Public Audit Committee

Meeting date: Wednesday, October 5, 2011

Official Report 456KB pdf

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“How councils work: an improvement series for councillors and officers—Arm’s-length external organisations (ALEOs): are you getting it right?”

I welcome Douglas Sinclair, who is the deputy chair of the Accounts Commission. He is joined by Fraser McKinlay and Gordon Smail, who are both from Audit Scotland, which supports the Accounts Commission.

As I did not do so earlier, I declare that, as is stated in my published declaration of interests, I am a board member of Renfrewshire Leisure Trust. It is not an arm’s-length external organisation, but it is one of the trusts of Renfrewshire Council.

The Accounts Commission welcomes the opportunity to brief the committee on its report on arm’s-length external organisations—or ALEOs as they have come to be known. John Baillie, the commission’s chair, sends his apologies for not being able to attend this morning.

This report is the second in a new series of Accounts Commission reports called “How councils work”, in which we examine specific areas of local government with a view to stimulating challenge and encouraging improvement in each of our 32 councils. We select topics on the basis of themes and issues recurring in our audit work in order to highlight them to councillors and council officers and, instead of undertaking new or additional audit work, we make best use of the material that is already available.

Our “How councils work” reports set out practical examples and signpost other material in a different way from section 23 reports and in a style that we hope is of practical help to councils. It is important to note that the reports do not name specific councils. Where problems arise in individual councils in relation to ALEOs, the Accounts Commission will pursue them, using its statutory powers to hold local authorities to account.

Our first report in this series examined roles and responsibilities and the working relationships that are, of course, central to good governance and the success of any organisation. Our audit work tells us time and again that getting roles and relationships right is enormously important to a council’s performance. Quite simply, if those elements are not right, the council will not perform effectively.

The second report is on ALEOs, which deliver a wide range of council-related activities, including leisure services and economic development. It is fair to say that they are now an established part of the local government landscape—indeed, we estimate that there are more than 130 major ALEOs across Scotland’s councils—and they are used increasingly by councils as an alternative way of delivering services. Although they offer the potential for reduced costs and greater flexibility in services, they also, as we highlight, come with risks. We say in the report that, although councils should not be risk averse they still need to be risk aware.

Our report neither promotes nor discourages the use of ALEOs; instead, it focuses on the principles of good governance and accountability in relation to them. After all, if such principles hold for councils, they should also hold for these organisations. In particular, it is important to maintain governance and accountability with regard to finance and service performance in what can be an increasingly challenging environment for all involved. For example, asking councillors to take on a role in an ALEO alongside their day-to-day council responsibilities adds another dimension to the already complex and demanding elected member role.

We have received very positive feedback on our “How councils work” series; indeed, we send the report to every councillor in Scotland. The next report in the series is on understanding cost information, which is another recurring theme in our local government audit work.

My colleagues and I are very happy to answer members’ questions on the ALEOs report and to explore in more detail the principles involved and how they are being applied more generally in local government.

Are you able to confirm that not all ALEOs pay the people who discharge their duties on the boards?

That issue has been overtaken by Scottish Government regulations prohibiting councils from making such payments.

But, even up until those regulations came into force, some chose to make payments and some chose not to.

Absolutely. It was a matter for councils. The Scottish Local Authorities Remuneration Committee thought that the payments with regard to ALEOs had to be considered in the context of the special responsibility schemes that councils operate under and that moving that responsibility from one part to another did not increase the quantum of payments. Indeed, that view has been endorsed and legislated for by Government.

Can I explore the responsibility of those who serve on the boards of ALEOs? If someone serves on the board of a private company as a director, they have a legal obligation to the board and to the company generally. When someone sits on the board of an arm’s-length organisation such as the ones that you considered, to whom do they owe their primary allegiance? Is it the council that nominates them or the organisation on whose board they sit?

