Committee
Public Audit Committee 01 April 2015
01 Apr 2015 · S4 · Public Audit Committee
Item of business
Accounts Commission Report
“Borrowing and treasury management in councils”
Graham Sharp (Accounts Commission)
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Thank you, convener. The report that we are here to discuss today on behalf of the Accounts Commission looks at borrowing and treasury management in councils. Borrowing is a major source of funding for councils to invest in infrastructure projects, such as schools and roads, that are essential for the provision of key public services. At the same time, in today’s environment councils have on-going challenges in relation to reducing public spending. The report looks at how councils are demonstrating affordability in making decisions to borrow, and at the different positions that councils are in as a result of historical borrowing and policy decisions. The report focuses on long-term borrowing. We did not evaluate day-to-day cash, investment and borrowing transactions or look at other forms of debt, such as public-private partnerships. The report is aimed at councillors as the key audience. It considers the clarity and purpose of treasury management reports that are presented to them, which are often very technical in nature. It also considers the skills and expertise that councillors need in order to perform their key scrutiny role. During 2014, we looked at treasury management reports relating to 12 councils to get an indication of the clarity, content and variation of financial policy among councils. We interviewed officers and councillors from six of the 12 councils to get a more detailed insight. The report provides a summary of the main themes and conclusions arising from that work and identifies what more needs to be done. The messages and recommendations in the report apply to all councils, and our expectation is that financial officers, along with councillors, will review the report, assess themselves against it and implement the relevant recommendations. I now turn to what we found. Borrowing by Scottish councils is £12.1 billion, or around 82 per cent of councils’ total debt. Councils take on debt to invest in capital assets such as schools and roads. As I noted, our focus for this audit was on the borrowing element. We looked at councils’ borrowing since the introduction of the prudential code 10 years ago. The prudential code is a framework to support councils and help them show effective control over levels of, and decisions relating to, capital investment activity, including borrowing. We found that just over half of councils have higher levels of borrowing now than they had 10 years ago. Councils are following relevant codes and regulations, and they are clearly demonstrating short-term affordability of borrowing and other debt. However, we have found it difficult to identify how officers analyse long-term affordability and communicate that to councillors through strategies and reports for councils. For example, councils have information on capital investment requirements for up to 10 years and on the timing and cost of repaying borrowing, and they also have forecasts of future interest rates, but there was no analysis bringing those together with budget scenarios to assess affordability in the longer term. Treasury management is a professionally run function in councils. There are signs of more joint working and of integration of activity with the capital investment function, which is a positive step. We see potential issues in the future around the transfer and succession of skills and experience in that area and suggest that councils might wish to plan for that together. Councils have a range of governance and scrutiny arrangements, which is fine. The detailed arrangements are not for us to prescribe, but they need to be consistent across each council to enable councillors to build up knowledge and experience in this technical area. Councillors need to ask, and to be equipped to ask, more questions of officers about the affordability of borrowing and other financing options, particularly in the longer term, and about performance based on prudential and other indicators as reflected in year-end reports. Reports for councillors could be improved. They can be very technical documents and they should be written with councillors and the general public in mind. I will quickly summarise our recommendations. The report makes recommendations that are aimed at: helping councils develop treasury management strategies to present a wider, more integrated strategic view of borrowing and treasury management; encouraging councils to be more open about, and to report on, longer-term affordability; and helping councillors to scrutinise treasury management activity. The first main recommendation is that councils should prepare the treasury management strategy with councillors as the key audience, and that they should present a wider, strategic view of borrowing and treasury management. That should also cover how the borrowing strategy is informed by corporate priorities and capital investment needs. Secondly, councils need to create more detailed and longer-term borrowing and treasury management analysis that is informed by their financial strategies. It should include scenario planning, the analysis of capital financing options and the use of prudential indicators over a longer period than the minimum three-year requirement in the prudential code. Year-end reports should provide an overall assessment of performance and treasury activity. Finally, councillors and officers should review governance arrangements to ensure that they provide councillors with a wider strategic view of borrowing and treasury management and that councillors have access to all relevant treasury management reports. They should also ensure that training for councillors provides the appropriate level and balance of treasury management knowledge and scrutiny skills. We have provided a short guide and scrutiny questions for councillors to assist that process, published separately from the report. My colleagues and I are happy to answer any questions that the committee has on the report.
