NATIONAL AUDIT OFFICE

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Scottish Enterprise: Financial Management

ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 22 JULY 1996

LONDON: HMSO HC 667 Session 1995-96 Published 16 August 1996 E8.15 This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance tith Section 9 of the Act.

John Bourn National Audit Office ComptioUer and Autitor General 19 Jufy 1996

The ComptroUer and Auditor General is the head of the National Audit Office emploflng some 750 staff. He, and the NAO, we totfly independent of Government. He certfles the accounts of W Government departments and a tide range of other pubhc sector bodies; ad he has statutory authority to report to Parliament on the economy, efficiency and effectiveness tith which departments and other bodies have used their resomces. Contents

Page

S-ary and conclusions 1

1 ktrodnction md scope of the National Audit Office’s review 8

2 Propriety and fiancial control 12

3 Securing value for money 25 1. Moray, Badenoch and Strathspey Enterprise’ 2. Grampian Enterprise Limited 3. ScotOsh Enterprise Tayside 4. Hfe Enterprise 5. Lothian and Edinburgh Enterpflse Ltd d8& 6. ScoMsh Borders Enterprise 0° 7. Lanarkshire Development Agency ~& 6. Dumfties and Galloway Enterpflse b 9. Enterprise Ayrshire Q; 10. Glasgow Development Agency ~$ 11. Renfrewshire Enterprise a 12. Forth Valley Enterpdse 13. Dunbartonahire Enterprise 0

. . @n

do n n

G

Q

W ScotOsh Enterpflae Area A

n Highlands and Islands Enterprise Area 1 ‘ Operated jointly by Sco~sh Enterpflse and Highlands and Islands I Summary and conclusions

1 Scottish Enterprise were established as an executive non-departmental pnbhc body in Aprfl 1991 with responsibfities for furthering economic developmenfi enhancing skiDs and capacities; improving the environment and increasing efficiency and international competitiveness in Scotland.

2 They are funded primarfly by grant-in-aid from tbe Scottish Office Education and Industry Department (the Department). Since 1991, Scottish Enterprise have spent E2.3 bi~om f465 miUion in 1995-96. At 31 March 1996 they held fixed assets of land, buildings and divestments valued at f 184 Won.

3 Scottish Enterprise themselves directly fund operations and projects of a broad and strategic nature. However, so that decieions concerning economic, environmental and training developments involve and draw upon local and business communities, Scottish Enterprise main activities, including government training programmed, are dehvered under contract by 13 Local Enterprise Compaties. In 1995-96, these Compaties directly spent 76 per cent of Scottish Enterprise funds.

4 This report records the National Audit Office’sfindings on the arrangements made by Scottish Enterprise to secure propriety, financial control and value for money in the use of these resources.

Propriety and financial control

5 The National Audit Office found that Scottish Enterprise activities are undertaken Within a sound framework of accountabihty and internal controls. This framework works well and further improvements being developed by Scottish Enterprise should enhance the efficiency of the controls. Key features of corporate governance, propriety and financial control have been estabhshed for Scottish Enterprise and for Local Enterprise Companies. 6 Scottish Enterprise have a comprehensive accountabfi~ framework to meet the control risk present in the enterprise network. This is founded on a Management Statement issued by the Depmtment. The statement sets out responsibtities for the Scottish Enterprise Board and the Scottish Enterprise Chief Executive, who is also the Accounting Officer.

7 The Enterprise and New Towns (Scotland) Act 1990 provides for the audit of Scottish Enterprise hy the Comptroller and Auditor General.

8 The Department monitor Scottish Enterprise activities md have commenced a quinqnennial pohcy, finance and management review of their functions.

9 Scottish Enterprise have developed and adopted their own code of practice on Corporate Governance and intend to further improve openness in their activities.

10 A range of internal mechanisms exist to control Scottish Enterprise activities, These include: an Audit Committee; internal fiancial control systems; and financial monitoring wMch includes effective mechanisms to monitor the activities of Local Enterprise Companies.

11 Scottish Enterprise have responded promptly to the fidings of financial monitoring and have strengthened financial control systems as a resdt.

12 Local Enterprise Companies are private companies constituted under the Companies Act 1985 with Memoranda and Articles of Association which cannot be changed without the consent of Scottish Enterprise and the Department, Accountability for and control of Scottish Enterprise resources used hy Locaf Enterprise Companies rests onthetermsofoperattngcontractsbemeen the LOCN Enterprise Companies and Scottish Enterprise,

13 Local Enterprise Companies have voluntarily adopted a code of Corporate Governace based on that developed hy Scottish Enterprise. They maintain registers of directors’ interests which they make puhhc and they also hold pubhc meetigs to pubticise their annual reports and accounts. From October 1996, they W make avaflable details of grmts, equity funds and loans they award,

14 Operating contracts require Local Enterprise Companies to: maintain financial systems and controls which ensure the proper use of public funds; establish an audit committee; and ensure that their internal audit arrangements are effective. Scottish Enterprise assist Local Enterprise Companies with financial, legal and operational guidance and advice, and they monitor the companies’ financial systems.

15 Within this overaU satisfactory framework, the National Audit Ofice identtiled an area where there was scope for reviewing current arrangements.

16 The ComptroUer and Auditor General, in his report on the accounts of the Scottish Enterprise Network, is required to give an additiond opinion as to whether their financial hansactions conform to the authorities which govern them. Local Enterprise Compaties, as private companies Umited by guwantee, pubhsh annual accounts audited by external auditors, in accordance with the Compaties Acts, and auditing standards. Such an audit report is an expression of the auditors opinion of the ‘truth and fakness’ of the financial statements and thek preparation in accordance with the Companies Act. The Comptroller and Auditor General has no rights of access to Local Enterprise Companies, though Scottish Enterprise have arranged for the National Audit Office to obtain information for the audit of Scottish Enterprise. This can mean the National Audit Office visiting Local Enterprise Companies and theti external auditors.

Scottish Enterprise should review the range of options, including the role of Local Enterprise Companies’ external auditors, available to provide assurances on Local Enterprise Companies compliance with the financial provisions of their operating contracts and on the proper use of public funds. Options should seek to provide a level of assurance consistent with that currently given by the Comptroller and Auditor General on tbe regularity of transactions in the Scottish Enterprise Network accounts, whilst minimizing the audit burden on Local Enterprise Companies and maximizing the efficiency and effectiveness of the arrangements.

Securing Value for Money 17 Scottish Enterprise have established a framework of controls which are designed to secure value for money. Since 1991 they have made improvements to the framework and further improvements are in hand.

18 Most of Scottish Enterprise’s proWammes are dehvered under contracts with Local Enterprise Compafies. Any interested party may at any time apply to operate a Local Enterprise Company. Since 1991 Scottish Enterprise have been contracted to the same Local Enterprise Companies without competitive tendering they have, however, sought to make the contracting process more transparent

3 and in 1995 irwited bids to maage specfic Locaf Enterprise Companies. They have arrmgements in place to consider bids from interested parties to operate Local Enterprise Companies, but no such bids have emerged.

19 In the absence of externsd competition Scottish Enterprise have to rely on alternative mechanisms to secure vahse for money in Local Enterprise Company sertices. These include detaifed scrutiny of business plans, negotiations on training budgets, Internal Audit examination, project appraisal, and retiews of best practice.

