Local Government and Regeneration Committee

Meeting date: Wednesday, June 13, 2012

Official Report 510KB pdf

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Accounts Commission for Scotland Reports

Good morning everyone, and welcome to the 16th meeting in 2012 of the Local Government and Regeneration Committee. As usual, I ask everyone to ensure that they have switched off mobile phones and other electronic devices that interfere with the sound system.

I have received apologies from Margaret Mitchell, and I welcome Jamie McGrigor, who is substituting for her today. I have also received notification that Kevin Stewart is unable to attend the start of the meeting due to a clash with the Welfare Reform Committee. He hopes to join us later. Does Jamie McGrigor have any interests to declare?

I do not believe that I have any interests other than those that are included in my entry in the register of members’ interests.

Our first item of business is an evidence session with the Accounts Commission for Scotland. The purpose of the session is to consider two reports from the Accounts Commission: “An overview of local government in Scotland: Challenges and change in 2012” and “Using cost information to improve performance: are you getting it right?”. I welcome our witnesses. John Baillie is the chair of the Accounts Commission and Douglas Sinclair is the deputy chair. They are joined by Martin Walker, assistant director of best value and scrutiny improvement, and Gordon Smail, portfolio manager for best value and scrutiny improvement. You are all very welcome.

Mr Baillie, would you like to make some opening remarks on the two reports?

Yes please, convener. We welcome the opportunity to brief the committee on the significant matters in local government that are contained in the overview report. Local authorities have, so far, coped well with financial pressures but they continue to face tough challenges from reducing budgets and growing demands for services. We welcome the progress that local government has achieved in recent years, but we recognise the significant scale of the task that it faces.

The year ahead offers opportunities for fresh thinking on service delivery, making the shift towards preventative spending and achieving more from partnership working. The aim is to deliver more integrated services that provide better value for money and improved outcomes for people and communities. Achieving best value is crucial—we cannot say that often enough. Those local authorities that place best value at the centre of all that they do will be well placed to deal with the challenges and changes of this year and beyond.

Those who are familiar with our overview reports may notice that there has been a significant shift in our focus this year. The report is still based firmly on audit work, but it is a much more forward-looking document in which we explore the pressures and demands that local government faces. The report sets out four responses that should help to counter those pressures: strong leadership and governance; effective partnership working; the investigation of new approaches to service delivery; and the use of performance information to drive improvement. The Accounts Commission believes strongly that effective action in those areas will help to ensure that local authorities, working in partnership with others, will achieve best value.

This year has been an election year in local government, and those who were elected in May will need to be up to speed quickly. Our report aims to assist new and returning councillors by setting out a concise picture of local government in context and by highlighting what the Accounts Commission sees as the top priorities for this year.

The cost report is called, “How councils work: an improvement series for councillors and officers—Using cost information to improve performance: are you getting it right?”. The report is the third in what we call the “How councils work” series. As committee members may be aware, the series aims to stimulate change and improve performance. It draws on audit work in all councils to highlight concerns and to improve performance. In particular, the report aims to assist new and returning councillors to get up to speed quickly, and to help them scrutinise policy and get the right information on the quality and cost of services.

We highlight the importance of having good-quality cost information to inform policy decisions and to scrutinise performance and identify some of the guidance and cost measures that already exist. We also provide practical examples from councils around the country to illustrate how they use cost information. The wide range of examples that was available to us helps us to show that councils could do more to share good practice and learn from one another. I am afraid that the syndrome of saying that it was “not invented here” is still with us.

Our report states that cost information is an important tool to look back at how budgets have been spent, but it also highlights that such information needs to be used more prospectively for councils to address current and future needs. Councillors need good cost information to make well-informed policy decisions and to scrutinise performance. Officers need it to help them manage services efficiently, assess performance and demonstrate value for money.

The commission emphasises that better use of cost information is more important given the current pressures on public spending and, indeed, that increased transparency about costs can help communities to understand the difficult choices that councils face and help staff to develop more informed policy.

I welcome any questions from the committee on either report.

Thank you very much. At the start, you talked about the general success that councils have had so far in dealing with the financial pressures, but obviously those pressures continue. Some people say that the low-hanging fruit has already been collected and that it is becoming increasingly difficult to respond. To that end, you talked about the need for fresh thinking. Does that include some radical changes in councils? If so, what sort of changes are required?

