Public Audit Committee

Meeting date: Wednesday, March 28, 2012

Official Report 461KB pdf

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“An overview of local government in Scotland—Challenges and change in Scotland 2012”

Item 3 is the committee’s consideration of the Accounts Commission report “An overview of local government in Scotland—Challenges and change in Scotland 2012”. I welcome to brief us on the report John Baillie, chair of the Accounts Commission, and his colleagues, Fraser McKinlay and Gordon Smail.

Thank you, convener. I have some brief opening remarks.

The Accounts Commission welcomes the opportunity to brief the committee on significant matters in local government, based on our recent overview report.

Local authorities have coped well, so far, with the 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 also 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, of course, 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 this year and beyond.

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

Of course, this is an election year for local government, and those who are elected in May will need to get up to speed quickly. Our overview report aims to assist new and returning councillors by setting out a concise picture of local government and its context, and by highlighting what we see as the priorities for 2012.

We are, of course, happy to take any questions that the committee might wish to ask.

Thank you, Mr Baillie. I will kick off.

As you indicated in your opening remarks, one of the themes that runs through the report is the financial pressures on local authorities, and you provide some figures for those as well as an indication of how local authorities are dealing with them, for instance, by reducing their staff.

In paragraph 129, you point out:

“In 2010/11, there was a significant increase in the level of usable council reserves”,

and paragraph 130 says:

“The overall level of usable reserves increased by £204 million (16 per cent) ... and totalled £1.47 billion at 31 March 2011.”

Although that is a figure from all 32 local authorities, you also say that

“Two-thirds of councils increased usable reserves in 2010/11.”

One reaction could be to say that although local authorities are strapped for cash and are reducing their staff to deal with that, they appear to be stashing away significant amounts of money. Is that good husbandry of resources, or is the level of reserves higher than it needs to be?

I will come to your question in 10 seconds, if I may. The question of reserves starts with transparency about what reserves are for and disclosing those reasons in the first place. Councils have different policies on earmarking reserves and on the ways in which they keep money back. Our concern is to make sure that reserves do not grow too much, and we monitor closely the relationship between net costs and expenditure. Gordon Smail might like to answer your question.

John Baillie does well to emphasise that point. We do not have to go back too far in our work on local government to a time when the position on reserves was not particularly clear. We have been monitoring the trend of reserves and a lot more information is now available on the subject.

Reserves are an important part of a council’s overall financial strategy. It is important to note that, although the trend analysis in our report shows that reserves are increasing, only a proportion could be described as free or non-earmarked. A large chunk of that money has been identified for future use and, going through all the figures, we can see that something of the order of £270 million across all councils is non-earmarked and available for contingencies.

The Accounts Commission and Audit Scotland have been careful not to say what an appropriate level would be. It is important that councils look at their local circumstances and come up with an appropriate figure. As soon as we said that X per cent of spend should be held back in reserve, the figure would become a benchmark, which would detract from the consideration of local circumstances.

We will continue to monitor reserves and look at the way in which councils set up their reserves policy. We make the point in this year’s report that it is perhaps time for councils to refresh their policies to ensure that they are fit for purpose in the current context. We will continue to look at the issue; it is also a key issue for local auditors in each council to look at as part of the overall financial assessment.

Mr Baillie said that the key to reserves was transparency in what they are for, and that there were different policies on transparency. There must surely be good practice in how reserves are defined.

That is a good point. By and large, councils are now much better than ever at declaring what their reserves are for, so there has been progress. My point is that sometimes it comes down to almost a difference in culture between councils. Some reserves may be described as non-earmarked and they truly are non-earmarked. However, others might be described non-earmarked but somebody is about earmark them. There is sometimes a timing issue.

The report is a snapshot. The chart in exhibit 17 on page 24 shows the trend. The earmarked part at the top of each column has grown slightly.

Would Fraser McKinlay like to comment?

We have spoken to the committee about this important issue in the past. For me, in addition to the overall levels, the variety in non-earmarked and earmarked reserves and the differences across councils that exhibit 18 demonstrates are striking. Our local auditors will keep a close eye on that.

You must get into the detail of the local plans to understand whether they are reasonable. As Gordon Smail says, that is the main reason why we have never said what the right overall level is, but the differences across the country are striking. There may well be good reasons for such differences, but we keep a close eye on the issue.

I have two questions. The first relates to paragraph 137 and is about Shetland Islands Council. All councils were given a clean audit certificate apart from Shetland. If that happened in one year, we might think that it was odd. I appreciate that my area covers the Highlands and Islands, but I am shocked that you have qualified Shetland for six years. How long can the situation go on? What is being done in the background to ensure that Shetland Islands Council is working towards achieving a clean audit certificate?