20 Under the terms of the Management Statement Scottish Enterprise delegated to Local Enterprise Compaties autbori~ to approve expenditure on enterprise, entironmentd and constdtartcy projects within specified Emits. The Statement also protides for the operation of training programmed to be ftiy delegated to the Local Enterprise Compties. However no financial Uits are re@ed to be set for these programmed. The National Audit Office found that Local Enterprise Compafies comphed with Scottish Enterprise delegated authorities, but that at one of the four Local Enterprise Companies they tisited scope existed to improve local delegated authority.

Scottish Enterprise have estabhshed sound delegated authority procedures but need to continue to remind Local Enterprise Companies of the need to adopt best practice in establishing and applying their own local levels of delegated authority.

21 Scottish Enterprise require Local Enterprise Companies wherever possible to award contracts involtig Scottish Enterprise funds after tendering action. In 1993 and 1995 Scottish Enterprise internal audit identified scope to improve Local Enterprise Company tenderingarrangements.Info~otinguphose fmtigs h a sample of 50 current Local Enterprise Company projects, the Nationaf Audit Office found that three of the 36 non-traifing and W of the 14 trtining projects they examined were not subject to competitive tender.

22 Scottish Enterprise and Local Enterprise Compafies explained that for youth and adtdt training there were firnited suppfiers and tendering was not practicable, though sertice protiders were required to submit detatis on defivery of trairdng and standards of sertice. Nevertheless expenditure on training represents some 35 per cent of Scottish Enterprise total annual spend and they should continue where practictile to seek a range of suppliers to encourage competition. Scottish Enterprise need to remind Local Enterprise Companies of the need to apply existing guidance on competitive tendering.

23 The Department requires Scottish Enterprise to ensure that W pubhcly funded projects we properly appraised and that project costs and benefits are monitored. In 1993 Scottish Enterprise commissioned constitants to assess the nature and quahty of their project appraisal.

24 The constants concluded that although Scottish Enterprise experienced diffictity in assessing the potential costs and hnefits of some projects, the problem was no greater than that experienced by most pubhc sector economic development agencies. They also found that project appraisal had been afforded a low priority in some areas and where appraisal was undertaken the consultants considered overall qnahty was poor,

Scottish Enterprise responded positively and have strengthened the approach to project appraisal by introducing improved staff training, advisory support and guidance but need to ensure that their guidance on project appraisal is being applied,

25 Wllst Scottish Enterprise have estabhshed effective measures to secure value for money from Local Enterprise Company Services, the National Audit Office found scope for further developments in two areas: the monitoring of Local Enterprise Company operating sorpluses, and the Scottish Enterprise Performance Measurement and Reporting System.

Operathg surpluses 26 Local Enterprise Companies can earn surpluses from providing training services to Scottish Enterprise as weU as from fees, charges, ba~ titerest and asset management. Local Enterprise Companies may use these surpluses to fund new and innovative projects outside activities funded by Scottish Enterprise and to respond to opportunities and needs not included in their operating plans. Operating surpluses must be apphed to activities which further Local Enterprise Company business plans.

27 The level of operating surpluses including spectic reserves and authorised commitments retained by the 13 Local Enterprise Companies rose from E13.3 miWon in March 1992 to f42.4 mflhon in March 1996. In revising arrangements for monitoring surpluses, in January 1996, Scottish Enterprise set an overall cap of S28 mi~on on accmntiated uncommitted operating surpluses, tith individual caps for each Local Enterprise Compay. Of the S42.4 minion total operating enrpluses in March 1996 E27.2 sumkm were accnmtiated uncommitted surpluses.

28 Since 1994-95, Local Enterprise Company operating plans contained information on the planned use of operating surpluses, and this is reported hy Local Enterprise Companies h performance measurement reports.

Scottish Enterprise should continue to take steps to contain Local Enterprise Companies’ operating surpluses titiln approved hmits

They also need to exercise improved monitoring over the use to which surpluses are put.

Scottish Enterprise should also continue to take account of Local Enterprise Company surpluses when considering their funding proposals.

Performance measurement and reporthg 29 Since 1991, Scottish Enterprise have spent over S2 btion of pubtic finds, and have reported their performance through actitity measures within expenditure programmed rather than against their wider, strate@c objectives. During 1993-94 Scottish Enterprise iuternd audit identified a lack of supporting information for targets agreed and set for Local Enterprise Company performance and inconsistencies and a lack of clarity in the way Local Enterprise Compmy outputs were claimed and performance was reported.

30 Scottish Enterprise, recognistig the need for more general improvements, commissioned conetitants to retiew their performancemeaswementsystem.Theconstitantsfomd that Scottish Enterprise’s performance measurement displayed stiar problems to those faced by other economic development agencies. These included a focus on activities rather than impacts, unclear and incomplete guidance, a performance framework which was too fimited and variation in the use of output measures.

31 The Nationaf Audit Office examined performance returns subtitted by Local Enterprise Companies and found continuing etidence of the wehesses noted by titernal audit mrd consultants.

32 Scottish Enterprise have akeady taken action to improve performance measurement and reporting in fine with best practice. Development of a new output m.enitortig frmnework began in 1993. This introduces direct links from strate~c objectives to tiditidual

6 activities. The framework was introduced in 1995, but Scottish Enterprise envisage that its fti imphcations W be implemented graduaffy over time.

Scottish Enterprise have recognised that their previous performance measurement and reporting system was unsatisfactory and have introduced a new framework in line with best practice. They have also recognised that it is important that they develop the framework to its full capability as soon as possible, This will help Scottish Enterprise to demonstrate on a clear, consistent and timely basis their achievements and performance in managing the substantial amounts of public money under their stewardship, 1. Introduction and scope of the National Audit Office’s retiew

Scottish Enterprise 1.1 Scottish Enterprise were estab~shed in Aprfl 1991, under the Enterprise and New Towns (Scotiand) Act 1990 with responsibfity for:

a) furthering the development of Scotlantis economy and h hat connection protiding, mtintaifing and safeguarding emplo~ent

b) enhancing skills and capacities relevant to emplo~ent in Scotfand and assisting persons to est~hsb themselves as self-employed persons there;

C) promoting Scotlantis industrid efficiency and international competitiveness; and

d) furthering improvement of the entioment of Scofland.

[Source: Enterprise and New Towns (Scotland) Act 1990, Section 11

1.2 Scottish Enterprise are funded by the Scottish Office Education and Industry Department through grmt-in-aid. Since 1991, Scottish Enterprise have spent 82.3 bilfion; S465 Won in 1995-96. At 31 March 1996 they held freed assets of land, btidings and investments, valued at fl 84 milhon (Fi@re 1 opposite).

1.3 Scottish Enterprise directly fund operations and projects of a broad or strate@c nature. However, so that decisions concerning econotic, environmental and training developments involve and tiaw upon local and business communities, Scottish Enterprise activities, includlng the government’s main training programmed, are delivered though contracts with 13 Local Enterprise Companies. In 1995-96, these Companies directly spent 76 per cent of Scottish Enterprise funds.