My answer has two parts. First, when councils look at a service, the first stage is to identify whether it is needed at all. If it is, councils must then ask how it should be delivered and by whom. Beyond that, they analyse those issues and come to a view. It is certainly true that choices other than in-house provision are available to councils; for example, service delivery can be done via a company or a trust, by arm’s-length external organisations, or through sharing services with other councils, or indeed with other bodies. The public sometimes misunderstand the term “shared services” to mean simply shared services with another council. Those options need to be looked at hard.

If I may digress briefly, the commission’s position on shared services is that we do not see them as a panacea. Heavy costs are often involved in setting up a vehicle that will deliver shared services, but if it is properly costed and properly evaluated at the beginning and the evaluation shows that there is benefit, it may be worth pursuing. It is inevitable that there are a lot of issues with shared services. We may come back to those, if you wish. The scrutiny of the case for whatever method of service delivery will be used is critical.

It is interesting that you said that shared services means services that are shared not only between councils but with different parts of the public service in general. The committee has been considering that issue in its inquiry. Do you have any good examples, which other local authorities should look at, of such an approach having worked in practice?

As Mr Baillie said, the quality of shared services has come up quite often. To be frank, practical examples of shared services working well are pretty thin on the ground. The commission’s report says that major savings through shared services are unlikely in the short to medium term; that is a longer-term aspiration.

However, the report refers to what is happening in East Lothian and Midlothian around education services. We have done no specific work on what is working well there, but we flag up that there is progress on councils working together in those areas and in other areas of Scotland. We wanted to highlight that that is partly to do with strong governance arrangements that were set up at the start. For example, there are elected members from both councils on various structures to help to support that, and officers at different levels are working together. East Lothian Council and Midlothian Council have one shared officer who plays a pivotal role.

Councils need to get things such as governance right from the start. They need the political and officer leadership to drive through changes where there is evidence that sharing services in that particular way—there are other ways, as Mr Baillie said—would produce the savings that are needed.

On the subject of collaborative working and shared services, what barriers exist to collaborative working and how can they be overcome?

I will mention two, and invite Gordon Smail to fill in some of the detail.

One particular barrier—Gordon Smail did some research for us on this—is simply the practical problem of being unwilling to cede control to anyone else. If a council is providing a good service, why would it jeopardise or risk damaging that? If a council has a bad service, it may not want to wash its linen in public. There is a very human problem in that regard. That is the main point, but there are also issues around governance that Gordon Smail will no doubt want to talk about.

There is a range of things that would perhaps create barriers to sharing services, including the question of whose patch it is, which Mr Baillie mentioned. There are also some technical issues around terms and conditions of employment in bringing together services into a new vehicle.

There are some examples of that being attempted—for example, a company that is set up by two councils in a joint venture arrangement. That raises questions around how the employees are transferred and the terms and conditions that apply, so it can be quite complicated.

We say in our report that the process of getting to shared services can in itself be very expensive and complicated, and can raise a range of questions. As Mr Baillie said, that includes issues of governance. To an extent, that ties in with our other report because it is about the need to understand the costs of existing services. If councils do not understand that cost, it is unlikely that they will be able to identify what they will gain from the shared services or collaborative working solution.

How can we encourage councils to work collaboratively?

One driver is the hard facts of life that councils are now facing. In the past, the view has been that it would be good to share services, and that there are benefits not just on the financial side but—importantly—around improving services for people, which is what it is all about. The hard facts of life will push people further down that road in any event.

There is a danger of viewing shared services as a panacea. Sharing services makes sense if there is a business case for doing so. However, to return to the convener’s point about low-hanging fruit, councils can make cuts very easily, but there is a real chance for them to ask whether they get value for money from the huge amount of resource that they currently spend.

There is an awful lot that councils can and should do to ensure that they get value for money. All councils, for example, carry out the same type of processes: they pay invoices and collect council tax, and yet the cost of council tax collection varies enormously across Scotland. There is no standardisation. Mr Baillie mentioned the “not invented here” syndrome. Councils should learn from one another, finding out, for example, who is best in class at collecting council tax and who can do it for the least cost, and spreading that information across the 32 councils so that they are all reducing costs. It does not seem right that a council tax payer in council A should be paying more than a council tax payer in council B for the same process.