The situation has not only been going on for the six years that you mention but has covered two separate auditing organisations. Before Audit Scotland became the auditor of Shetland Islands Council, the auditor was an external firm, PricewaterhouseCoopers. It likewise referred to the difficulty with not including the Shetland Charitable Trust in the group accounts.

To come to your question, the council has done quite a lot of work to try to resolve the issue. I would not say that it is at the stage at which it is about to be resolved, but a lot of thought has been given to how it might be resolved. We hope for further progress when we look at the results of this year’s audit. In fairness to the council, it believes ardently that its position is correct as a matter of principle and is not some nonsense. The advice that we have been given is fairly unequivocal that the financial standards should be applied in a way that would allow the information to appear in group accounts. I do not know whether Fraser McKinlay, as controller of audit, wants to add anything.

11:00

There is a lot of constructive discussion going on on both sides to try to resolve the issue. I do not think that anyone wants to see the qualifications continue but, as John Baillie said, there is a fundamental difference of view on the issue. Changes are happening separately on the make-up and governance of the Shetland Charitable Trust, which is part of the discussion. If they go through, they may well have an impact on our discussions with the council around grouping. It is a continually changing picture. As I said, very constructive discussions with the council are still going on to try to resolve the issue.

I appreciate that, but if there have been constructive discussions for more than six years, you are being very patient.

My other point is about paragraph 157 and the issue of maintenance. Mr Baillie said that the main point was to get best value. I would have thought that the basic thing to do to get best value from assets is to maintain them, because otherwise they fall down around your ears. Paragraph 157 states the cost of the maintenance backlog for council properties is £1.4 billion. However, I want to concentrate on the £376 million for urgent maintenance. Is undertaking that maintenance not the best spend-to-save policy? Where will that £376 million come from? That is one of the issues in the report that is of most concern to me.

I agree. We, too, were very concerned about the urgent aspect when we did the report, for the reasons that you have indicated. The example that I use of remedial work is simply about the old problem of having a roof that you do not repair, which then becomes a far wider and deeper problem. The situation to which you refer concerns us. Our exhortation—I make a point of repeating it here—is that something has to be done about that. Does Gordon Smail want to comment? Was that your area, Gordon?

I do not have anything to add, other than to say that it is important to place the maintenance issue in the context of everything else that is going on. That is why we highlighted it in paragraph 157, and in an earlier diagram in the report, against everything else that councils have to deal with. We just wanted to give a sense of the scale of the issue in relation to property assets—that is, buildings—and roads, which we also refer to in paragraph 157.

That is the next point that I was coming to. Paragraph 157 says that the cost of removing all road defects in Scotland is £2.25 billion. Surely that cannot be ignored. I noticed recently that the cost for claims to councils for damage to vehicles from potholes and so on is rising by millions every year. I just cannot comprehend the £2.25 billion. Where will the money come from to sort the road defects and to pay for the urgent building repairs?

May I use that question to expand your concern even more? It is all part of the same issue.

Yes, please do.

Sometimes I bore my colleagues in Audit Scotland by talking about dangling debts. You referred to the councils’ properties and roads; other issues to take into account are inflation, servicing public-private partnership contracts, the pension scheme, equal pay and fuel duty increases. Those are all listed, among other things, in exhibit 3, which also refers to £713 million for roads as the urgent part of the £2.25 billion figure to which you referred. Councils have to face up to all that. It is the old story, as you touched on earlier: the less that is spent today on preventative work, the worse it becomes tomorrow. We keep flagging that up and we monitor how it is addressed; that is all that we can do.

I am new to the committee, which is why I ask my next question. Paragraph 157 states that there is a cost of £1.4 billion for the maintenance backlog for council-owned property assets, with £376 million for urgent repairs, and a cost of £2.25 billion to remove road defects. Have those figures been increasing in recent years? What is the trend?

I think that the figures have been increasing, but I defer to my team on that point.

We do not have that information. The figure for the buildings is based on the 2009 Accounts Commission report, but I do not have any more up-to-date information than that.

We can check that for you, Ms Scanlon. Your question about where the money will come from is a good one—we do not have an answer to that. Across the country there are examples of councils trying to do their bit in their local area. In some places councils have been able to find more money for roads in the budget process, but it is difficult. There is competition with other budgets that are under significant demand around social work and other services to vulnerable people. Councils are in a bind, and there is no easy answer.

From around paragraph 159 onwards, we talk about the need to consider a slightly more collaborative approach to using assets across the public sector—that has to be part of the solution. More innovative thinking is needed about the wider public sector estate and how it is used, rather than looking just at health and councils and others. That is a potential way of driving some efficiencies into the system for the greater good.

Those costs certainly cannot be ignored.

Indeed.

We have tried to exhort councils to consider how assets are used and to consider getting rid of them altogether if they are sure that the assets are surplus to requirements. That would solve part of the problem.

Are you talking about buildings?

Yes.

What type of buildings?

