Internal Audit Report into Caithness Heat and Power

13th January 2010

Caithness Heat and Power is a joint project supported by The Highland Council since its inception in 2004 because of its potential to provide renewable energy in an area of fuel poverty via an innovative biomass district heating system at Pulteneytown, Wick.

The project has, to date, failed to achieve its objective due to problems relating to technology, and an internal audit report by The Highland Council's Head of Audit and Risk Management into the enterprise has highlighted that the Council's and the company's governance arrangements covering the project should have been stronger .

The report, covering the governance activities of the project leading to its inception in 2004 until August 2008 when the Council took over the company, was considered today (Tuesday) at a special meeting of The Highland Council in Inverness, where the Director of Audit (Local Government), Audit Scotland, was also in attendance.

The project was set up in 2004 by the Council, Inver House Distillers Ltd and Pulteneytown Peoples' Project, who each had a director on the board of the company. The Council took over the running of the company in August 2008, when it was clear the project was not achieving its aims of providing heat and power via the biomass boiler or electricity via a gasification plant.

Since taking over the company, the Council has appointed members of the council to the new Board and has considered options for the future operation of the company.

To reflect the financial liabilities of CHaP, the financial statements for the year ended 31 March 2009 include a provision of �6.9 million, which reflected �4 million for financial guarantees in favour of the Clydesdale Bank and �2.9 million for the possible repayment of funding from the Energy Savings Trust if funding conditions are not met.

The council's costs incurred on the project to date are:

sum committed by council in Nov 2005 - �1.600 million

total working capital advances loaned to CHaP to-date - �3.550 million (this could rise to a maximum of �4.970 million as agreed by council)

related in-house development and procurement costs - �300K (maximum agreed by the council)

Potential future costs of the project are uncertain until it is decided how the project is to be taken forward. The Council is in discussion with two bidders, who have shown an interest in taking over the district heating system and the Council is considering detailed solutions, which set out how the bidders would fund, design, install and operate new equipment required to connect into the existing pipe network, which serves 250 homes.

The bids will be evaluated by a Council project team and its advisers. The results of the evaluation will be reported to the Board of Caithness Heat and Power for decision on whether to proceed to invite final tenders. In order to reach that decision the Board will need to agree that the detailed submissions are sufficiently clear and robust to provide confidence that they can deliver the Council's objectives

The Council accepted a number of actions for improvement to ensure better governance in any future venture of this nature.

The findings of the internal audit, which focused on the period covering the governance activities of the project leading to its inception in 2004 until August 2008, include weaknesses in the following areas:

; formal project appraisal, business planning, governance arrangements, and a comprehensive statement of resource implications

technological and financial risk assessments were not adequately undertaken or reported to the council and did not feature in the council's risk register.

The Council noted that the External Auditor, Audit Scotland had been kept fully informed of the problems associated with the ChaP project, which led to the internal audit investigation. In compiling his report, the Head of Internal Audit and Risk Management had liaised with the External Auditor to discuss the report findings and conclusions.

The Council accepted that many improvement actions had already been taken. In addition, the Council accepted a number of further actions for improvement to processes to ensure that failures of the CHaP enterprise are not repeated in any future venture of this nature.

The Highland Council Convener Councillor Sandy Park said: "The internal audit sets out what went wrong and the steps we must take to ensure we never repeat the failure of this enterprise in any future project of this nature. Looking ahead, we hope we can secure a partner to deliver a district heating scheme fuelled by a local renewable source at an affordable price."