3 Reporting and Compliance
3.1 Annual Reporting Requirements
3.1.1 Trust ports exist for the benefit of their stakeholders and reporting to them and the wider community should be a priority of every port board. While there is a requirement within section 42 of the Harbours Act for preparation of annual accounts, copied to Scottish Ministers, we would encourage boards to circulate reports as widely as possible. Boards should consider how this can best be done in respect of their stakeholders and local communities. Ports with websites should also publish their reports and accounts there.
3.1.2 The annual report should include a performance and efficiency statement, recording the performance against targets set for the year but these should be proportionate to the size and complexity of the operations being undertaken in each port.
3.1.3 Trust ports may also produce an annual 'strategy document'. This is not intended to result in the publication of commercially sensitive information. The document should address issues of interest to stakeholders in general terms. Typically, the document should contain information on the board, issues of accountability and port operation, current performance and future plans. Boards should make clear their targets for the coming period.
3.1.4 In the case of large trust ports, the strategy document may take its lead from a Port Master Plan, the production of which is now recommended for all major ports in England and Wales and we are aware that some larger Scottish trust ports have already adopted this approach where they feel it is appropriate for them to do so. A port master plan should be suited to the needs of the operation and while the Department for Transport guidance is available should Scottish ports wish to adopt it, it is not the intention to produce separate guidance on that subject.
3.1.5. Where a trust port considers itself too small to produce an annual strategy document, the board should instead consider a simple statement to accompany the accounts suitable to the nature and scale of its activity.
3.2 Accounts and Audit
3.2.1 The Harbours Act 1964 requires trust ports to deliver their annual reports and accounts to Scottish Ministers relating to harbour and associated activities.
3.2.2 Section 42 of the Harbours Act 1964 provides that, subject to any regulations previously made by the Secretary of State3, the accounts and reports to be delivered must be prepared in accordance with the provisions of the Companies Acts 1948-2006 relating to the form and content of company accounts and reports4. In particular the trust ports report on matters covered by the accounts must be prepared in accordance with Companies Act requirements applicable to directors' reports. It is essential that all boards ensure that their accountants and auditors are conversant with the special provisions in relation to statutory harbour authorities. Local legislation may oblige an authority to prepare accounts and this will generally meet the requirements of the 1964 Act. Scottish Ministers will continue to take an interest in accounts and other planning documents provided to them by trusts
3.2.3 The purpose of a set of accounts is to provide a true and fair view of the business' financial performance, position and cash flows. To meet this purpose, the Companies Act 2006 permits an entity to prepare its accounts in accordance with either UK or International GAAP (note, however, that the consolidated accounts of listed entities must comply with International GAAP). Boards should ensure that their accounts are properly prepared in accordance with either UK or International GAAP in all material respects, in order to provide a true and fair view.
3.2.4 The accounts may be supplemented by a Business Review, contained in the Chairperson's Report. The Business Review should be forward-looking, comprehensive, neutral and comparable over time. The narrative should explain the main factors underlying the ports' current position and performance and how these will be affected by key trends or factors in the future.
3.2.5 It is also expected that the Business Review would include arrangements to repair or replace business critical plant and machinery when the need arises. Ports will need to be ready to meet the associated costs and should be considering alternative methods of financing these to achieve best value for money. Such methods may include the accumulation of a pool of liquid assets, funded by retained profits, to cover the eventuality that external financing may not be available when it is needed. Failure to make adequate plans to meet such costs may jeopardise the long-term survival of certain Ports and as such may represent a key strategic risk.
3.2.6 The Business Review should therefore discuss the risk of failure of business critical plant and machinery and the strategy adopted to mitigate this risk, including methods of financing replacement costs. Where the Port does not retain profits in the form of liquid assets as part of its financing strategy, the Business Review should note and explain the rationale for this approach.