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That touches on our other report on using cost information. For example, councils do not know the cost of processing a planning application—they should know. That is important, because unless they know the cost they do not know whether they are doing something efficiently. There are what we call the three Ss: simplifying a procedure down to the core; standardising it across the 32 councils; and sharing it if there is a business case to do so. Too often, local government has jumped to shared services rather than doing the first two steps of simplification and standardisation.

What can we do to ensure that those improvements happen?

The efforts of the Society of Local Authority Chief Executives and Senior Managers in Scotland have been welcome. The society has focused on trying to improve performance information. The commission has said consistently for some time that we want to see more cost information—that is performance information that is related to cost. We have a huge backlog, for example, on road maintenance, but we do not know the comparative cost across the 32 councils of maintaining a kilometre of road, so how can we know that we are getting value for money from the huge investment in our roads? Local government is beginning to embrace that performance information agenda, which the commission whole-heartedly supports.

We will come to cost in due course, I suspect—although it is all pervasive—but I return to the general question about what we can do to help things along. The move towards community planning partnerships and the integration of services may help local authorities to focus more on shared services.

That move towards CPPs had been on the stocks, but something is definitely happening with it now. That might encourage those parties who will have to work together to get the governance processes right, and once they have all the infrastructure in place—who does what and when, how it will be monitored and so on, boring though that may sound—they might realise that they can do it and that shared services are a much more manageable proposition than perhaps they had thought.

Have the workforce reductions been managed effectively or are there risks to service delivery resulting from the loss of senior staff or from reduced staffing in key areas?

It is fair to say that a number of the reductions—as the convener referred to—have probably been the easy, low-hanging fruit, although I do not like referring to people in that way. They were the people who were perhaps thinking of terminating anyway, or of moving into retirement or whatever. There may be something in that.

My concern, and the commission’s concern—we refer to it in the overview report—is that we may be reaching a stage where senior management capacity is so thin that good experience is beginning to be threatened a little. We have a particular concern about losing the experience of managing transformation projects. In going for further senior management reductions, that aspect should be taken into account.

Is there guidance for councils on how they should deal with workforce reductions in terms of the senior management, for example? I was a Glasgow councillor and one of our concerns was that the council made the option to leave available to everyone over 50 years old. Basically anyone in that age group who wanted to leave could do so. That left some of the departments bereft of talent.

I do not think that there is any formal guidance. That is why we are introducing this caveat, to say to councils that when they are reducing the workforce they need to stop and look at how they do it in case they save cost in the short term but pay a high price in the longer term.

In smaller councils we have certainly encountered the issue to do with senior management that John Baillie highlighted. That is also an issue in the context of corporate capacity for change. Given the scale of the challenges that councils must cope with and the volume of work that they must embrace in relation to option appraisal and different ways of designing services, councils have a huge workload. Unless councils have corporate capacity to undertake the work, they will struggle.

In general, councils are not recruiting, so in the long term there is a danger of getting a skewed workforce. Older people are leaving but younger people are not being recruited to fill the posts. There is an issue in the medium to long term about the shape of the council workforce.

There are implications in the short term as well as in the long term. Much change is going on at senior manager level—chief executives, directors of finance and the like. Councils have lost a lot of experience over the years, at a time of huge turnover in elected members. There is an issue in the short term to do with ensuring that business gets back on its feet as quickly as possible after the council elections.

Is continued workforce reduction and pay restraint a sustainable means of achieving cost reductions in future? If not, what must councils do?

In going for workforce reductions, councils must take account of what they anticipate having to do in future. Councils should take an holistic approach rather than simply focus on the cost reductions today. As we have said elsewhere, action can be taken today that will be paid for tomorrow in quite different ways. There needs to be a considered approach—I am sorry if that is a statement of the obvious, but it is our position.

I do not have much to add. There is evidence that councils are taking a more strategic approach to workforce planning. For many years, human resources departments in councils were very much tied up with equal pay claims and the like; they are now moving to a more strategic approach. In our work we exhort councils to tie that in with the financial and asset sides of the business, so that there is an overall strategic approach to managing the business. That is key, and forward planning issues need to be taken into account.