8 Expenditure 1995-96 Business receipts1995-96 Em Zm Training 168 Prope@Dsposals 10 Environmental Improvement 84 Investmentdisposals 5 Business Support 162 Rents 10 Administration 51 Interest and dividends 3 Total 465 Cmddbuflons 3 Other Investment Fund Receipts Total

Fixed Assets at 31March1996 fm Industrial, commercial prope~ 151 Other propew 3 Plant and Equipment 1 Equi& and Loans 11 PropeW Mortgages and Loans 5 Development Loans 6 Loans to Local Enterprise Companies 4 Leg-up loans 3 IB4

Source:ScofiishEnterprise

1.4 The Local Enterprise Compauies are private compauies fimited by guarantee with Boards of Directors drawn primarily from their local busiuess community. Scottish Enterprise and tbe Local Enterprise Companies constitute the Scottish Enterprise Network.

1.5 Scottish Enterprise have also estabhshed speciahst bodies. JointJy with the Scottish Office Education and Industry Department they run Locate in Scotland which deals with inward investment and Scottish Trade International which promotes exports. Scottish Enterprise also operate a series of sma~ compauies which maidy provide adtisory services, for example Scotland Europa Ltd which specialises in European matters.

1.6 Fi~e 2 overleaf summarises the arrangements for the delivery of Scottish Enterprise activities.

9 Scotish Otice Education and Industry Depatiment

I Scotdsh Enterprise I 4“ f / Expofls via Direct Provision of Scotish Trade / International LEC operating contracts Grants, Loans, and LEC funting prope~ and advice to industry and business I I ——

/

/ Provision of Grants and Loans suppoting delivery of Suppoti of Individual ● localproject and programmed National for business creation and and expansion International ● Environmental improvements and Strategic land renewal Projects

● National training programmed (see also figure 8).

Source:NationalAuditOffice

10 Scope of the 1.7 This report records the National Audit Office’s findings on Scottish National Audit Enterprise’s arrangements for Office’s examination Propriety and Financial Control - whether Scottish Enterprise’s arrangements covering corporate governance, independent audit, fmancid administration and control of assets were ensuring propriety and control in the use of pnbhc funds.

Securing Valne For Money - whether Scottish Enterprise’s arrangements were aimed at securing economy, efficiency and effectiveness in their use and management of resources.

1.8 In their examination, the National Audit Office took account of the statutory and regulatory framework within which Scottish Enterprise operate, and the work of the Scottish Enterprise Financial Monitoring Team, their Internaf Audit Unit and Scottish Office Internal Audit.

1.9 The National Audit Office sought etidence of the way in which the Scottish Enterprise Board and Accounting Officer set out to discharge their responsibilities under the body’s Management Statement and the Accounting Officer’s Letter of Appointment. They dso had regard to the principles estabhshed by the Cadbury Committee on corporate governance, and the Committee of Pnbhc Accounts’ recommendations in their report The fioper Conduct of fiblic Business.

1.10 In addition, the National Audit Office examined 50 projects at Scottish Enterprise and four Local Enterprise Companies: Lothian and Edinburgh Enterprise Ltd, Scottish Borders Enterprise, Glasgow Development Agency, and Forth VaUeyEnterprise. 2. Propriety and financial control

2.1 This part of the Report records the findings horn the National Au&t Office’s examination of whether Scottish Enterprise’s arrangements covering corporate governance, independent audit, financial administration and control of assets were ensuring propriety in the use of pubhc fuuds and effective internal control.

Accountability 2.2 Scottish Enterprise operate tithin a comprehensive accmmtabfi~ framework framework (Figure 3 opposite).

Composition, 2.3 Scottish Enterprise is managed by a Board. Board members, responsibilities, and including the Chairman, are appointed by the Secretary of State. Figure 4 summarises the Boards’ main responsibilities. conduct of the Scottish Enterprise Board

. providing direction on pohcy mattera and approving strategy and o~ectivea for Scrdtiah Enterpflss . controlling and managing Scottish Enterpflae . ensuring that projects and pmgrammes are conaiatent with the overall objectives of the Enterprise and New Towns (Scotland) Act 1990, with Government po~cies and the ouectives set by the Secretary of State . preparing annual corporate plans, including targeta for peflormance, and annual accounts . ensuring that Government training guarantees for Scotland are met that all initiatives, projects andprogrammed arefully appraisedandaddvalu$ andthat targets are achieved.

Responsibilities of 2.4 The Scottish Enterprise Chief Executive is appointed as Accounting the Scottish Officer. His letter of appointment sets out his financial management responsibihties in this role (Figure 5 on page 14). Enterprise Accounting Officer

12 I I 1990 Act Audit by C&AG 3 I — A \ I / Secretary of State I

/- I SOEID and Depatimental AO

-) r Scottish Manual of Proje Enterprise Management and Information Pmgramme RUII + ::tegic A / / SCOTTISH ENTERPRISE Chairman Board ‘[ Audit Committee Scotish Office Chief Executive (AO) Internal Audit ...... Code of Corporate Governance Internal Audit -+ Internal Financial and r

,[ —2LEC Operation Contract / 13 LOCAL ENTERPRISE COMPANIES ...... Chairman Board Chief Executive Internal Audit

LEC Control and Accountability

Framework Hgure B Source:Natiorra/AuditOffice

13 He must ensure . theregulaflty andproptiety oftransacfion~ . thattheaccounta of Scotiah Enterprise areproperly keptandpresentei . that there are proper safeguards against fraud and theft of property and fund$ . thatthereare proper safeguards toavoid waateand efiravagance and forpromoting economy, e~ciency and effectivenea$

● thatinrespect of Local Enterpflse Companies, there are fully adequate monitoring and control systems in place to safeguard public fund$

Source: Scoftish Enterprise Management Statement 1995-96

2.5 The Chief Executive isalsoa member oftie Scottish Enterprise Board and has a pivotal role in assisttig the Board to develop pohcy and priorities and in ensuring that they are implemented effectively. The Chief Executive has overa~ responsibility for the efficient management of Scottish Enterprise and for overseeing relationships tith Local Enterprise Companies.

Independent audit 2.6 The Enterprise and New Toms(Scotland) Act1990 (Section 3O), and retiews protides for the audit of Scottish Enterprise by the ComptroUer and Auditor General. were Scottish Enterprise receive grants from the European Commtity, they are also subject to tispection by the European Commission and the European Court of Auditors.

2.7 Since 1991, the National Audit Office have, intietithstandmd practice, raised a number of concerns ~out finwcial control h management letters arising from examination of the Scottish Enterprise accowts. Scottish Enterprise have responded positively to these points,

2.8 The Scotish OfficeEducation ~dIndus@Department mofitor Scotish Enterprise activities through regnfar progress rem ad meetigs ad Scotih Officebternd Audit have conducted retiews of the Scottish Enterprise kternd audit arrangements. The Department commenced a @~eti~ pohcy, fismce md management review of Scotih Enterprise tictiom h Jwuary 1996. The Department md Scottish Enterprise are considetig the case for fwtber systematic retiews of Scottish Enterprise activities.

Scottish Enterprise 2.9 Folloting the Cadbury Committee recommendations and fieasnry Corporate guidance, Scottish Enterprise have developed and adopted their om Governance Code of Practice for Corporate Governance which re@es those concerned titb Scottish Enterprise activities to:

14 . observe the highest standards of impartia~ty, integrity and objectivity in relation to stewardship of pubhc funds and management of Scottish Enterprise;

. comply tith au reasonable reqneste for information about Scottish Enterprise activities;

● be accountable to customers, staff and individual citizens as weU ae to the Secretary of State and through him to Parhament;

. matimise value for mone~

. maintain registers of Board Members’ interests.

2.10 The Code was pnbhshed in May 1995. In their annual report for 1995-96, Scottish Enterprise conRmmed that they had comphed with the code during that year.