3.2.7 The following provisions should also be reflected in trust ports' governance and reporting in proportion to the size of the operation:
- Board members should explain in the annual report their responsibility for preparing the accounts;
- Board members should report that the business is a going concern, or provide qualifications as necessary;
- The board should maintain a sound system of internal control to safeguard the port assets and the future benefits to stakeholders, in particular
- The board should, at least annually, conduct a review of the effectiveness of the system of internal control,
- It should include in its annual report that it has reviewed the system of internal control (financial, operational, compliance and risk), and
- It should satisfy itself that at least one member of the audit committee, if appropriate, has recent and relevant financial experience;
- Any audit committee should have primary responsibility for the appointment, reappointment and removal of external auditors; and
- Where the auditor provides non-audit services, an explanation of how auditor independence is safeguarded should be included in the annual report.
3.3.1 This guidance represents a code of good practice. All trust ports should review their governance arrangements against the standards set out here. The board, or, if applicable, its audit committee, should take on responsibility for oversight of implementation and adherence to this guidance and all other codes of practice within their port.
3.3.2 Trust ports should do all they can to comply with the guidance. Scottish Ministers acknowledge though, that not all trust ports will be in a position to comply with every provision. In some cases the size and nature of the trust port's operation may mean that a particular stipulation doesn't apply, or that compliance would be excessively burdensome. Trust boards should exercise their own judgement as to the essential elements for their operations and may seek clarification on the guidance as necessary from officials.
3.3.3 Annually as part of their report, trust ports may wish to detail their compliance with the guidance, and where they have not been able to comply, explain their reasons. This approach offers stakeholders the opportunity to see how far a trust port is meeting the good practice requirements set out here, and to challenge if not satisfied. In such an instance the port will be expected to respond constructively.
3.3.4 Scottish Ministers will monitor compliance with this guidance but interested parties should play their part in bringing to Ministers' attention any examples of unaccountable behaviour in the trust ports sector. If anyone believes that a board, its members or its officials are acting in a manner which:
- is illegal, improper, outside their powers, unethical or otherwise in breach of the principles of the trust port;
- might involve maladministration, fraud, criminal or unlawful activity or misuse of port assets; or
- is otherwise inconsistent with this guidance or any other professional code
He or she should raise the matter with the executive and/or board in the first instance (or approach in confidence a nominated official or board member entrusted with the duty of investigating such allegations). The trust port should provide a written response to a complainant within a reasonable time scale. This should explain whether they consider the complaint justified and set out the remedial action they intend to take. Where the complainant does not believe the response is reasonable in addressing the grounds of his or her concern, the matter should be reported to Scottish Ministers who may assist in resolving any dispute in their role as "honest broker".
3.3.5 The previous paragraph is not intended to discourage stakeholders from reporting matters to the police or other authorities, or issuing legal proceedings themselves, in appropriately serious cases.
3.3.6 However, Ministers have no locus in regulating commercial decisions or activities of a trust port. Nor do they become involved in 'good neighbour' disputes as these are matters for the board to resolve. Their interest is in ensuring that the board does not take decisions in an arbitrary unaccountable manner which is inconsistent with the spirit of this guidance.
3.4 Commercial Accountability
3.4.1 Trust port boards should transact port business in the interest of the whole community of stakeholders openly, accountably and with commercial prudence. Trust ports should be run as commercial businesses, seeking to generate a surplus which should be ploughed back into the port, or otherwise directed towards the interests of the port's stakeholders. Scottish Ministers expect trust ports to be operated efficiently and effectively, and to generate a commercially acceptable rate of return, consistent with their size and level of operations.
3.4.2 All trust ports should set themselves a target level of return for existing activities and new projects, determined by the board. The target level of return should reflect the need to provide a contingency and, in addition, make optimism bias adjustments commensurate with the perceived level of risks associated with any particular activity or investment.
3.4.3 In pursuing that target level of return, it is in the interests of all stakeholders that a trust port should set its dues, evaluate its investments, and charge for its services, at commercial and competitive rates, neither exploiting its status as a trust port to undercut the market, nor abusing a dominant position in that market.
3.4.4 Harbour dues must be set at a level that allows for proper maintenance of the trust port's harbour and/or conservancy duties, and geared to attaining the target level of profitability. Harbour Authorities in general have a duty to publish standard dues tariffs.