Any buildings that are not used fully or from which councils can relocate and so cut running costs as well as maintenance or capital costs.

I understand.

Paragraphs 38 to 41 quite rightly highlight the impact of the welfare system reforms. They emphasise how profound the changes will be, how they will change the way in which local government delivers services and so on. Are there any plans to find out how well the councils have adapted once those changes have taken place? Welfare reform is quite a serious issue for councils.

Councils are concerned about the impact of those reforms. Fraser McKinlay will expand on that point.

We are not making any commitments just now, but we need to keep a close eye on the impact of the changes as the plans become clearer. The transition arrangements for going from the current set-up to universal credit will be absolutely key. Our local auditors in councils will keep an eye on things, but we will also keep an eye on things from the national perspective to ensure that the issues are being dealt with. Certainly—as Mr Beattie will know better than I do—in speaking to council chief executives, we find that the impact of the welfare system reforms and the shift to universal credit are giving them real cause for concern. As Mr Beattie says, it is a fundamental shift to the way that the process currently operates. We are not making any promises, but the issue is certainly up there on our radar in terms of risks to the public sector and to councils in particular.

In connection with arm’s-length external organisations, the last sentence of paragraph 48 states that:

“a lack of clarity about roles and responsibilities undermined governance with serious consequences for services and public finances.”

That is quite a strong statement. What is the background to it?

How councils should deal with ALEOs is a source of concern to us and has been for some time. We published a report on it last year. Any councillor who is appointed to an ALEO has a dual responsibility, as you know. If the ALEO is a limited company, the councillor has a responsibility to comply with the companies legislation and look after that ALEO. At the same time, the councillor has a responsibility to the council to ensure that public money is well spent.

Our earlier report, “Following the Public Pound”, outlines the principles that should be followed. As far as we can, we constantly try to ensure that councils adhere to following the public pound principles when they are dealing with ALEOs. Sometimes there are good reasons for the formation of ALEOs, but that does not negate the need for councils to adhere to those principles.

From what you are saying, it seems that many councils are not following that process. Are we saying that that is more prevalent than not or that it is true of a very small minority?

Those are strong words in paragraph 48, but it is worth pointing out that we were trying to reflect the generality that Mr Baillie has described. I refer to a piece of work that we did last year on Highland Council’s involvement in a project called Caithness Heat and Power. That is a separate report, which is publicly available and which set out the real-life consequences of not getting an ALEO right.

The previous document, on ALEOs is a general good practice guide for councils. However, the report on that particular council highlighted what happens when roles and responsibilities are not made clear from the start. That gave us the evidence base to comment in the report; in other words, we were able to make it real for people reading the report and to show that it is not just theory—it can happen in practice.

I have been approached by a number of third sector organisations regarding ALEOs; I think that all the elected representatives here will have had such approaches. Those organisations feel that ALEOs are sometimes used to plug gaps and divert funding away from them. Does your report look into that extensively? Are those fears founded, or is the issue one of perception rather than reality?

The report makes it clear that if an ALEO is to be formed, there should be well-documented reasons for that to happen and that a good business case should be established.

Gordon Smail may want to cover whether ALEOs were plugging gaps.

We provided a briefing to the committee on that subject in October when we published the report on ALEOs, which has helped to clarify quite a number of the issues relating to ALEOs. We are not trying to encourage or discourage their use; we want to point out their pros and cons and the possible pitfalls around governance and the like.

With regard to funding, it is very much about being able to use the phrase, “Following the public pound”. In other words, clear decisions must be made by councils about why they want to deliver a service and how they will provide it. Closely associated with that is the amount of money that councils will provide in that way and how they will ensure that they get the same value for money from a pound that is spent indirectly through an ALEO as they would if they spent it themselves. There are important points in that regard about openness, transparency and, ultimately, accountability for public money—that is the key point. At the end of the day, it is public money regardless of whether it is being spent directly by the council or indirectly through the ALEO.

I move on to paragraph 82. This is the second report that I have seen that has commented on the savings that are likely—or, more correctly, unlikely—to arise from shared services. I am well aware that many councils anticipate considerable savings from shared services over a period. Obviously, these reports look back rather than at what might or might not be possible in future.

Perhaps councils are being optimistic in their budgeting in the hope that they will save millions of pounds from shared services. I am not talking about the possibility that we might have a more efficient service to the end users. If we are looking for cash savings, from what you are saying it looks unlikely that that will be achieved.

Again, we always stress that when councils are entering into shared services agreements, the business case should be tested robustly, for the very reasons that you indicate.

On the specific savings in each case, I think that a number of recent exercises have shown that sometimes there are benefits and sometimes there are not the benefits that had been hoped for. Fraser, do you want to amplify?

