Hansard

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.