive in implementing RAB. As we have detailed in papers published in the Fraser of Allander Quarterly Economic Commentary, (particularly vol 30, no 4, March 2006), major mistakes were made in the introduction of RAB as regards the determination of water charges in Scotland. The implication is that much more of the capital investment of the water industry is being funded from current charges than should be the case: this has damaged the competitiveness of Scottish business, and has also allowed the Scottish Executive to transfer public expenditure provision away from water to other programmes Ц in effect, using high water charges as a new form of taxation. All in all, the errors made by the Scottish Executive in the introduction of RAB, both in relation to Scottish Enterprise and to water, point to the need for the financial control functions within the Scottish Executive to be greatly strengthened. !С─бЬ─Э─дВ.е╞AжзиайакHIe!И!■■№uUБ$HI[hrs34CDa Ъ   A═╬!═╬▄*+g h `!a!b!d!e!■■№∙∙∙∙ЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎЎ K@ё Normala c"A@Є б"Default Paragraph Font"B@Є" Body TextUБc"■O" Normal (Web)ddee!    И!e! @1РTimes New Roman РSymbol "РArial"АЁ╨h+┤жЖ+┤жЖe Г5Ё|FThe Scottish Enterprise Overspend: Getting to the Roots of the ProblemMargaret CuthbertMargaret Cuthbert ■   ¤   ■    ■                               ■                                                                                                                                                                                                                                                                                                                                                                                               Root Entry         └FP╢│ШЦ╞└WordDocument    у'CompObj            jSummaryInformation(        №■    ■    ■                                                                                                                                                                                                                                                                                                                                                                                                                                                                       ■       └FMicrosoft Word Document MSWordDocWord.Document.8Ї9▓q■ рЕЯЄ∙OhлС+'│┘0╠РШшЇ(8 T` И Ф ам┤╝─фGThe Scottish Enterprise Overspend: Getting to the Roots of the ProblemШЦ°Margaret CuthbertЮЛpb?NormalvMargaret CuthberDocumentSummaryInformation8                                                 ■       └FMicrosoft Word Document MSWordDocWord.Document.8Ї9▓qxфself:Х╠5 GThe Scottish Enterprise Overspend: Getting to the Roots of the Problemt20.Microsoft Word for Windows 95@F├#@EКЦ╞@EКЦ╞e■ ╒═╒Ь.УЧ+,∙о0╪@HX` hp xфself:Х╠5 GThe Scottish Enterprise Overspend: Getting to the Roots of the Problem