The point about shared services is well made, and it relates to paragraph 75, in which we talk about different ways of delivering services. It is not just about shared services. As the chair of the Accounts Commission says, it is critical that there is a good business case, but in a sense, it is even more critical that people know how they will deliver the efficiencies that are set out in the business case. That is the hard bit, in fact. Even if the point of making the decision to go forward with a project is reached, delivering the savings and taking the tough decisions that are involved in it are not straightforward.

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As has been said, our reporting—even the more forward-looking bits of the report that we are discussing—is based on experience of the past. The comment that it is unlikely that significant savings will be delivered in the short term is based on experience of shared services projects to date. There are simply not that many that we have seen that have delivered big numbers quickly. Therefore, if people are embarking on a shared service, they should be clear about why that is being done and they should go in with their eyes open and with a realistic business case that includes when and how they will realise the efficiencies.

Have any of the shared services that you have looked at failed to deliver any savings or, worse still, lost money?

We have not looked at any specific projects as part of the exercise, but there are occasionally reports across the country of projects that have not delivered what they were supposed to deliver. That is critical, because budgets that are set in February every year quite often require savings to be delivered through transformation projects, or whatever they happen to be called. If they are not delivering, those savings need to be found from somewhere else. There have been examples of that in various parts of the country in the past 12 months.

Let us move on to the old favourite of information gathering. Paragraph 104 refers to

“a lack of consistent and robust information at a national level”.

Practically speaking, is a great deal of progress being made on that? The question of information gathering and proper comparative figures coming out keeps coming back. There does not seem to be consistency.

The Accounts Commission and Audit Scotland have been banging on about that for many years on the basis of the question: how can proper decisions be taken if the information on performance and costs is not available? I think that that is behind your question. A lot of work is being done in the background to try to improve matters, but so far it is not at a point at which it can be launched.

Fraser McKinlay may want to speak further about performance information.

That is a long-standing issue. I know that members’ colleagues on the Local Government and Regeneration Committee are considering it in their inquiry.

The Accounts Commission already has statutory performance indicators, which all councils are required to report against. To that extent, the commission plays a role in ensuring that some comparative benchmarking information is available. However, a couple of years ago, the commission rightly handed on the baton or threw a challenge back to local government by saying, “You should be doing this yourselves. This is your job.” Since then, council chief executives have been working on a set of benchmarking data and indicators, and we expect to see some of the fruit of that work this summer. We await that with interest. I hope that it will provide a set of benchmarking indicators that will go at least some way to providing a national picture of performance across councils.

There are two types of benchmarks, which are used for self-evaluation—as Fraser McKinlay said, they should be in councils already; they should not have to be devised at this stage—and for public reporting. Therefore, there are two banks of performance indicators that we are keen to see established robustly and running forward in a trend, as the trend is particularly important.

I want to return to the issue of costs. This ties in a bit to the previous discussion about shared services.

To be able to identify what efficiencies will be generated, people need to know about their costs. That should be part of the fundamental decision-making process. There is something that the commission has been keen on, which has come through in many elements of our work. In May, we will say a bit more through the “How councils work” series about why cost information is so important in decision making and performance management, and try to unpick a bit what we mean by cost information. It is easy for us to say, but we need to say a wee bit more about what it involves and how it can be used with reference to case studies, for example, to make real for people what we expect and why it is vital in managing services and making vital decisions about them.

I have one last question. Paragraph 128 says:

“Councils are considering new ways of financing capital expenditure.”

Specific mention is made of tax increment financing. How many councils are successfully adopting that? I am always a bit concerned by talk of innovative ways of raising capital, because as such methods become more intricate and exotic, the risks increase incrementally, as we have seen with the banks. Do you have a view on councils getting involved in that sort of financing?

I invite Gordon Smail to answer that but note, in passing, that I whole-heartedly agree that the risks increase with the complexity.

We are flagging up TIF as one of the ways of providing the financing for capital that councils are looking at. A couple of big projects that involve that method of financing have been approved in Edinburgh and North Lanarkshire—the one in North Lanarkshire is to do with the site of the former Ravenscraig steelworks. Those are pretty big projects, particularly the North Lanarkshire one, which involves very large sums.

All that we want to do is to flag up TIF as one of the new ways of raising capital that councils are thinking about. In the report that we produced this time last year, we said a bit more about what was involved in TIF arrangements. For us, the key issue was the risks that are associated with the fact that the whole system is predicated on the production of non-domestic rate income. In the current environment, there are inherent risks in anticipating a flow of funds from non-domestic rates on retail properties, for example. As in the previous item on the Commonwealth games, we are using the language of risk. We have done no further work on the issue.

As part of our performance audit programme, we will do a study of major capital projects in local government, which will look across the piece at how such projects are taken from the initial idea through to completion and at some of the funding mechanisms that are available, including the TIF option. More work will be done on that.