3.4.5 There should be no presumption that dues levied on a specific group or type of user should be exclusively reinvested in improving services and facilities on offer to that user. Users are first and foremost customers of the port, and the proceeds from their custom should be utilised prudently to maximise benefit to all stakeholders and in the best and most effective interest of the future of the trust port.
3.4.6 Investment policies too should be fair and equitable. A trust port's investment policy should be set out in broad terms in its accounts and strategy, for the benefit of stakeholders. A board should act not only to protect the commercial position of the port, but also to take investment opportunities which offer maximum benefit across the whole stakeholder group. Having regard to such wider stakeholder benefit may legitimately result in longer term investment planning, or other actions which bring additional benefits for stakeholders.
3.4.7 Ports of all complexions have the potential to compete with other users to offer services within the port area. As with dues and investment policies, it is essential that this competition be seen as fair and open. While it is legitimate to impose charges relating to services contributing to safety (including pilotage), protection of the environment or general well-being of the port user, charges should not be imposed for services that port users do not need. Boards should recognise that different users have different service level requirements. This should be recognised in levying charges. Where it is practical and cost effective, ports should offer a service tailored to the individual user's needs.
3.4.8 Having determined service levels, the board should be able to demonstrate that it has met these without incurring unreasonable cost. Boards should seek to obtain value for their stakeholders by:
- challenging the way in which services are provided or obtained and whether they are needed;
- comparing performance of in-house service provision with external options and agreeing performance measures derived in conjunction with users and suppliers on a regular basis;
- consulting all stakeholders (including staff) on current performance, options for improvement and suitable performance measures and targets; and
- considering the competitive position (how well does a service bear comparison with the best available elsewhere? Is there a case for working in partnership with other providers to obtain good value?).
3.4.9 Users should be consulted about the provision of services and those services provided in-house may be the subject of market testing if this is considered to be the best option for the trust port and its stakeholders. The board should be able clearly to demonstrate in its annual efficiency statement that where it is providing in-house services, it does so to a standard that does not incur unnecessary costs for stakeholders, and should, subject to not breaching commercial confidentiality, justify its commercial decisions clearly.
3.5.1 As trust port boards hold the local monopoly right to exploit an asset (which can deliver public goods as well as private benefits), it is important that trust ports actively demonstrate in a suitable fashion, their levels of efficiency, and strive for improvement where necessary. It should be possible for a trust port's stakeholders to measure the performance of the port in a straightforward manner, to compare it with relevant market competitors, where these exist, and with the port's own historical performance. A great many larger trust ports already do this but for smaller ports it may be a daunting exercise and they may wish to consider a simpler means of monitoring their performance on a less formal basis which better suits their activities and levels of income.
3.5.2 Annex B sets out a variety of performance indicators which, may be used by larger port businesses to provide an accurate picture of their performance year on year. They include indicators of both financial and operational efficiency, and also of wider impacts, which can be calculated relatively easily and aim to demonstrate the overall economic contribution that the port makes to the economy.
3.5.3 Reference to its performance should be a key element of any annual report and whether this is a detailed assessment against KPIs or a more straightforward statement is a matter for the board in keeping with the size of the undertaking and should not be seen as an undue burden on the resources of the smaller trust ports
3.6 Good Housekeeping
3.6.1 It is essential that the statutory and legal framework underpinning the effective operation of the trust port be maintained. This framework constrains the operation of the port. This means that the chief executive or harbour master is best placed to determine the need for change and to bring it to the attention of the board. Boards also need to keep abreast of new legislation that has implications for the port. Information on new legislation comes in many forms and from many sources. The chief executive and/or harbour master should be tasked with keeping abreast of changes.
3.6.2 Port legislation, byelaws and compliance with the Port Marine Safety Code should be the subject of regular and automatic review and Boards should ensure this process is undertaken. These reviews should take account of changes in local circumstances and national legislation. They should also attempt to accommodate likely short to medium term future requirements. Reviews should be conducted by competent port management, possibly supported by a board committee comprising members with appropriate skills. This group should report to the board with whom the final responsibility for effecting change must rest.