10:45

Councillors in that position have a dual responsibility, but it also depends on the nature of the body. If the body is a company that the council has established, then, under company legislation, they have a duty as a company director. They must balance their duty to the council as a whole against their duty to look after the best interests of the ALEO on whose board they sit. We do not suggest that that is easy, but councillors must be aware that they must balance their interests. They also need to be supported and trained in understanding their responsibilities. For example, we highlight in the report a situation in which a councillor felt that his job on the ALEO was to protect the council’s interests. However, that was part of his job but not his whole job. He also had a duty as a member of the ALEO to further its best interests. If a councillor finds himself in a situation in which he believes that it is difficult to balance those two roles, he should seek advice—that is a principle of good governance.

Yes, but you suggest that some ALEOs have been constituted as limited liability companies, in which case board members have a different set of responsibilities.

Yes.

I take it from what you say that not all board members are clear that a completely different set of responsibilities pertain to them once they enter into that role.

That is true from our report. It underlines the importance of a council, when it establishes an ALEO, taking the time and effort to ensure that whoever it appoints to the ALEO understands their role and responsibilities and knows where to get support and advice. For example, in one case a councillor was not effectively supported by his own council when he was on the ALEO and was unclear as to his responsibilities. That is not a good position for a councillor to be in. It is important that the council provides the necessary training so that councillors who are appointed to ALEOs understand their responsibilities.

That would also be true if a council established an ALEO as a charity. Clearly, the member who is appointed to the charity has a responsibility to further its best interests. There is a tension in such roles that councillors must understand when they are appointed to them. They must also have support and access to information when they perceive that they have a conflict of interest.

From what I perceive happening and from what you have just said, it is quite clear that councillors, whether they are on the board of a company or the board of a charity that a council has established, often think that they are there to represent the council’s interests rather than to carry out separate, independent duties as members of the board. If that is still the case, we will still hit problems. It would appear that it is a bit of a dog’s breakfast across Scotland.

I do not think that we suggested that. There is no evidence from our audit of widespread problems in ALEOs. There are occasionally specific instances where the principles of good governance have not been reflected, but I would not like to give the impression that it is a dog’s breakfast—it is far from that.

You believe that the majority of members of the types of organisation that you just described—charities and limited liability companies—are quite clear that their responsibility is to the body on which they sit rather than to the council.

They have a dual responsibility. However, we have no evidence to suggest that there is a widespread lack of understanding about the respective roles of elected members on ALEOs. If it were otherwise, there would be many more instances of ALEOs not functioning effectively.

Some ALEOs have limited liability and some are charities. Is there another group of ALEOs that are neither charities nor limited liability companies but which exist independently of the local authority?

There could well be. The ones that we look at tend to be companies of various sorts—limited by guarantee or whatever—or trusts that are subject to legislation. However, there are examples of unincorporated bodies that lie in the middle ground.

On the main point, it is about going into this with your eyes wide open, as Mr Sinclair said. It is about knowing what your responsibilities are as a councillor and in your role on the ALEO. Our experience is that some elected members almost wander into the role as a member of the ALEO and it is only when push comes to shove, things start to go wrong and questions get asked that things start to untangle a bit. The report is saying that people have to be made fully aware of their respective responsibilities from the start.

I have asked questions about the role of councillors, but concerns could equally be expressed about staff. If a member of staff is transferred or seconded from a local authority to a limited liability company, a charity or some other unincorporated body, their responsibility is to that body and no longer to the council. The distinction for them should be even clearer than it is for councillors.

Absolutely. We saw from looking at cases in individual councils that that has quite often been a problem. The report says that, in cases where a conscious decision is made to second somebody to the ALEO, things are a bit more clear cut—people understand exactly what their roles and responsibilities are. We have seen one or two examples—this happens as a result of the good intentions of the officers involved—where the ALEO perhaps starts to get into financial difficulty and somebody from the council’s finance department takes on more and more of a role, to the extent that they take on a formal role in the ALEO, which compromises their position so that they are caught between their responsibilities to the finance department of the council, which employs them, and their role in relation to the finances of the company for which they are now acting as treasurer, for example.