I start by saying how grateful I am for the Accounts Commission’s understanding of Shetland Islands Council’s position; one accountant’s qualification is another accountant’s careful treatment of accounts. I have always been told that accountants are like lawyers in that they can come to different views on such things. As a former member of the council, I have a lot of sympathy for the principled position that has been taken, but I take Mr McKinlay’s point that constructive discussions are being held to resolve the matter.

I have two questions, the first of which relates to Mr Beattie’s point about shared services. Is any work being done on that? I was very taken by what was said about there being circumstances in which the aspiration to deliver shared services is not conducive to delivery of savings. Is the Accounts Commission, Audit Scotland or a parliamentary committee doing any work on that?

I am not aware of any specific work that is being done on that, other than all the local activities that are under way.

I wanted to make a point earlier—it may be tangential; I am not sure. One of the big problems with shared services is getting people to cede control of parts of their areas. It is assumed that when all the plans are laid and the calculations are done and tested robustly, control will be ceded just like that, but human nature being what it is, that is an extremely difficult hurdle to get over. That is one reason why shared services are sometimes difficult to see through to proper fruition.

We have seen that from previous reports on community planning partnerships and community health partnerships. I take that point.

Would it be fair to say that shared services is an area on which further work needs to be done for this committee or another committee?

Fraser McKinlay will comment in a second—I am sorry, Fraser.

We have seen evidence that suggests that some immediate expenditure is necessary to set up shared services and that the gains are made in the medium-to-long term. That would be worth exploring much more fully.

I will take that away and we will think about whether there is more that we can do. Shared services are being covered as part of the Local Government and Regeneration Committee’s inquiry into public service reform, so it will be interesting to see what comes out of that.

Okay. Thank you.

My second question is on the third bullet point in your summary and conclusion. I am not trying to read too much between the lines, but you state:

“It is vital that statutory officers, and in particular the statutory officer for finance, have appropriate access and influence.”

I was struck by the expression “access and influence”. Can you expand on that?

Yes. It is a fairly basic point. It always worries us when the statutory officer who is responsible for the resource called financing is not at the top table. That is not to say that that is the only way to do it, but if that officer is not at the top table, other arrangements must be in place to ensure that that senior voice is heard, otherwise there is an obvious difficulty regarding advice on figures and financing getting lost in the general debate and, perhaps, in the general zeal to pursue a project.

Is that recommendation firmly aimed at elected members, or is it much more about management teams and chief executives setting up the right structures within the 32 local authorities?

I am sure that the panel will all comment. It is really about both; it starts with the councillors who have to agree the decisions—the council cabinet—and goes on from there.

I reiterate that it is about both. The statutory officer for finance has an important independent responsibility to the council—not just to the chief executive—so it is important that that person has, as we said, “access and influence”. In the past, the Accounts Commission has debated whether to produce a clear policy statement that begins, “There shall be”, but we are more interested in how things work in practice. We have also seen examples in which officers acting under section 95 of the Local Government (Scotland) Act 1973 being at the top table has not worked. It is not a given; a number of factors need to be in place to make that work.

We are flagging up the fact that things have changed quite a lot over the years; council structures have changed and the nature of chief executives has changed. There was a time when most chief executives were ex-directors of finance—although I am not suggesting that they always make good chief executives. There has been a change and we are flagging up the need to ensure that that voice—which is important not just for keeping an eye on the books, but for the strategic advice and influence that the role should have within a council—is at the top table and is heard.

Fraser McKinlay has covered the point that I was going to make, so I will not repeat it.

There is a question of visibility in terms of elected members recognising the statutory roles, whether it is the section 95 officer for finance, the head of paid services, the chief executive of social work or the monitoring officer for legal issues. Those are the four key roles, although there are others. When we speak to elected members, we get the sense that they are not quite as aware of those vital roles as they might be. Following the elections in May, there will be an opportunity to restate to elected members who those people are, what they do and how their statutory roles sit slightly separately from their day-to-day roles in the council.

I have a last question. We had a period of ascending public expenditure post 1999, but we are now in a period of descending public expenditure for councils as well. Does that make the statutory role all the more significant? I am very taken with Mr McKinlay’s point that you nearly went for making the director of finance, in that context, a statutory role—or egging it up to some extent or making it a requirement. That could come. We are in a difficult period. Do you think that you will have to revisit that at some stage?

I would never say “never”. The importance of having somebody at the helm of all the finances must be stressed, and I think that everybody sees its importance.

Should the role be not complicated by corporate services? Should that officer do just finance?

What is important is that the function is at the top table, either physically or in spirit, with the mechanisms to ensure that it is always heard loudly. All councils, even the smallest ones, as Tavish Scott will know, are complex—there is significant expenditure and complex operations. In the private sector, it would be untenable for there not to be a finance director at the top table. Accountants have an expression: “Ashes to ashes, dust to dust, cash to cash.” There is a flavour of that in all this.