I think that Douglas Sinclair and Gordon Smail hit on the idea that it can be easy to make savings but the question is which areas to target. The workforce has probably been one of the easiest targets, but in the context of a policy of no compulsory redundancies, a voluntary scheme for staff reductions means that councils lose people with a great deal of experience. Has the quality of financial advice in councils reduced in recent years because councils have been driven to make efficiency savings? If so, has that had an adverse effect on decision making?

Thus far, the evidence does not suggest that decisions have been poor, but our concern is that that might well be the position in future. It is interesting that the chief finance officer is not always the section 95 officer under the Local Government (Scotland) Act 1973. The head of finance is not necessarily at the top table, so our concern is that his or her advice might not be given the weight that it deserves to be given.

We made a more general point in our overview report, which we developed in our cost report, about the absence of good cost information and good option appraisal—councils’ consideration of what to do with the workforce is part of the option appraisal process. That takes me back to my point about the need for an holistic approach. We do not look at the workforce simply as a source of cutting cost; we have to take into account the consequences.

To answer the question directly, thus far we have not yet seen evidence of bad decisions being made as a consequence of poor financial information being available. However, in calculating sustainability in future, far more information will be needed, because the decisions will be more complicated. In short, it is not just about people who are close to retirement.

My colleagues might want to amplify those points.

As auditors, part of our language is about risk—we want to flag up the risks. That ties back to Mr Dornan’s question about the effect on senior management teams in councils. One effect of the attempts to save money is that the senior management teams in councils are reducing in size. We flag up in the overview report that a consequence of that is that, on some occasions, the most senior officer for finance—the proper officer—is perhaps not at the top table on the senior management team.

The report flags up how crucial the chief financial officer’s role is. It is not just about ensuring that the budgets are set and kept on track during the year; there is an important strategic role of guiding the council through difficult and complicated decisions and advising on complicated financial transactions such as tax increment financing schemes or public finance initiatives and public-private partnerships and the replacements for them. The role of the chief financial officer, as one of the proper officers, is absolutely central. That is why the commission is keen to flag up the risk of any diminution of the status of that role in councils.

At the risk of appearing to be flippant, although I am not being flippant, accountants—I must confess to being one—have an expression, “Ashes to ashes, dust to dust, cash to cash.” Ultimately, everything comes back to cash, which is why the chief financial officer is needed at the top table. It is that simple.

Is the fact that in some areas the statutory finance officer is not part of the senior management team probably leading to a higher-than-usual incidence of non-compliance?

That is possible. When we talk about being at the top table, we mean that those people should either be part of the senior management team or have sufficient influence so that they are listened to. It is not so much about status and more about function. The key point is that that person or team of persons must be listened to and their advice followed, or justifiably not followed. It is sometimes difficult for a finance officer to be the killjoy or the person with the bad news, particularly when there is an exciting project that will engage with the community, but which is too expensive or not sustainable. It is a tough job. People need the appropriate character and independence to do it.

How much variation is there in council policies on reserves? Is there a need for guidance for councils on that?

As the question suggests, the policies vary. Partly, that is to do with the personality of the councils. Some councils like to have everything identified and earmarked. I suspect that, in other councils, although not everything is earmarked, somebody somewhere on the council knows that the money will not be spent on anything but a particular aspect. Our concern is to make the councils’ reserve position transparent so that people can understand what is there and what it is for if it is set aside.

The general rule for councils is that they seem to take a percentage of their operating costs as an acceptable level. I think that, roughly, they run at about 2 per cent. Perhaps Gordon Smail will say more on that.

There is a range. We do not have to look back too far to find a time when the position on council reserves was not particularly clear. Through the work of the commission and the overview report, we have drawn the issue to the fore, which is a positive development that means that elected members are much more attuned to the reserves position. Local government finance is complicated. Some reserves represent money, whereas others represent the other side of accounting. It is important that we understand all that, so transparency is important.

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As a result of the work that we and the Chartered Institute of Public Finance and Accountancy have done, all councils now have policies on reserves and can set out how much they want to hold in reserve. The Accounts Commission will not specify what councils should hold in reserve, because if we said that X per cent of net costs of services should be held in reserve, that would become the benchmark. We much prefer that councils take the decisions that are right for their local finances. Reserves are only part of a council’s overall financial strategy, and it would be wrong for us to specify such matters centrally.