Where a senior member of staff of an ALEO, who is responsible to the board of that ALEO and no longer to the council, continues publicly to articulate and advocate council policy, surely that creates a conflict of interest for them, because they are no longer responsible to the local authority but are responsible to the ALEO. By engaging in the advocacy of council policy, they are potentially compromising their role as a senior member of staff.

There is a distinction between an officer who is employed by the ALEO and an officer who is appointed to the board by the council.

Could you stick to the example where they are employed by the ALEO?

If they are employed by the ALEO, their duty is to further the best interests of the ALEO. Where a senior officer is appointed to the board of the ALEO, there can be a tension between his responsibilities as a board member and his accountability to the chief executive of the council. In a long-term relationship, that can give rise to some pretty serious difficulties.

In that respect, they are no different from a councillor in the way that they need to manage things.

Indeed.

I want to stick with the scenario where there is a senior member of staff of an ALEO publicly articulating and advocating council policy. There is a potential conflict of interest there and that person would surely have confused their roles. What sanctions are available when someone behaves in such a manner?

If things are working properly, the situation that you describe should not come up. The point that we are trying to make in the report is that, if a council is thinking about setting up an ALEO, it needs to be very clear that that ALEO is going to further the policies and interests of the council. That is why the governance mechanism that is set up between the ALEO and the council is so important. It would be very problematic if a senior officer or member of an ALEO were doing or saying something that was in conflict with what the council was trying to achieve—that would be a sign that the governance was not working. That is why we tried to draw out examples of good practice in relation to working and communication at political and officer levels.

You are absolutely right to make the point. ALEOs create uncertainty and duplication of roles, and people need to think their way carefully through the issues. There is no easy answer. That is why the Accounts Commission decided to bring out the report.

I understand what you are saying. There would be problems if a senior member of staff in an ALEO articulated a view that contradicted the view of the council that had set up the ALEO.

If an ALEO had been set up to manage a particular service and the council was then proposing to embark on relatively contentious change, it would be inappropriate for a senior member of the ALEO board to articulate and advocate the council’s position ahead of the council making a decision on the policy. Is that not the case?

It is rather difficult to comment on a hypothetical situation, without knowing exactly what we are talking about. In theory, I suppose that it would depend on whether the policy was going to have a direct impact on the ALEO’s operation. You could probably argue that the chief officer for the ALEO, as the person with responsibility for the good and effective operation of the organisation, might think that they were within their rights to comment. As I said, though, that is—

They should not be used as a surrogate member of the local authority, to act on behalf of the local authority. There should be a separation of interests, should there not?

Yes, there should be a separation of interests.

If that is not happening, who should take action? Does it fall to the council to impose sanctions? Does it fall to the ALEO? Does it fall to the board?

That takes us back to good governance. At the outset, the council and the ALEO should have a clear understanding of how they will communicate with each other and resolve issues. For example, in the context of the debate about the next year’s budget, there should be protocols that enable both parties to deal with the issue effectively, rather than getting into a situation such as you described, in which—if I followed you correctly—an officer of the ALEO publicly criticises the council before the council has taken a decision on the ALEO’s future. If the council and the ALEO get into such a situation, they are in a bad place. They should have set the thing up properly, with agreed protocols on how to resolve the difficulties and differences that will inevitably arise, particularly as money gets tighter.

We have talked about conflicts of interest and the tensions that undoubtedly exist. Do you have a view on councillors going to work for the ALEO? Do you think that that is good practice? How might it influence the councillor?

The recruitment policies of the ALEO should be in line with best practice. As long as the councillor is appointed on merit and is considered to be the best candidate for the job, I see no difficulty with that.

Should such a councillor declare an interest when they are performing their duties in the council?

They absolutely should.

The convener raised the important issue of conflict of interest between a councillor’s responsibilities as a member of the board of an ALEO and their council responsibilities. On page 16 of your report you quoted three councillors who serve on ALEO boards, who all said—I paraphrase—that they were there to represent the council. Such an approach seems to be a pretty clear breach of the fiduciary duty of a charity trustee or company director. You have said that there is a serious issue in that regard. What work is being done to clarify the responsibilities of councillors who serve on the boards of ALEOs?