11:30

Paragraph 125 of the report states that

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

Is that because of project and programme management or is it more related to resources and the reductions in capital receipts, particularly because of the 1 per cent increase in the cost of borrowing from the Public Works Loan Board?

Gordon Smail will comment on that; I do not have the detail.

One of the report’s purposes is to monitor trends; we have been monitoring that trend. It features in the local reports—they are on our website—that we do for each of the 32 councils.

The slippage occurs for a number and mixture of reasons. It could be down to individual projects, or it could be that an anticipated asset sale is not achieved within the right timescale. In the current environment, money that was anticipated from the sale of land or buildings not being realised can knock a programme back.

There are also programme management issues, as Mark Griffin mentioned. To an extent, that is to do with councils having the right expertise; some projects are very complicated.

The key issue with slippage for us is to have a read-across to the service delivery plans. If service delivery plans rely on having assets available in a certain condition at a certain time, but they are not available, how can the council make its planned service changes and improvements? A lot is wrapped up in this issue. We are doing work on capital projects and local government, and slippage is one of the issues that we are looking to unpick a bit more.

There are sometimes very good reasons why programmes slip. We know of some councils that have decided to put a break in a programme because of other things that are happening in the locality. In other words, they have had to choose to wait for something else to happen in order to make the capital spend come along at the right time.

Should councils have in-house the detailed expertise that is required for such capital programme, or should they rely on external consultants? Is there a knock-on effect from councils being reluctant to go to consultants because of newspaper stories about big bills from consultants?

We do not have in our evidence base anything that would allow me to comment on that or to come back to you. We have picked up on the question whether councils have the right skills to deal with projects, and there could be additional points to raise about sharing resources across projects because the required expertise might be in areas that councils could share. That might to an extent be going on already, but there could be scope for more. As I said, however, I have no evidence that would allow me to give you a firm response.

The question moves us towards procurement capacity, which we touch on later in the report. There has, under the general thrust of Scotland Excel and so on, been discernible improvement in councils’ ability to procure.

Paragraph 150 of the report starts: “Large reductions in senior managers may affect ‘corporate capacity’”

and you have linked that to reductions in the numbers of back-office staff impacting on front-line police officers. As budgets, management and back-office and administration staff numbers reduce, is there a risk that there will be an impact on teachers, social workers, and classroom assistants and their ability to deliver front-line services? Do you see more of their time being caught up in administrative or management functions?

If the reductions go too far, there is a real risk of that in the examples that Mark Griffin has given. One of the difficulties—I suspect that this is what is behind your question—is in ensuring that backroom services are not cut so far that the council has to start transferring duties silently, if you like, to front-line staff.

Another point is that the more the back room is cut, the more necessary controls may disappear. Internal control relies on division of duties. In the future, if the reductions go too far, councils might not have available the people who are needed for division of duties. Corporate memory is another aspect; the learning from bad experience earlier in the history of the council—by history, I mean even five years ago—may not be retained.

A challenge of this debate is to identify what “front line” actually means. It is not an easy line to draw. We can understand that teachers are front line, but what about quality improvement functions for education authorities, which colleagues in Education Scotland have been concerned about? When making savings in education departments, councils do not start with teachers; they start with the quality improvement function. However, there is a lot of evidence that the quality improvement function can have a real impact on the quality of teaching. It is not a straightforward issue. We are raising the point that if councils make those kinds of decisions on staffing they must be clear on what impacts and implications there will be on service delivery.

I am interested in some of the points you made regarding the time when chief executives came mainly from a finance background. Your report states that we live in “challenging” times, and that we have to think and work differently. There is a need for a good balance and strong political will to make decisions. In my experience as a councillor, nine times out of 10 a finance officer will say “Keep the money for a rainy day, councillor”, I will say “It’s thunder and lightning out there”, and the officer will say “But it could get worse!” We are in a position where we have to think a wee bit differently, and move away from that type of attitude. Is that why things are changing in a lot of the local authorities?

I do not think that we have any clear evidence that supports or denies your point. I stress again that we are not saying that finance officers have to be front and centre all the time. Balance is needed, as you said. The key for us is that in a well-functioning council, the councillors should have good working relationships with the executive. In the very first of the improvement series we have stressed that point and explained how councils can go about building those relationships, and all the things that must happen. For us, good working relationships in which everyone—including people whose political views differ—can get on and collaborate to get things done are the key.

You mentioned the tax incremental finance scheme, and you said that it is a risk, but you are not really concerned as long as every programme goes through the correct process. I see the scheme as being a way to get capital investment for local authorities to invest in the future.

I was not an elected member when public-private partnerships came in. On page eight you have listed some of the councils’ costs for PPP contracts. I know for a fact that my local authority has £100 million-worth of education estate that has cost us £400 million to finance. You mentioned “Buy now, pay later? A follow-up review of the management of early retirement”, a report you published in 2003. My example is a classic case of “Buy now, pay later”. Did you attach risk to the PPP projects reports when they were going through the process?