In the same item of business
The Convener
Lab
Agenda item 2 is a briefing on the Accounts Commission report entitled “Borrowing and treasury management in councils”. I welcome from the Accounts Commissio...
Graham Sharp (Accounts Commission)
Thank you, convener. The report that we are here to discuss today on behalf of the Accounts Commission looks at borrowing and treasury management in councils...
The Convener
Lab
Thank you, Mr Sharp. I refer the witnesses to page 31 of the report, which states: “Council governance structures are in place but not all meet code requi...
Gemma Diamond (Audit Scotland)
We found that councils were all generally following the principles of the code but, sometimes, the requirement for everything to be approved by the full coun...
The Convener
Lab
How many councils did you find in that position?
Gemma Diamond
Two of the six that we looked at.
The Convener
Lab
So only six councils were looked at in this assessment.
Gemma Diamond
That is right. We looked at six councils in detail.
The Convener
Lab
In percentage terms, therefore, the figure could be even higher.
Gemma Diamond
We do not have any evidence for other councils, so I am not able to comment on that.
The Convener
Lab
Should that part of the code not be pursued to ensure that the requirements are met?
Gemma Diamond
The councils all consider that they are meeting the general spirit of the code’s requirements, because the full council would have the opportunity to see the...
Fraser McKinlay (Audit Scotland)
As Gemma Diamond said, we took a sample, which is what we often do in our work. However, if it would help the committee, we could see whether we could find o...
The Convener
Lab
Correct me if I am wrong but I believe that in your opening remarks, Mr Sharp, you said that councils were meeting those requirements—I am sure that you refe...
Graham Sharp
In my opening remarks, I said that, in material terms, councils are meeting the code. The more significant point that I think we are trying to get across in ...
Mary Scanlon (Highlands and Islands) (Con)
Con
On page 5, the report says: “Overall borrowing has remained at around £12 billion for the last three years, with total assets of £39 billion.” In fact, tha...
Graham Sharp
There are a couple of levels to that question that need to be dealt with. First of all, we are talking about total figures, and I would be neither content no...
Mary Scanlon
Con
I am an economist, not an accountant, but I note that you constantly mention £12 billion of borrowing against £39 billion of assets. The way I read that comm...
Graham Sharp
As I said, I would assess that on the basis of individual councils’ specific plans and borrowings, not on the aggregated figures.
Fraser McKinlay
I do not suppose that using those numbers is designed to give comfort or otherwise; rather, it is designed to give a sense of scale. Similarly, with referenc...
Mary Scanlon
Con
On the financial plans for individual councils, the histogram in exhibit 4 on page 13 shows that East Lothian and West Lothian have probably more than double...
Fraser McKinlay
I will kick off; if we do not have the detail, I will be happy to come back to the committee because, as you say, the numbers are striking. From other audit...
Gemma Diamond
I do not have the detail on it all. It essentially depends on the council’s asset management plan and capital investment plan over the period. Exhibit 4 show...
Colin Beattie (Midlothian North and Musselburgh) (SNP)
SNP
Who is ultimately responsible for borrowing by councils?
Graham Sharp
I believe that the councils themselves are legally responsible for their borrowing.
Colin Beattie
SNP
The councils are responsible, not the Government.
Graham Sharp
Correct.
Colin Beattie
SNP
Councils are completely independent.
Graham Sharp
They are.
Colin Beattie
SNP
Thank you. Paragraph 16 states that 17 of the 32 councils increased their borrowing, but paragraph 18 says: “fewer councils are borrowing now than ten year...