11:00

It is worth returning to our first report in the “How councils work” series, which was about roles and responsibilities. A section in that report draws out important points. We spoke to a sample of councillors for that report—around 60 in five councils—and those quotes came back. We asked them specifically about ALEOs. The first report brings some clarity about things that people should look for, and we hope that we have developed that a bit more in our report on the specific issue of ALEOs.

There are things that we can do and things that the Accounts Commission can do through its reports. We are also working with the Improvement Service, for example, on things to look out for and guidance notes for its information for elected members series. Those documents are included in the online training that the Improvement Service provides.

There is an important juncture coming up, of course. Local authority elections will be held next year and there is the possibility of quite a turnover again, with elected members coming into councils and elected members finding themselves on the boards of ALEOs, whether they are trusts or companies. What elected members need to support them as they face the difficult questions that we have talked about must be anticipated.

Will Audit Scotland return to ALEOs to ensure that good practice is being followed?

Absolutely. We produced the report because of a recurring theme in the audit work that we see. As we said in the report, we know that ALEOs are an established part of the landscape and we expect auditors to follow through the work. We will consider the impact work that has been done in councils as a result of our report, and auditors are very much more attuned to the kinds of problems that arise.

ALEOs are a two-way street. More ALEOs have been set up in recent years as a result of consideration being given to new ways of delivering services, but quite a number of them have been wound up by councils and brought in-house. The picture is moving; that has implications for everybody involved, whether they are elected members or officers.

I want to ask a question about a different issue: the remuneration of councillors who serve on ALEO boards, which is mentioned in paragraph 53 of the report. I am sure that you know that accusations have been made in the past. It has been said that having councillors sitting on ALEO boards is simply a way of topping up their income and that they get payments that they would not otherwise get if they simply sat on council committees. I noticed your comments about the Scottish Local Authorities Remuneration Committee, which believes that such payments undermine

“the principles of the existing remuneration scheme for councillors.”

Does Audit Scotland share that concern? If it does, what action is being taken to address the issue?

As I mentioned in response to a question by the convener, the Government has addressed that issue. Councils are no longer legally able to make those payments. The point was well made by the Scottish Local Authorities Remuneration Committee that, if a councillor is getting a responsibility payment for leisure in the council, transferring does not change that fact. It means that a person is doing less work as a councillor—the work is done by another body. Therefore, the totality of expenditure to councillors for the special responsibility allowance should remain the same. The Government reflected that in its decision to stop councils making those payments.

The Government is to be commended for the speed with which it acted.

Absolutely.

I quite agree with what was said about the balance of the board being particularly important. From my experience, Renfrewshire Leisure trust has a balance of members of the public and representatives and employees of the ALEO. We have skited about with many other ALEOs and not really mentioned that representation has not happened at that level. Do you agree that that could be where some ALEOs have gone wrong?

We support the principle that having a balance on the board is a good thing. If there are benefits to be had from creating ALEOs, one of those benefits must be the ability to bring in expertise from different places and a different skills mix. Elected members will continue to be included, but one would hope that other kinds of experience would be brought in, as well. We would absolutely support that. Councils need to think very hard about the make-up of the board when they look to set up such a body.

If users are involved, that gives a different dynamic to the group.

Yes.

With a lot of the ALEOs, part of the problem was that there was no user involvement. Users offer a distinct voice. When there is a debate, their voice often changes the whole dynamic.

That is absolutely right. If one of the justifications for setting up an ALEO is to improve service performance, the voice of the user needs to be heard as part of that process.

Yes. From a service user perspective, it should not matter whether the provision comes directly from the council or through an ALEO. We recognise that.

I have one more point to add on the composition of boards. We have seen a number of examples in which the activity that the ALEO is undertaking involves quite a technical aspect. Sometimes the technical wherewithal might lie in the council, whereas the ALEO is one step removed—

That is an extremely valid point. With some of the ALEOs that we are not mentioning, the problem was that they were quite technical. In effect, they were full council departments that became stand-alone companies. I can see how that became a problem.