2.11 In their response to the Scottish Select Committee’s Report on the Operation of Enterprise Agencies and the Local Enterprise Companies (Cnmd 3036, Januwy 1996), the Government accepted recommendations to further improve openness in Scottish Enterprise activities. In partictiar, Scottish Enterprise til continue pub~shing detafls of LEC Business Plans; and since April 1996 dettils of the Wants, equity funds and loans they award have been avaflable. Scottish Enterprise wiU also appoint an external adjudicator to consider any complaints wMch remain unresolved after internal complaints procedures have been efiausted.

2.12 The Second Report of the Committee on Standards in PubEc Life (Cmn 3270-1, May 1996) considered arrangements for maintaining standards of conduct in Iocd pubhc spending bodies, including local enterprise compaties. The report welcomed the considerable progress made by Scottish Enterprise and the Local Enterprise Companies including the creation of open procedures to tackle confllct of interest issues; implementing their own detailed governance rties and cmrying these principles forward through contracts tith Local Enterprise Companies; and the work being carried out to set up an external complaints adjudication procedure. The report concluded that the contractual relationship tith Local Enterprise Companies involves an element of re@ation and the Committee welcomed the steps being taken hy Scottish Enterprise to improve governance, openness and propriety.

15 2.13 The Committee report contains a number of recommendations which are being addressed by Scottish Enterprise including arrangements for the scrutiny of Board papers where possible; identifying potential Board members; estabhsbing tider membership schemes in terms of the Companies Act for Local Enterprise Companies; and pubhshing a statement of Local Enterprise Company comphance titb governance issues in the Scottish Enterprise annual report. The report also recommends retieting the audit framework to ensure it takes account of aU aspects of public sector audit requirements. The Government ti respond to these points in due course.

Financial 2.14 Within the accountabfity framework described in Figure 3, Scottish administration Enterprise have in place extensive internal mechanisms to monitor and control their activities. The main mechanisms are:

. Audit Committee . Internal Control . Hnancial Monitoring Team merged from July 1995 . Internal Audit }

Soume: National Audit Ofice

Audit Committee 2,15 Scottish Enterprise have an Audit Committee whose main responsibiEties are monitoring the effectiveness of internal control systems and operational procedures; considering and recommending approval of Internsd Audit plans; retietig the scope and results of internaf and exterrud audit and ensuring management action is taken as a resulti and retieting and endorsing Scottish Enterprise hnual Accounts.

Internal control 2.16 Scottish Enterprise have established, and operate, a range of internal controls over expenditure, tie disbursement of funds, custody and protection of assets and other activities in accordance tith Treasury guidance. Scottish Enterprise use titernal au~t and evaluation teams, to monitor the financial management systems, operational quality and performance outputs across the Enterprise network.

Internal audit 2,17 The Scottish Enterprise Internal Audit Utit are responsible to the Chief Executive md the Audit Committee. They appraise Scottish Enterprise internal control systems and the economy, efficiency ad effectiveness of Scottish Enterprise expenditure. They sdso protide

16 adtice on proposed projects and programmed and matters of pubfic accountabfity, and conduct special investigations into areas of concern. Their work extends to examinations in Local Enterprise Companies.

2.18 Each year, Internal Audit have obtained sufficient etidence to enable the Audit Committee to assure the Accounting Officer that sound and reliable financial systems are in place in Scottish Enterprise. Their work has also led to improvements in systems includlng those for managing propertfi contro~ng the use of constitants and contractors; getting the best out of information technolo~, and project management.

Monitoring local 2.19 Untfl Jtiy 1995 Scottish Enterprise employed their Financial Enterprise Monitoring Team to protide assurance that Local Enterprise Companies’ financial Companies comply with contractual obligations to maintain sound financial controls over propriety and accountabihty for pubhc funds. systems Analysts tisited each Company on a cyc~cal basis and examined the financial systems, and documentation supporting invoices submitted to Scottish Enterprise.

2.20 The team’s work has led to improvements in etidence in support of invoices for training expenditure; controls over enterprise and entionmental projects; comp~ance in the use of delegated powers; and in checks on ehgibfity for claims and the use of funds for training programmed. Scottish Enterprise took prompt action in response to the team’s findings in each of these areas.

2.21 Internal audit retiewed the restits of Scottish Enterprise’s financial monitoring of Local Enterprise Compatics. They concluded that the work undertaken protided satisfactory coverage, but hig~ghted scope for further improvement in the way the Companies’ financial controls and other systems were evaluated and documented.

2.22 In Jtiy 1995 Scottish Enterprise merged Internal Audit with the Financial Monitoring team and entisage that the combined resource will reduce overlap and help to further improve the coverage and quafity of the monitoring process. In addition steps have been taken since Aprfl 1996 to bring together Scottish Enterprise and Local Enterprise Companies’ internal audit activities in a network managed team. Ttis is intended to reduce overlap; and protide a more consistent and coherent approach to risk assessment and audit examination.

17 Key potits 2.23 Scottish Enterprise:

. haue in place a comprehensive range offinancial procedures to meet the control risks present in the enterprise network.

. have responded positively to the principles of corporate governance by adopting comprehensive codes of practice and haue taken action to meet recommendations from the Scottish ~ Select Committee to further improve openness in their activities.

. have responded positively to the work and recommendations of their Financial Monitoring team and Internal Audit and have merged the two groups to improue their effectiveness.

. haue introduced a network managed ap~roach to.further improue the efficient and effective operation of internal audit.

Control of assets 2.24 Scottish Enterprise’s asset base is El 84 Won. In 1995-96, revenue of E49 mMion was generated mtidy from rents, investments and disposals (Figure 1). At 31 March 1996, Scottish Enterprise debtors tottied S79 milhon (fi56 miUion of which was due from Local Enterprise Companies) wd loans outstanding totalled 832 tion at cost.

2.25 Since 1991 Scottish Enterprise have been developing ticome control systems to cover age-hsting of debtors, iruproved control over property rents, and reconci~ation of hwestment and financial records. Au improved register of iucome entitlement arisfig from Scottish Enterprise assistance to development projects, introduced on 1 May 1996, has yet to be fdy developed.

2.26 Scottish Enterprise may exceptiondy defer debt recovery when circumstances relating to the debtor or the project change. This arose in a case involving a property development company, iuvolviug debts tota~lng S1.4 mi~on outstanding siuce the late 1980s; Scottish Enterprise’s Chief Executive commissioned an Internal Audit investigation to examine the procedures over tbe treatment of the company.

2.27 The Internal Audit report, dated October 1995, concluded that the company had not received preferential treatment, but that a number of procedures relating to recording and monitoring debt entitlements and debt deferment had not been foUowed. Scottish Enterprise therefore established an action plan to address the specific weaknesses (Figure 7 opposite).

18 Scottish Enterprise will: . estabhsh and maintain an accurate entitlements record; . make clear who is responsible for monitoring the different elements of a deal, including notification of sums due, raising invoices and pursuit of debt, and to improve the overall co-ordination of debt controt . ensure staff are aware of the need to follow upon concerns they have raised; . ensure sound procedures are in place for retention of documents.

Source: Scottish Enterprise

Key points 2.28 Scottish Enterprise:

. need to complete the development of their newly introduced income entitlement register;

. should ensure that clear responsibilities are establish edfor debt management, particularly for large or long standing cases.