However, we can ensure that councils have reserves policies in place. As we say in this year’s report, we think that the time is right for councils to look at their policies again, if they have not looked at them recently, to ensure that they are still fit for purpose in the current environment. We can also flag up variation between councils’ reserves policies, as we have done in exhibit 18 of our report. We show the general fund position across all 32 councils, then we split that between what councils tell us is set aside for particular projects or costs that will come up in the future and the smaller element of non-earmarked cash that is for a rainy day. It is interesting to look at that variation.

We publish all the financial information data behind the report, including that on reserves, on our website. We know from speaking to councils over the past few years that they find that helpful in making their comparisons between councils and asking why their reserves are larger or smaller than those of what they consider to be their comparators.

Another observation that we and councils sometimes make is that it is right and proper for councils to use their reserves at a time of rainy days, which is the case now and will be so for the next several years. Communities might be concerned if councils were building up their reserves just now, when they are needed. If they are not careful, they can end up trading one generation off against another.

I have three questions on capital programmes. The overview report states that

“slippage in capital programmes is a recurring and worsening issue”.

That is borne out by the fact that total local authority capital spending went down from £2.2 billion in 2009-10 to £2.1 billion in 2010-11, which was well below the planned level of £2.5 billion. What action are councils taking to improve management of capital projects?

At least some of the delay in capital programmes was down to poor weather. However, on the core of the problem, one difficulty that arises is delay in procuring sites. There seems to be a pattern of underestimating the time that it takes to procure sites. Another aspect is that part of the funding for capital projects sometimes requires the sale of capital assets, but in a depleted market the business case might no longer exist. That means that councils have to undertake distressed sales if they want to push ahead with projects. At the moment, such issues are causing difficulties.

Members will have noted from the report that there has been increased borrowing for funding capital projects, rather than other means being used. However, the day will come when that borrowing will have to be repaid. Obviously, councils are using prudential borrowing, but the amounts are growing.

What can be done for the future? The issues that I have described must be addressed and there must be realism in presenting the case for capital projects, ensuring that the facts and views that were put into the original business case still stand. I suspect that some of them no longer stand.

Does Gordon Smail want to add anything?

Mr Baillie has covered most points.

I will come on to what we are doing about this in a minute, but there is an issue to do with individual project management, to which Jamie McGrigor’s question refers. There is also the question of overall programme management of a council’s involvement in capital spending.

Some of the areas that councils are involved in are complicated. To link back to the previous part of the conversation about sharing services and expertise and learning from the best, councils might well pool expertise in a particular type of capital project.

In terms of what we are doing about that, Audit Scotland, on behalf of the commission, is part way through a project called major capital investments in councils, in which we are looking specifically at how councils have managed major projects. That work covers a whole range of issues, including how projects are financed and managed, and, indeed, the whole question of slippage.

We have reported on slippage in the overview report. There has been a trend over a number of years. The main point about slippage is that it is not wholly about meeting the targets in terms of delivering at a particular time, but about the impact on the services for which the buildings or what have you are being put together. On the other side of the coin are the plans for delivering services to people in communities, which rely on the assets being available in the right place, at the right time and in the right condition.

I understand that councils are also considering the use of newer approaches to capital financing, such as TIF schemes, whereby borrowing is based on anticipated additional business rates income resulting from the proposed development.

The overview report refers to a

“lack of objective expert advice”.

Do councils have the appropriate skills and expertise to manage newer and potentially riskier forms of financing such as TIF?

That depends on the individual council, and we are keeping a close eye on the issue. Again, it plays back to what we have said about the need for the good financial person to be at the top table so that projects are considered carefully and properly. It is awfully easy for people to have a pipe dream and a well-intentioned idea, but can it work? Where are the figures? What is the business case, and is it based on hard facts, or is it soft and dreamy? Those matters need to be evaluated carefully, and that should be the core of the approach. Sustainability will be checked as a consequence.

Is TIF a good model?

It is a model, and it is worth experimenting with in some cases. I never give a generic yes or no answer—I am an accountant. [Laughter.]

In the overview report, the Accounts Commission for Scotland found that

“The condition of council assets remains a concern. The cost of addressing the maintenance backlog for council-owned property assets is estimated at £1.4 billion, with £376 million of this described as urgently required.”

It also found that

“the cost of removing all road defects in Scotland is £2.25 billion.”

What progress is being made in addressing maintenance backlogs?