It is extremely important that that expertise is not lost. When a decision is taken to make an activity arm’s length, consideration should be given to the risks that are associated with that. Councils should have their eyes wide open to such matters at the start.

As an elected member of Renfrewshire Council, I was concerned about the idea of councillors getting money from sitting on ALEO boards, as used to happen. My belief is that it is like becoming a member of a board of directors. It is possible to be on the board of three or four different companies, but when you make a decision for a particular board, you make the decision purely for that company. I think that councillors needed to understand that.

One of the points in the report goes back to Murdo Fraser’s question on what we were doing to reinforce these messages. The fact that the report will be sent to all councils and councillors will reinforce the message. We expect all councils and councillors to go to the checklist at the back and to test their performance against that checklist.

Could you say a wee bit more about what the performance, accountability and scrutiny landscape looks like? I notice that page 18 gives a good example of a council setting up an external scrutiny committee to look at the performance of an ALEO. Is there a consistent picture? Do ALEOs report to their boards? Do they report back to the councils on performance? Are scrutiny committees set up specifically to look at their performance? Is there a preference? What direction of travel should we be going in?

I will start and then ask my colleagues to come in.

One of the principles of establishing an ALEO is that there should be effective performance arrangements and the performance of the ALEO should be scrutinised by the council—I think that we suggest at least every quarter—to ensure that it is sustainable and that it continues to deliver on its objectives, particularly with regard to value for money.

Gordon Smail might want to add to that.

I think that the picture is quite mixed, which is a good thing. One of the phrases that we use quite a lot in the report is that monitoring of ALEOs should be “risk-based and proportionate”. That is absolutely true. It is about understanding right from the start what kind of activity is involved, what is expected of it, and what governance and scrutiny arrangements are appropriate to match the activity. It is horses for courses. It is vital that councils think about what the ALEO will look like before getting involved, and that that view is adjusted over time as necessary.

The approach that is adopted has to be risk based and proportionate. The focus in our report was on the biggest companies and trusts that councils are in—of which I think we counted 130—but there are many other similar arrangements in which even quarterly scrutiny might be overly burdensome for everyone involved.

Scrutiny is not necessarily directly linked to money—we do not expect more scrutiny if more money is involved. What matters is an activity’s risk. Some activities might involve a relatively low level of money but be very risky and raise huge issues for the ALEO’s finances, service performance and the council’s reputation if things did not go right.

The commission supports the principle of good governance in councils, which I suppose applies equally to ALEOs. A scrutiny committee of a council should always be chaired by a member not of the ruling administration but of the opposition, to ensure transparency and objectivity.

Even with the mixed picture, are you content from your study that sufficient quality scrutiny is going on to give the public the sense that ALEOs are delivering value for money and so on? Did you reach that view?

I repeat that there is no sense of widespread problems with the ALEOs, of which more than 130 exist. Where problems exist, the Accounts Commission has powers to take action.

Annually, our auditors routinely examine and report on every council’s governance arrangements for ALEOs. If that flags up concerns about a lack of governance or of scrutiny, we pick that up.

How the public are helped to understand how services are delivered is probably still an issue in some places. I am not sure whether most people who use a leisure centre know whether it is run by the council, a trust or another body. That relates to basic stuff, such as to whom people complain if they are unhappy, how that relates to their council and how that works.

Even if governance is okay in terms of the following the public pound principles and looking after how a bit of the business is run, councils have a way to go in helping the public in some places to understand how services are delivered, what a trust is and why a trust rather than something else is being used. Public performance reporting on those matters has a way to go.

How do ordinary councillors exercise their role on their constituents’ behalf when things go wrong? If a council decided to put the delivery of school meals out to an arm’s-length organisation and parents approached a councillor about the quality of the meals, that councillor would no longer be able to question that at committee or hold directors to account, because the service would be delivered by an ALEO. Annually, the councillor could examine performance measurements, if such information was fed back to the council. If tenants complained about the quality or efficiency of a building works department’s repair service, councillors would no longer be able to influence that.