Composition, 2.29 The 13 Local Enterprise Compaties are private companies hmited responsibilities and by guarantee. Each is constituted under the Companies Act 1985 conduct of the local with Memoranda and articles which cannot be changed without the consent of Scottish Enterprise and the Department. They operate Enterprise with a comprehensive framework of accountability and control Companies arising from the operating contract which imposes aU the requirements and conditions of the Management statement on the Local Enterprise Companies (Figure 8 overleao.

Independent autit 2.30 Local Enterprise Compantes pubhsh annual accounts audtted by and retiew external auditors in accordance with the Companies Act. Scottish Enterprise told the National Audit Office that, while the external * auditors take account of compliance issues in assessing risk in planning their audit of accounts, they are not specifically required to report on Local Enterprise Company compliance with the financial provisions of the operating contracts with Scottish Enterprise. Scottish Enterprise rely on their own financial monitoring and that of the Local Enterprise Companies to provide this assurance and told the National Audit Office that the Local Enterprise Company external auditors also have regard to this work for Companies Act audit purposes (paragraph 2.14-2.23).

19 Scottish Enterprise Board Strategy and Corporate Plan L

● Management Statement (financial Managerialand LEC Operating Contract ~, LECBusinessPlan OperationalFramework) and Annual Operation Plan ● Manual of Projects and Programme Rules “r (Operational Requirements,

F Weekly and Monthly / Rnancial and Management Information LOCAL ENTERPRISE COMPANY -il Chairman /

Board ● Petiormance 5– Audit Committee /_ Measurement Chief Executive ● Project Evaluation EXernal Appointed I Internal Audit Auditors ~/ ● Network Development PrOceas I

I ScOtish Enterprise ‘r / Internal Audi~ / Hnancial Monitoring and Evaluation Provision of Grants and Loans suppoting the delivery of — J I ● Local projects and programmed fm business creation and expansion

● Environmental improvements and land renewal

● National training programmed /

Source: National Audit OMce

20 2.31 Local Enterprise Company external auditors’ reports provide an opinion as to whether Local Enterprise Company accounts show a true and fair view of their state of affairs, income and expenditure and cash flows and whether the accounts comply with the provisions of the Companies Acts. The Comptroller and Auditor General, in his audit report on the accounts of Scottish Enterprise and the Scottish Enterprise network is required to ~ve an additional opinion as to whether their financial transactions conform to the authorities which govern them.

2.32 The Comptroffer and Auditor General has no statutory rights of access to the Local Enterprise Companies, nor does he have access under the terms of the Scottish Enterprise contracts with them. However, Scottish Enterprise have arranged for the National Audit Office to obtain information for the audit of Scottish Enterprise accounts and for specific value for money work. This has meant the National Audit Office visiting Local Enterprise Companies. FoUowing the introduction of consohdated accounts for 1995-96, Scottish Enterprise arranged necessary access for the National Audit Office to the Local Enterprise Companies and their external auditors.

2.33 The Local Enterprise Companies may also be subject to audit by the European Commission and the European Court of Auditors, European legislation protides a right of access to any organisation, including private sector companies, in receipt of community funds and access to Local Enterprise Companies is provided for in their operating contracts with Scottish Enterprise.

Key points 2.34 . Local Enterprise Companies are independently audited, but, as they are private companies limited by guarantee and audited in accordance with the Companies Act, their external audit does not encompass compliance with the financial provisions of operating contracts with Scottish Enterprise;

. Scottish Enterprise should reuiew the range of options. including extending the role of Local Enterprise Company external auditors, auailable to prouide assurances on Local Enterprise Company compliance with the financial provisions of operating contracts and on the proper use ofpublicfunds. Options should seek to prouide a leuel of assurance consistent with that currently given by the Comptroller and Auditor General on the regularity of transactions in the Scottish Enterprise Network accounts, while minimizing the audit burden on Local Enterprise Companies and maximizing the efficiency and effectiveness of the arrangements.

21 Local Enterprise 2.35 The Scottish Enterprise operating contract does not re@e Local Company code of Enterprise Companies to adopt codes of practice for Corporate Corporate Governance. However, each one has voluntarily adopted a stadard code based upon the Scottish Enterprise code. The Local Enterprise Governance Company codes outline the practices they shotid fo~ow on aspects such as inte~ity, accountab~lty and opemess. From 1994-95 each company provided an annual statement of comphance with the code (Figure 9). Tbe 1995-96 Scottish Enterprise annual report includes a statement on network comphance.

CorporateGovernance WtilsttheDirectorsendorse the recommendations set out in the CadbuW Committee’s Code of Best Practice, they recognise that the code is aimed primarily at tisted companies. In November 1994 Scotish Enterprise pubhshed a afatement on Local Enterprise Company corporate governance, The Code of Best Practice.

The Directors support the highest standards of corporate governance and confirm that the company complies with all provisions of the code. The Directors befieve that this code more closely reflects the business activities of the Local Enterprise Companies,

Directors’ Interests in Contrasts During the year, the group, in the normal course of business, entered into the following transactions to organisations or companies in wfdch Directors had a manageflal responsibility.

Where a Director was appointed duflng the year only those transactions undertaken subsequent to the date of appointment are included. Where a Director retired during the year only those transactions undetiaken m contracted prior to the date of retiral are included.

All such contracts were subject to the Company’s normal tendeflng procedures where appropriate and were negotiated at arm’s length.

Director Company Project Value f V Murphy Glasgow Airpoti Limited Contribution to education pack 9,402 R Beafy IBM (UK) Limited Youth Training/ Stillseekers Pmgramme 208,978 H Riddoch Minebea Electronics (UK) Limited Profit through People 3,908 E Forbes The Royal Bank of Scotland plc Selection, recruitment and training support 126,100

The group works in partnership with a number of pubtic bodies with whom many joint projects have been undetiaken during the year. The following also held oficial positions in these organisations

Director PubhcBody PositionHeld H Mulholland Inverclyde District Council Councillor J Mulhn Strathclyde Regional Council COuncillOr R W Shaw University of Paisley Principal Reid Kerr College Member of Board of Management O Taylor Renfrew District Council CouncillOr

22 2.36 Under both the Compafies Act and their operating contract with Scottish Enterprise, Locfl Enterprise Companies are required to maintain a register of directors’ interests. Each Company’s register is open to the pub~c and they each hold pubhc meetings to pubhcise their annual reports and accounts. Annual accounts contain detatis of organisations in which any of the dwectors are interested which have received loans and grants (see for example Figure 9).

2.37 In response to the recommendations of the Scottish Select Committee’s report on the Operation of Enterprise Agencies and the LECS(paragraph 2.11), Local Enterprise Companies wiU, from October 1996, make avafiahle detafls of the grants, equity funds, and loans they award.

Key point 2.38 The Local Enterprise Companies have responded positively to the principles of corporate governance by adopting comprehensive codes of practice. Similarly on directors’ interests, they comply with the need for a publicly available register From October 1996 they will make auailable details of the grants, equity funds and loans they award.

Financial 2.39 The basis of the relationship between Scottish Enterprise and each administration individual Local Enterprise Company is governed by the operating contract. The contract requires each Company to have financial systems and controls which ensure the proper use of pubhc funds, to estabhsh an autit committee, md to ensure that their internal audit arrangements are adequate and effective and in accordance with best practice. The contract requires the Local Enterprise Companies to comply with the Management Statement and the Manual of Project and Programme Roles, and to have due regard to Scottish Enterprise Best Practice Guide. The companies must also ensure the adequate control of pubhc money by their c~ents or providers.