I was not chair of the Accounts Commission in those days, so I am unable to comment on that.

We are not saying that PPP or private finance initiatives are good or bad; we are just stressing that, if councils go into them, they should make sure that they have made the right decision, that the proper options appraisal process has been followed. Proper robust evidence—or the best available robust evidence—has shown that to be the answer. That is all we are saying.

The context is that we are in a position where budgets are tight and tightening. The increase of the—if you like—first calls on budget means that there is less flexibility in the remaining budget. The issue is how councils draw together budgets, what the implications are, how much flexibility they have and where they can make decisions when there are already substantial first calls on budgets.

The lack of flexibility that PPP contracts impose on setting a budget makes that even more challenging for elected members, given councils’ current position.

On shared services, I note that paragraph 78 indicates that Clackmannanshire Council and Stirling Council have a successful programme, in that their education and social care services work together. However, it would be difficult to do the double reporting involved on a larger scale. For example, that would be difficult with the Clyde valley model. Do you have any ideas on reporting structures in that regard? There could be a problem in getting the reporting back down to the local level for every local council’s decision-making process.

Our general approach is to say that, having worked out the business case, you determine what your aims are for the project. You then put in place the performance measures that you will need to look at to ensure that the project remains on track. It is absolutely critical that you determine who does what and when. All those factors then drive the reporting process. Having addressed those factors, you then just keep the reporting as simple as possible, for the reasons that you indicated. If there is confused reporting, by definition you get confused or no monitoring.

Does Fraser McKinlay want to add anything?

I think that Mr Adam’s point is that it is horses for courses. The model that Clackmannanshire Council and Stirling Council developed works for them, which is partly because of scale. It is an interesting model because it has allowed the politicians to retain the governance of those important services for their areas, so the issue of ceding control that the convener mentioned earlier has not become such a problem in Stirling and Clackmannanshire. They will manage to join up and make efficiencies in how the services are delivered.

As Mr Adam said, it is difficult to see how that model would work in the Clyde valley. Our informal understanding is that some bits of the Clyde valley partnership might share some bits of the back-office services between them. Rather than seven or eight councils getting together, perhaps two or three councils could think about getting together. Perhaps that model has more mileage. It will be very interesting to see what happens with the other bits of the Clyde valley work in the coming months. We will keep a very close eye on that. However, in a joined-up arrangement, what works is most important.

The reporting mechanism for the Clyde valley model is extremely important because the more local the decision-making process, the better for everyone in the area. However, that must be balanced against the larger Clyde valley scale. In that regard, I can see why you say what you say in paragraphs 80 and 81, which outline the difficulties with the Clyde valley model. I have sat through many a meeting on those issues.

I have a couple of questions. The first is on housing and preparations for future housing demand, and the second is on the role of councillors.

A table in the report tells us that the number of those aged 75 and over will increase by 23 per cent in the next 10 years, with consequent increases in demand on housing services, social care services and so on. The social care aspect of that was raised in a report from the Auditor General that was discussed at a meeting of the previous Public Audit Committee, which I think Mr Baillie attended.

Do you get the impression that enough preparation and planning are being done in Scotland’s local authorities for the increase in the elderly population in order to provide adequate housing for the future? The Scottish housing quality standard is due to be met in 2015, so I am interested in your view of where we are in terms of reaching that. What will be the impact on the private rented sector? Will demand diminish or increase over the next few years? What will be the impact on overall demand for housing over the next 10, 15 or 20 years from the increase in the elderly population that you predict?

11:45

I will start with a general point, which is that we have always said that, in relation to the medium and long term, councils should try to look further ahead than the three-year and five-year cycles that they often use. That is a general point that applies to all council activities.

I will ask my colleagues to supplement the response to your first question. The private rented sector is dependent on so many different market features that it is difficult to give you an answer that could be considered remotely authoritative.

The general point is that the more houses that are supplied that were not there before, the more that must help to meet overall demand. At the same time, greater demand and rising expectations for houses drive us the other way. I am not saying anything that you do not already know; I am just making general observations.

Gordon Smail might like to comment.

I will pick up on the general point. There are pressures on finance and there are longer-term demands, but my strong sense is that the longer-term demands far overshadow the current pressures.

I will address the specific question about meeting the Scottish housing quality standard by 2015. In the background, we work closely to look across each council area with our scrutiny partners, including Social Care and Social Work Improvement Scotland and the Scottish Housing Regulator. Our work with the Scottish Housing Regulator covers the scrutiny risks. One risk that it will identify is the extent to which councils are far enough down the road to meeting the housing quality standard. That gives you some reassurance that work is going on in the background with housing experts to look at the progress that councils are making. It comes into the mix in the scrutiny response when auditors, regulators and inspectors work together to look at such issues.