We can take that to the logical conclusion. If a council decided to put all its services out to an arm’s-length organisation, how would a councillor exercise any control over what happened to the people whom they represented?

You ask a good question. As Douglas Sinclair said at the beginning, we have not taken a view on whether ALEOs are good or bad. We audit the framework that we have. There are bodies called ALEOs, so our interest and the commission’s interest is in ensuring that they are set up and run properly.

I return to the exhibits on page 18. One reason why they represent good practice is that they give councillors the avenue—the mechanism—by which they can challenge ALEOs’ performance appropriately. The convener is right that that differs from being on a committee.

To be fair, that is where the tension between being an elected member and being an ALEO board member comes into sharp focus. If a councillor’s colleague says that their constituent is complaining about the quality of school meals, will that councillor—as the ALEO board member—stay quiet about that or think that it is perfectly legitimate to raise the issue in a board meeting? When councillors decide whether to create ALEOs—we should bear it in mind that they make the ultimate decision—we propose that they need to think through exactly those issues.

As well as taking action to address payments, should the Government set a framework that requires local authorities and ALEOs to adhere to minimum standards of accountability and scrutiny, such as the best practice examples that are given in the report? If that is not done, councillors could be left disenfranchised and communities could be left vulnerable.

11:15

I would not have thought that that would necessarily be the case. To take your example, if there were substantial complaints to councils about the performance of an ALEO that was delivering school meals, the council would not necessarily have to wait until the annual performance report to do something about that. It set up the ALEO and it can abolish it if it so wishes. It can call for an immediate report on the performance of the ALEO and hold the ALEO to account.

Yes, but you do not have the four-weekly, six-weekly or eight-weekly reports to the council by the director of the department, on which that director could be challenged.

That comes back to Gordon Smail’s point about risk. If there were a sense that the school meals service were on the point of collapse—if it were simply not performing—it would be within the council’s gift to require more frequent reports on the performance of the ALEO, by the ALEO, to the council. That contractual relationship does not change.

That is absolutely correct and relates to our point about getting things right from the start. In putting together the report, I got the sense that councils could be a bit more prescriptive in drawing up the terms for the ALEO. The issue might well be about the complaints-handling system and the feedback that arises from that, but it extends into all kinds of areas, such as expectations around equalities.

On the issue of the framework, a code of guidance was put together by the Accounts Commission and COSLA in 1996. In 2005, under the Local Government in Scotland Act 2003, that guidance was given statutory backing. That means that there is a framework that is more than just best practice. That helps us, as auditors, make criticisms and hold to account individual councils by reports to the Accounts Commission.

Am I right in thinking that councillors cannot work for the local authority in which they serve?

Yes. Under the previous system, with regional and district councils, it was possible for a district council employee to be a regional councillor and vice versa.

So someone who works in the catering service of a local authority would not be able to serve as a councillor in that local authority.

We can double-check that, but I think that it is correct.

Yes, I think that that is correct.

However, if the local authority decides to turn the catering service into an ALEO, councillors could work in it.

If the councillor were directly employed by the ALEO, that would be the case.

Is that not a bit of a loophole? If councils decide to make a service an arm’s-length service, councillors who are prohibited—for good reason—from working for that local authority could go and work with the arm’s-length body.

That is a good point. We will think about it. I have no idea how widespread that might be or whether it has created any issues, but we can check.

The issue is not whether it is widespread; it is about safeguards to ensure that there are no potential abuses and that councillors cannot get round a prohibition simply by establishing arm’s-length organisations. If that loophole exists, I would argue that action should be taken to close it.

Can we come back to you on that?

Yes.

As there are no further questions, I thank our witnesses for their contribution. It has been extremely interesting. I look forward to the Accounts Commission contributing to the work of the committee over the coming years.

11:19 Meeting continued in private until 11:36.