2.40 Contracts commenced on 1 AprU 1991 and are updated and amended each year tating account of business and operating plans prepared by each Company and agreed with the Scottish Enterprise Board. The contract identifies the type and extent of operational activity the Local Enterprise Company til engage in during the year, its delegated powers, and the resdts to be achieved.

2.41 The Department’s Management Statement requires Scottish Enterprise to satisfy themselves that Local Enterprise Companies have in place satisfactory systems for monitoring and reporting on their financial and operational activities. Scottish Enterprise provide

23 financisd, legal and operational guidance to Local Enterprise Companies , and assist them to establish the necesswy system of control.

2.42 And as noted above (para~aphs 2.16-2.21), Scottish Enterprise Internal Audit team tisit Local Enterprise Companies and their sertice protiders to retiew the outcome of tbe financial appraisal and monitoring process.

Key points 2.43 Scottish Enterprise haue:

. put in place effective mechanisms to monitor the activities of Local Enterprise Companies. They monitor Local Enterprise Company financial systems to ensure that each Company is financially viable; that income, expenditure and assets are “properly controlled; that safeguards exist against loss or misappropriation; and that claims due under the contract are I invoiced promptly.

. responded promptly to the findings offinancial monitoring and have strength enedfinancial control systems as a result.

24 3. Securing value for money

3.1 This part of the Report records the findings of the National Autit Office’s examination of the Scottish Enterprise arrangements for securing economy, efficiency and effectiveness in their use and management of resources.

3.2 The National Audit Office examination focused on

. The extent of competition achieved by Scottish Enterprise for Local Enterprise Company services.

. The extent of competition achieved by Local Enterprise Compauies for dehvery of their programmed.

. Project appraisal and monitoring.

. Use of operating surpluses.

. Performance measurement and reporting.

Competition for 3.3 In August 1989 the Secretary of State for Scotland pubhshed a local Enterprise prospectus inviting groups of local businessmen to form consortia to Companies bid for development funds to aHow them to produce business plans for specific Local Enterprise Company areas. were successfti bidders’ business plans were agreed these wordd serve as the foundation for the award of operating contracts which wodd be on a three-year rolling basis expendable amually. Otiy one bid for funds was accepted from each area, where rival groups emerged they were encouraged to co-operate as a single consortium. Business plans for the 13 areas were produced during 1990 and the 13 contracts were awarded in March and April 1991. Since 1991 Scottish Enterprise have updated and varied contracts annually to the same 13 companies without competitive tendering.

3.4 Auy interested party may at any time apply to operate a Local Enterprise Company. In Aprfl 1994 Scottish Enterprise approved arrangements to make the process more transparent and in 1995, foUoting amendments to LEC boundaries arising from local government re-organisation, Scottish Enterprise advertised for

25 consortia bids to rn~age those Local Enterprise Companies affected. Scottish Enterprise have received no alternative bids to operate a local enterprise company.

3.5 In the absence of external competition for local enterprise companies contracts, Scottish Enterprise seek to secure value for money through a scrutiny of annual Locrd Enterprise Companies proposals for extension of their contracts. These include an annusd ~ planning process which involves detailed scrutiny of Local Enterprise Company business plans by the Scottish Enterprise I Board; negotiations on volumes, outputs and prices for national ! training programmed; value for money examinations by Scottish Enterprise Internal Audlti guidance on project appraisal; and I reviews of Local Enterprise Company operations to identify and disseminate good practice.

3.6 In their response to the Scottish Select committee’s Report (Cmnd 3036, January 1996) the government noted that contractual ; arrangements between Scottish Enterprise and the Local Enterprise Companies wotid be one of the issues under scrutiny during the Poticy and Financial Management Review of Scottish Enterprise to he conducted by the Depwtment in 1996.

Key points 3.7 .7cottish Enterprise:

● have arrangements in place to consider bidsfrom interested parties to operate Local Enterprise Companies but no such bids hal~eemerged;

● have to relg in the absence of competition, on alternative mechanisms to secure value for money in Local Enterprise Companies services. These include detailed scrutiny of business plans, negotiations on training budget, Internal Audit examinations, project appraisal, and reviews of best practice.

Protision of LEC 3.8 In 1995-96 Local Enterprise Companies received S358 Won horn sertices Scottish Enterprise. Wout 35 per cent of this funding relates to the provision of services for youth and adtit training.

3.9 The Department’s management statement requires Scottish Enterprise to approve Local Enterprise Companies enterprise and environmental projects valued in excess of S250,000, investment constitancies and surveys vaJued in excese of fl0,000, and other constitancies over f50,000. Under the terms of the Management Statement Scottish Enterprise have delegated responsibiRty for the operation of national youth and adult training programmed to the

26 Local Enterprise Compaties. However, no financial limits are required to be set for these programmed. Scottish Enterprise negotiate training budgets with the Local Enterprise Compafies who have authority titbin the provisions of the Manual of Project and Programme Roles to decide with whom and on what terms contracts funded from the traiting budget are awarded. Sitiar practices are used on training funds used by Training and Enterprise Councils in England and Wales.

3.10 In the period 1993-95 Scottish Enterprise Financial Monitoring and Internal Audit teams expressed concerns about breaches of delegated authority. As a restit Scottish Enterprise introduced a series of presentations and awareness seminars to remind staff of the rties and the levels of delegated authority which applied to Scottish Enterprise. The National Audit Office therefore examined the apphcation of delegated authority levels in a sample of 50 projects at the Local Enterprise Companies. The National Audit Office found that Local Enterprise Companies comphed with Scottish Enterprise delegated authorities.

3.11 In Une with the delegated responsibtity for the operation of tra~ng programmed, Local Enterprise Companies make their own arrangements for delegated authority covering training expenditure. In their examination of projects at one Local Enterprise Company the National Audit Office found that one of the three training projects they examined was valued at f326,000 but had been authorised by an officer with a delegated authority hmit of S250,000.

3.12 More generaUy the National Audit Office noted that the same Local Enterprise Company’s total training budget of E21 million had been delegated to the company’s Director of Training. The Director was also responsible for aU contracts with training providers. In the interests of sound management the Local Enterprise Company have revised their procedures so that their Board now approves all training contracts in excess of S250,000.

Key point 3,13 Scottish Enterprise:

● have established sound delegated authority procedures in accordance with the Management Statement for all their expenditure programm es;

. should remind Local Enterprise Companies of the continuing need to adopt best practice in establishing and applying their own local leuels offinancial delegated authority.

27 Competitive 3.14 Scottish Enterprise operating contracts with Local Enterprise tendering Companies require that wherever possible, contracts involving Scottish Enterprise funds shodd be awarded after appropriate tendering action,

3.15 In March 1993 Scottish Enterprise internal audit reported that six of 50 non-training projects examined which shotid have been competitively tendered had been let by single tender. A repeat exercise, in January 1995, found no clear examples where competitive proposals ought to have been obtained but internal audit considered there were still improvements to be made in recording tender evaluations.

3.16 In the hght of internal audit’s findings the National Audit Office examined tendering arrangements in a sample of 50 projects fuded in 1994-95 comprising 14 training projects and 36 non-training projects.