As members probably know, as part of our rolling programme of performance audits on behalf of the Accounts Commission and the Auditor General, we keep our eye on housing provision. If the committee is increasingly interested in the matter, we will consider that.

Okay. My second question is about the role of councillors. You said that we are in a very challenging environment. I have been a local councillor for almost 20 years. My colleagues across Scotland are finding it particularly difficult to deliver services and meet local people’s expectations in this challenging environment. The context is, of course, that many elected members also work in industry or business.

Did you speak to elected members during the survey or the analysis to find out their view of their future? A lot of good work has been done in recent years to provide training for elected members, but I still have a concern about remuneration. I say that without fear of anyone suggesting that I am feathering my ain nest, because I will not be returning to the local authority. Is there a feeling that local authority councillors are remunerated sufficiently for their work? Some of them are in charge of budgets worth hundreds of millions of pounds yet, of necessity, they have to fulfil the role part time and work for a living. That is a huge demand, which we sometimes overlook in Scotland. We expect a high level of service from our councillors, but many of them are part time. Did you have a wee opportunity to talk to councillors across Scotland and establish their view on the issue?

Our work in councils—for example, on best-value audits of councils or police authorities—involves us speaking to elected members, so we have quite a good feel for what they think about their workload. As you say, a key theme throughout the report is the demands on elected members, including their fundamental role of representing people in communities, providing leadership and providing good scrutiny of services to drive improvement. When we overlay those responsibilities with some of the other aspects of the role that we have discussed, such as representation on ALEOs, it is clear that a lot is required of councillors.

The report highlights the main issues as we see them from an audit point of view. As we say up front, we hope that we have produced a report that, among all the induction programmes and the like that councillors get, helps to give new councillors an overall feel for the main issues.

As auditors, we would not comment on remuneration. An organisation called the Scottish Local Authority Remuneration Committee looks at that very subject. That is probably the best place to take your point about how much councillors are remunerated for the role that they undertake.

As councillors take on more and more work, pressure will build for them to go on to a different remuneration scale. That is not based on evidence; it is just an observation—I am playing back what you said, in fact.

My experience over the years is that the ability of local councillors to interact with local communities has never been in question, because they can do that almost any time of day or night, at weekends and so on. However, the ability of potential local councillors to give up some paid employment to do the job of a councillor is being seriously challenged these days. I imagine and hope that that will be reviewed in the near future.

Yes. As you well know, it is particularly acute for new councillors, who have lots to learn and take on board. As with previous elections, it is expected that after the elections in May there will be an awful lot of new councillors with that burden to bear.

Paragraph 148 on single status says that

“future costs are likely to be of the order of £180 million.”

However, the final sentence says:

“Employment tribunals continue and recent cases have opened up the possibility of more claims for compensation.”

Is that on top of the estimated £180 million? If so, are local authorities budgeting prudently for the possibility of more claims? I am returning to the issue of unallocated reserves, I suppose.

Single status has been a significant issue for local government over a number of years, and it is an area that we continue to monitor.

On the figures in the report, it is worth reflecting on some of the underpinning accounting rules that we are applying. We have a figure for the amount of money that has been spent and another set of figures for money that has been set aside. However, there is another part—an unknown part—that in accounting we would call a contingent liability.

The way in which the figures are built up is based on a council legal department’s assessment of the outcome. As auditors, we look at the assumptions that are made and work out whether they are reasonable and whether the figures that are included in the accounts are correct under the accounting rules. I know that that is a very technical response but that is how we come to the figures. In short, taking together the amount spent and the amount set aside, we estimate that the cost of equal pay, to date and in future, is about £630 million.

However, there is another unknown factor. We know that there are continuing legal cases going through the courts. As I say, it is for council legal departments to make an assessment and provide evidence to us. We then look at the figures that councils include in their accounts. I do not know whether that is a helpful response but I wanted to try to build a picture of how we come to those figures.

I may have to read that again.

If I may offer to supplement that, we talked earlier about reserves and earmarking, and I referred to the fact that while funds might be earmarked, there may be one or two timing issues. This may be an example of that. There may be a circumstance in which the council may not want to provide against something because by doing so it is giving the tactical game away in terms of negotiations.

As Gordon Smail said, there is no doubt that case law has such an impact on all of this that it is genuinely difficult for councils to predict accurately what will happen. The cases seem to keep coming. We have had this conversation with the committee for however many years, and there have been more cases recently, at the start of the year, which have moved the whole thing on again. As Gordon said, our job really involves a test of reasonableness. Do we think that what the councils have set aside is reasonable? Obviously, we do not see the detail of the cases and we are not lawyers so it is difficult for us to go beyond that.

Thank you. As there are no further questions, I thank Mr Baillie, Mr McKinlay and Mr Smail.