It is fair to say that councils have looked at both areas more closely as a consequence of our reports. They now have plans to address the situation. Gordon Smail can talk about the detail in a moment.

The other aspect is whether the relatively new emphasis on community planning partnerships will lead to changes: for example, is maintenance of some buildings needed, or should they be got rid of if there is a bit of spare capacity somewhere else?

The answer is, frankly, that the absolutely essential and urgent work covered by the part of the figures that you cited—the £1.4 billion and the £2.25 billion—will inevitably have to be addressed, but the rest of the assets may well be allowed to carry on in their current state simply because there is no money.

The roads will just get worse and worse.

That is right, and it is for the engineers to assess what is absolutely essential and what people will put up with.

There is also, however, the issue of the spend. If you look at the council spend—what is the figure, Gordon?

Council spend on roads and transport is about £1 billion a year.

How do we know that we are getting best value out of that £1 billion? Nobody is disputing that there is a backlog. However, we do not have the comparative costs of maintaining a kilometre of road from council A, council B and council C. Councils do not have that information, so they are assuming that there is a backlog without necessarily having the information that would enable them to say whether they get best value out of the £1 billion that is currently spent. Some councils study that in-house, but when was the last time that they tested the market in relation to that spend?

Rather than always saying, “We need more money”, it is important always to ask, first, whether you are getting the best value out of the resources that you are currently spending.

I live in a rural region. Contractors have put it to me that councils are spending money on patching roads when they should be realigning roads, which, with modern equipment, is not necessarily very expensive. Is such work being planned properly?

Gordon Smail might be aware of the plans that councils have. I know that we address that in our report.

I do not have that information. The report cross-references a report that the Accounts Commission published in 2011, which was a follow-up report on roads. If you want a specific piece of information, we could get back to you on that.

That would be helpful. Thank you.

Our deputy convener is not here, because he is attending a meeting of the Welfare Reform Committee. This committee has also considered the issue of welfare reform, and it is clear that the reforms will have a major impact on local government, not least in terms of housing benefit. How prepared for that are local authorities?

At the moment, we have little evidence to suggest that they are prepared, but that is not necessarily to say that they are not. It is simply something that we have not considered in any detail at this stage. We have trailed it in the report as a serious concern. There are issues about claimants receiving and paying money, the horrendous bureaucracy that might be created and where the money will come from to fund that bureaucracy. That is the extent of our work just now. We do not have hard evidence about the specifics.

The issue is being considered in our annual reviews and audits, so we will see more evidence over the next year.

It is certainly something that we will keep an eye on.

We will do the same—very much so.

What evidence is there that councils have taken action to respond to the concerns that have been raised by the Accounts Commission in the overview report and previous reports about the lack of clarity with regard to roles, and about responsibilities and the accountability of such delivery mechanisms with regard to the governance of ALEOs?

ALEOs are an interesting and useful vehicle, in many cases. Our position is always that the spirit of regulations on spending public money and following the public pound should apply equally to ALEOs.

Councillors who are allocated responsibility for ALEOs are placed in a slightly difficult position in that they have an obvious responsibility to the council but, if the ALEO is a limited company, they have a responsibility to that limited company, too, under company law. They have to be clear that any potential conflicts of interest are quickly identified and dealt with.

Our general position is that ALEOs need to be monitored in the same way as any other project, and the council needs to be up to speed with reports from the councillors who are charged with looking after ALEOs for the council.

That covers the main points. We have been considering ALEOs for a while. One of the reports that we are here to talk about this morning—“Using cost information to improve performance: are you getting it right?”—is the third report in a series that we call “How councils work: an improvement series for councillors and officers”. The second in the series, which we published last June, was on ALEOs. We saw an opportunity to draw on our experience of what we had seen of the governance of ALEOs, including one or two high-profile cases of an ALEO failing and causing the supporting council quite a bit of difficulty in picking up the pieces.

The ALEOs report is a helpful report that sets out all the main areas around governance, roles and responsibilities. We are neither discouraging councils from going down that route nor encouraging them. We are just saying that, if they are going to go down that route, they should get it right from the start and keep it right. That is really how that report was structured.

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Do you have any evidence that the councils are taking action and responding appropriately?