3.17 The National Audit Office found that none of the 14 trating projects, including a contract of S2.95 miMon for the provision of adult and youth training placed with one training provider, were subject to competitive tender. Scottish Enterprise and the Local Enterprise companies explained that for Youth and Adtit training particularly there were Hmited supphers and competitive tendering was therefore generally not practicable. In some cases Youth and Adtit traiting contracts are a usefti incentive for businesses to provide training, and may form part of a package of assistance to attract business to the area. In order to ensure that value for money and qua~ty is being achieved from traiting contracts the Local Enterprise Company require providers to submit detafled proposals for the dehvery of training and the achievement of approved quahty systems. Proposals are scrutinised and an annual review is undertaken to inform the regeneration of contracts.

3.18 The National Audit Office also found that, of the 36 non-training projects, three cases had not been subject to competitive tendering (Figure 10 opposite).

28 One Local Enterprise Company sub:cotiracted business development sewices to sight Local Development Organisations wtich are companiea aet up in partnership with local authorifiss to provide advice and detiver business development assistance to small firmy deliver high-volume atarf-up pmgramme$ and local projects in line with Local Enterprise Company regeneration priorities. These contracts, valued at f2.4 milhon in 1994-95, were not competitively tendered, Scottish Enterprise and the Local Enterprise Company considered there were no alternative suppliers available and competitive tendeting waa not appropriate.

Example 2 One Local Enterprise Company used consultancy companies to provide business development advice to buaineaaea with grotih potential. One consultant received multiple contracts, largely in the fl ,500-f2,500range to a total value of f42,000 without competitive tendering and without any formal contract The Local Enterprise Companies has now introduced competitive tende~ng for contracts above f2,000.

Example 3 One Local Enterprise Company has since 1991 used the same two conaultancy companies for building project monitoring and management. The consultants each annually receive approximately f20,000,made up of a number of consulfancy fees of value less than f2,000, In total since 1991 these firms have been paid f150,000,The Local Enterprise Company has never competitively tendered for these consultancy contracts, They initially used the ionsu[tanta on the recommendation of Scottish Enterprise, and will seek competitive tenders in future.

Key point 3.19 Scottish Enterprise need to:

. remind Local Enterprise Companies of the need to apply existing guidance on competitive tendering.

Project appraisal 3.20 The Department’s management statement requires Scottish and monitoring Enterprise to ensure that all pnbhcly funded projects are properly appraised and that expected project costs and benefits are monitored. The Manual of Project and Programme Rties provides guidance to the Scottish Enterprise network on project appraisal and monitoring.

3.21 In 1993 Scottish Enterprise commissioned constants to assess the nature and quafity of project appraisal in the network. The consnftants concluded that, although Scottish Enterprise experienced dlfficdties assessing the potential costs and benefits of projects in some activity areas, the problem was no greater than that experienced by most pubhc sector economic development agencies. They also found that because of these diffictities, in some areas project apprtisal bad been afforded low priority and, as a

29 restit, was undertken on an informal basis which lacked documentwy evidence to support conclusions. TMs had led to poor presentation of appraisal resufts. Mere appraisals had been undertaken, the constitants judged the overa~ wsdity to be poor.

3.22 Scottish Enterprise have introduced a series of staff training courses on economic appraisal and project management in the Scottish Enterprise network; and seminars and workshops have been estahhshed to disseminate best practice within the network. They have also introduced further dettied guidance on appraisal to assist project managers.

3.23 The Nationsd Audit Office examination of project appraisal and monitoring in the 50 projects in Scottish Enterprise and four Local Enterprise Companies found that in three of the 36 non-training projects the guidance on project appraisal for fdy documented appraisrds had not been observed (Figure 11).

~amp[e 1: Projecl appraisal where projects were not supported by sufficient appraisal evidence One proiect designed to provide business development advice and assiafance to businesses with high growth potential had an estimated cost of f200,000. There wac no documented aPPrCiSalOfthe Proiect. The Local Enterprise Company noted that the project had been approved as Part of the Local Enterprise Company operating plan on the basis of previous experience and judgement.

Example 2 One project which provided management development training to groups brought together from a particular industW sector m with a particular business development need had an estimated cost of f255,000 over two yeara. There was no documented appraisal of the project.

Exampls 3 One project which involved sponsorship of an environmental conference, an environmental audit consultancy and a consultancy to achieve environmental qualiV standards had an estimated cost of f17,500.There was no documented appraisal of the overall projector of the component parts The Local Enterprise Company noted that appraisals had been undertaken but not documented.

Key petit 3.24 Scottish Enterprise have strengthened the approach to project appraisal by introducing imprmjed staff training, advisory support, and guidance. They need to ensure that the guidance is being applied.

30 Operating surpluses 3.25 The Scottish Enterprise operating contract with each Local Enterprise Company specfies the agreed levels of training to be deHvered by the Company. Standard funding rates, based on unit measures such as training weeks and outputs in the form of vocational qualifications, determine the contracted price of that eervice to Scottish Enterprise. As an incentive to encourage efficiency savings in the defivery of training programmed, where the Local Enterprise Compay can provide the service at a cost below the funding rate they generate a surplus. Local Enterprise Compties can aleo earn income from fees and charges, bad interest and asset management. Tbe accumdated profit across the Company’s operations is known as its operating eurplus.

3.26 Operating surpluses provide an opportunity for Local Enterprise Companies to fund projects and unexpected requirements outside the scope of the activities funded by Scottish Enterprise. Surpluses must be used to fund projects and activities which fnrtber the aims of LEC business plans with priority being given to LEC training activities. Surpluses can also be used to fund activities which do not necessarily comply with detailed operating roles in the Management Statement or the Manual of Project and Programme roles.

3.27 The Scottish Enterprise Bored regard the facfity to generate operating surpluses to be an essential flexibtity for tbe Scottish Enterprise network. Surpluses provide resources for local enterprise companies to undertake new and innovative projects which otherwise wmdd not have been done and to respond to opportunities and neede not included in the operating plans of the Local Enterprise Companies.

3.28 Under their operating contracts, Local Enterprise Companies are required to include proposals for the use of operating surpluses in the operating plans submitted to Scottish Enterprise for approval. They are also required to account separately for operating surplus funds.

3.29 In their 24th Report of Session 1993-94 (HC257) on the Welsh O~ce Appropriation Accounts, the Committee of Pubfic Accounts sought reductions in the level of retained surpluses generated by Training and Enterprise Councfls from pubhc funds, and noted tbe potential for tating levels of surpluses held into account when negotiating future contract prices.

3.30 Accumnfated surpluses comprise sums held as specific reserves, amounts earmarked for authorised commitments and an element of uncommitted surpluses. The level of accumulated operating

31 surpluses retained by the 13 Local Enterprise Compaties rose horn S13.3 milhon in 1991-92 to 842.4 mil~on h 1995-96 (F1~e 12). In response to the Scottish Enterprise Bowd’s concerns .Oout the level of retained surpluses Local Enterprise Compties forecast a reduction in the level of accmtiated surpluses of S8.4 ti~on during 1994-95. However, as Figure 12 shows, be~een 1 Aprfl 1994 and 31 March 1995 this figure increased by S5.5 Won to S31.7 milhon.

240m E35m f30m f25m - f20m - El5m fl Om f5m -

31Mar 1992 31 Mar 1993” 31 Mar”1994 ’31 Mar 1995 31 Msr lg96 Rgure 12 shows accumulated surpluses, including specific reserves and commitments between 1992 and 1996.

3.31 In revising their arrangements for motitortig operating surpluses, in January 1996, the Scottish Enterprise Board aWeed to set an overall cap of S28 mfllon supluses in the netiork after tatig account of specific reserves and commitments. A cap was aUocated to each company. Where any company exceeds theti cap the Scottish Enterprise Board til tish to understand the reasons and may take any excess into account in allocating budgets to the company. At 31 March 1996 accumulated recommitted surpluses amounted to f27.2 milHOn.

3.32 Scottish Enterprise have coUected information on the generation and ut~lsatimr of Locsd Enterprise Company operating surpluses since 1993-94. Information has been provided on a quarterly basis and reported in summary form to the Scottish Enterprise Board, the Department, and the Treasury. Folloting changes to operating contracts in 1994-95 Local Enterprise Company operating plms

32 now contain information on the planned use of operatimg surpluses. Actual use of surpluses has been reported to Scottish Enterprise from 1995-96.

Key points 3.33 Scottish Enterprise

● need to continue to take steps to contain Local Enterprise Companies’ operating surpluses within approued limits;

. will continue to monitor proposalsfiom the use of operating surpluses included in Local Enterprise Companies’ operating plans;

. need to exercise improued monitoring over the use to which surpluses are put, possibly through improved reporting;

. need to continue to take account of Local Enterprise Company surpluses when considering their funding proposals.

Performance 3.34 Since 1991-92 Scottish Enterprise have reported their performance measwement and through activity measures within expenditure programmed rather reporting than against their wider, strategic objectives. For example, their Report and Accounts for 1994-95 reported against 17 key indicators for inward investment enterprise, environment and training activities (Figure 13 overleafl.

3.35 Each year Local Enterprise Companies are required to produce a three year business plan. Scottish Enterprise examine each plan and their allocation of funds to the Compaties takes into account tbe quahty of each Local Enterprise Company strategy, past and proposed performance, and the Scottish Enterprise Boards assessment of the extent of opportunity and need for economic development in each area. Local Enterprise Companies also produce more detailed annual operating plans which form the basis of targets against which the company’s progress is monitored,

3.36 During 1993.94 Scottish Enterprise internal audit identified a lack of supporting information for the targets which had been agreed and set for Local Enterprise Company performance. Internal audit also found inconsistencies and a lack of clarity in the way Local Enterprise Companies outputs were being claimed and performance was being reported. Internal audit attributed much of the confusion to a lack of adequate @dance to the Companies on performance measurement.

33 Inward investment results — — — Number of projects

Planned investment 94-95 m m 93-94

Companies’ forecast employment New 94-95 m I Safeguarded 94-95 93-94

Activity measures

Enterprise Property – pflvate sector investment in RAPID projects (Smillion) Investment - pflvate sector investment in deals concluded (2 miltirm) Advice and information – number of firms assisted m General grants and loans - number of grants and loans Private sector investment associated with proiects started (f milhon) Business Stati-up Scheme- number of statis Training and employment grants scheme - number of stafls

Environment Land - area of land renewal in projects completed in year (hectares) Leg-up - private sector investment associatedwith projectsstafled (! mil[on) m

Youth training Youth training - number of stafis HI “A in training with employed status

Training for work Number of Training For Work statis ,11 1,,

“A of stafis from ptiority groups m — — — — —

Source: Scottish Enterprise Annual Repoti 1994-95.

34 3.37 Scottish Enterprise have reco@sed the need for more general improvement in performance measurement for the network. They therefore commissioned constitants to review their performance measurement and to make recommendations for a more robust system. The consultants found that Scottish Enterprise’s performrmce measurement displayed simifar problems to those faced by other economic development agencies and identified a number of spectic mess which rewed attention. These included:

. In measuring performance Scottish Enterprise and the Local Enterprise Companies focused predominantly on activities rather than on impacts reflecting inherent difficdties associated with impact measwement.

. Guidance to Local Enterprise Companies lacked clarity and completeness.

. Impact measures were firnited to labour market effects, such as jobs created or safeguarded.

. The performance framework was too fimited.

. There was wide variation in the use of output measures.

3.38 The National Audit Office examined performance returns submitted by four of the Local Enterprise Companies for Aprfl to September 1994. They found continuing evidence of the weaknesses noted by Internal Audit and by constitants (Hgure 14).

Discrepancies between reported performance and local records were identified by Local Enterpflse Compsnies and the National Audit Ofice at three of the four Local Enterprise Companies visited, Petiormance reported Performance verified to Scottish Enterprise by LEC supporting documentation LEC 1 Hectares of land renewed 3.7 2.1

LEC 2 Hecfarea of land renewed 76 26 Pflvate sector leverage f8.7 million f5,1 miltion Number of Training for Work Starts 981 495

LEG3 Private sector leverage f46 million f48.8 million Total leverage (environment projects) f60 million f52.3 million Jobs created and safeguarded 6.812 10,195

35 3.39 Because economic impact cannot be properly measured mtfl some time after assistance has been protided, impact measures always contain an element of forecasting. It is therefore important that Scottish Enterprise apphes methodology wtich is appropriate and consistent across the network. The National Audit Office found wide variations in the quality of information and the methods used by Local Enterprise Companies to record achievements. Information was derived in some cases from an evaluation of projects and programmed whereas in other cases it reflected the aggregation of individual projects achievements. Both methods can be vahd provided they are undertaken carefu~y and consistently.

3.40 Scottish Enterprise have already taken action to improve performance measurement and reporting. They are developing a new output monitoring framework to form the basis of planning and reporting the networ~s performance. Development began in 1993 and the new framework was introduced in early 1995. The fist performance data from the frmework was produced for 1995-96 (Figure 15 opposite).

3.41 The new framework builds on the actiti~ measures currently used in Scottish Enterprise’s performance measurement system by introducing direct links from strate@c objectives through output and impact measures for indltidual activities. The framework is designed to demonstrate effectiveness in terms of economic impact, to assist resource aUocation against strate~c objectives, and to help identify operational management best practice in the Local Enterprise Companies. The new framework shotid be capable of satisfying key features of current best practice in performance measurement.

3.42 The short-term aim of the new Scottish Enterprise output monitoringframeworkisto ensue consistencyin planningand performance measurement across the network. Scottish Enterprise mwisage, however, that the fti implications of the framework WM necessarily be implemented gradually over time although they expect improvements to come about quictiy. They have not set targets for improvements in the qutity of the performance data, but since 1994 Scottish Enterprise and the Local Enterprise Compafies have undertaken a number of impact evaluation studies. These have indicated progress towards objectives and WMform an increasingly important part of Scottish Enterprise performance measurement.

3.43 In addition, since August 1994, Scottish Enterprise have introduced a rolting programme of strategic retiews of Scottish Enterprise and Local Enterprise Companies. The programmed aims are to develop

36 \ -)

37 and tiprove the effectiveness and wti@ of network performance through: shartig good practice, agreed action where good or bad practice is found; and creating a more co~aborative ctitwe titti the Scottish Enterprise network.

Key potits 3.44 Scottish Enterprise have:

● Since 1991, spent over E2 billion of public finds;

. Recognised that their preuious performance measurement and reporting framework was unsatisfactory and, in response, developed a new performance framework which addresses key features of best practice and which has been fally operational from 1995-96;

. Recognised that the full implications of the framework will be implemented gradually and will keep the development under review.

38