From our audit work, there is evidence that by and large the ALEOs are being monitored. There are one or two cases—Gordon Smail has referred to them—about which we had serious concerns, and we have published reports on them. Councils have for some time been monitoring their ALEOs, but there are some cases in which they have not been doing so. The question that we always have on our checklist is, “What’s happening to your ALEOs?” An ALEO is no different from any other project and must be monitored carefully.

A major part of the issue is the governance process. Every time that I mention the word “governance”, not only do the recipients’ eyes glaze over but my eyes start to glaze over because it is such a boring word and concept. However, it is absolutely core to running ALEOs on a proper basis, with everybody knowing who is doing what and when, and who is responsible.

I will add to something that Mr Pentland said earlier. As the pattern of service delivery in local government becomes more complex—with not just the council but a whole range of bodies providing services—that emphasises the importance of the statutory role of the section 95 officer, the complexity of the tasks that he or she may face in the future and the importance of that person having independence, authority and the right of access to go to the council, even if that involves disagreeing with a senior colleague. It really puts a spotlight on the incredible importance of the section 95 officer.

Do you have a position on when it is appropriate for a council to create an ALEO? Is there any guidance for councils on that?

We do not have guidance. It ties in with what we said earlier about looking at the various options for service delivery. If councils, in their policy role, decide that the ALEO is the best solution for delivery of a particular service, they should observe the guidance that has been issued by the Convention of Scottish Local Authorities and the Accounts Commission, which goes back a number of years. The report on ALEOs that I mentioned earlier is a kind of refresh that includes practical advice, examples of how to go about things and examples of some of the pitfalls that might be encountered if councils do not get it right.

In a nutshell, the key to ALEOs is governance. Who is supposed to be doing what and when? Who is reporting back to the council? What is the quality of the service? What is the cost of the service? Does it provide best value? Is it value for money? Those questions should be asked regularly rather than just at the start of a project—they should be asked time and time again by the councillors who are in charge of overseeing the ALEO project.

Since the introduction of single status agreements, councils have paid out more than £450 million in settling equal pay claims. It seems that, given the possibility raised by recent cases of future claims, future costs are likely to rise beyond £180 million. However, where does that figure come from? We spoke earlier about councils’ resources building up. Do you think that this might be one of the rainy days on which councils are looking for help with paying those costs?

I do not know the extent to which the issue is already provided for in individual councils’ reserves. Gordon Smail might want to say more on that.

I am afraid that there is some accountancy stuff in here, as you might appreciate. We identified the figure of £450 million up to the end of March 2011 as what councils had spent on equal pay. Over and above that, £155 million of the £180 million is what councils expect that they will have to pay out. They have carried out an assessment locally, looked at the legal cases that are coming through and said that it is likely that, in the coming years, they will have to pay out £155 million. There is also £25 million sitting in councils’ reserves—the earmarked part of the reserves that we talked about earlier. So, from an accounting point of view, there is the amount that has been paid out and the amount that councils expect that they will have to pay out.

There is also an amount over and above that, which, in our language, is known as a contingent liability. The contingent liability relates to uncertainty about the outcome of some of the on-going legal cases. Overall, we are looking at the figure that is in the report, but it is likely that there is more expenditure to come. As you are probably aware, when cases come through, that has a knock-on effect on arrangements that have been made in the past, so I do not think that we have seen the end of it yet.

As auditors, we ensure that the accounting rules are followed properly, and my sense is that most of the accounting has been done properly, but I think that more expenditure will come through the system.

I mentioned that councils were building up contingency funds, but are councils sufficiently well prepared to manage any future costs that arise from equal pay claims?

Pretty well all the councils have lots of experience of having to deal with the issue, so they are prepared in the sense that it is quite a well-trodden path. Whether they have reserved enough money is an open question, which I do not think that any of us could answer. However, councils have the processes and the expertise and experience to handle equal pay claims.

Councils have had to face up to single status, and rightly so. There is evidence that some councils have been better than others at using that as an opportunity to renegotiate some outdated terms and conditions of service. Although there has been pain on the cost side, some councils have found ways of paying for that. How well councils share information is an issue. Some councils have been better than others at realising that they can meet some of the cost by getting a more flexible workforce and getting rid of some conditions of service that are long past their sell-by date.

I will take you on a journey to the Shetland Islands, which some lucky members of the committee had the privilege and the honour to visit to gather evidence. It was a worthwhile visit.

For the sixth year in succession, Shetlands Islands Council was not given a clean audit certificate, because of the council’s decision to exclude the Shetland Charitable Trust and its subsidiaries from group financial statements. How does the council justify the approach that it has taken in relation to the trust? What effect does that approach have on the accounts that are presented?

Up until now, almost all Shetland Islands Council’s councillors have been on the trust as trustees, although that may change with the new governance arrangements that the trust is looking at. The council justifies its approach by saying that when the councillors are in the position of trustees, they act in that role in a manner that is separate from and independent of their role as councillors, and that when they go back to the council, they act separately and independently in their role as councillors. Fundamentally, that is their position.

The position of the auditors is that auditing standards and the appropriate accounting standard say that the substance of the situation should be looked at, and the substance of the situation is that although the councillors are trustees, they are still councillors, which means that it is difficult for them to act independently when they take decisions in the trust to spend money on local services that would otherwise have had to be spent by the council. The substance of the argument is that such expenditure should therefore be grouped in the council’s accounts.

Six years down the line, the situation has still not been resolved. How can we move things forward?

That is an interesting question. We were in Shetland only two weeks ago to visit the new council. We had an extremely cordial meeting, at which we discussed all sorts of things, including the best-value report and what steps forward could be taken. It was a very useful meeting.

The council has procured legal advice from counsel on what it can and cannot do, which the auditors will look at. However, the auditors do not look at the law in isolation; instead, they have to consider the whole picture—in other words, the spirit and substance of the law. We will see what the auditors say when we get this year’s report, but the council certainly has a keen desire to get the qualification removed.

You might also know that in a separate report the council has made a proposal, which is currently under consideration, that the number of councillors who are trustees on the Shetland Charitable Trust be reduced to seven or eight. I do not know whether that will remove the qualification entirely—that is a matter for the auditors to examine independently—but it might well be that, instead of being wholly consolidated, the trust will be set out as a one-line group or reference in the council accounts. I apologise for getting a bit technical but I must emphasise that I am speculating and that that is merely a possibility. Rather than interfere, I must leave the auditors to form their independent view and then take action as a consequence.

When do you think that that information will become available?

I believe that the sign-off is usually in September, so there is still some way to go. We—by which I mean Audit Scotland—get the accounts for audit around June.

The end of June.

The audit will start thereafter. The Accounts Commission might get notice of some of the issues involved but we will not do anything until the auditors have formed a view, as any such move would be seen as an attempt to interfere with their independence—and we must not do that.

Coming back to benchmarking and the lack of a collaborative approach to such matters, I wonder whether there is any risk that councils are being overwhelmed by the range of potential indicators that have been suggested for benchmarking purposes.

Even if they are not being overwhelmed, they might well believe that they are, which is just as bad. Almost two years ago now, we decided that, instead of simply imposing statutory performance indicators, we should ask councils via SOLACE what they wanted—not necessarily in order to report to the public, although that would form part of it, but for self-evaluation purposes. After all, self-evaluation is the key to effective scrutiny. For the past two years, we have been talking to and, indeed, working quite intensively with SOLACE. In the next month or so, it will publish the first tranche of council-agreed performance indicators that will start to allow the kind of comparisons that Douglas Sinclair mentioned a moment or two or ago to be made. That will be a significant step forward.

You might be familiar with this, but councils have always argued that you cannot necessarily compare one council with another; for example, the circumstances in urban and rural councils might be quite different. The information that will be gathered will allow councils to be grouped in families of similarity to allow more effective comparisons to be made. That approach, too, has been agreed. As I have said, we have been working closely with the councils and will try to enshrine all that in the SPIs.

The one part that is missing is a lot of the information on performance indicators that the public will want and, for that reason, we are formally consulting Consumer Focus Scotland on public reporting and asking it to give us some input that we can work on. Of course, it is handy that the chair of that very organisation—Douglas Sinclair—is sitting on my left.

I was going to ask whether the exercise was going to be voluntary but as you have already suggested that people seem to be willing and prepared to work together you will not need to answer that question.

I suppose that we all take the view that it is far better for the people who have to prepare these things to come forward with their thoughts instead of our imposing something on them.

As members have no more questions, I thank the witnesses for their helpful evidence. I suspend the meeting briefly.

10:45 Meeting suspended.

10:53 On resuming—