To deliver savings and improve service delivery, local authorities in Scotland have increasingly looked to establish Arm’s Length External Organisations ('ALEOs') which have steadily increased in numbers since the 1980s. According to Audit Scotland, there are an estimated 130 significant ALEOs in Scotland at present, with a turnover of £1.3 billion, and employing over 28,000 people.
Despite this, there are no legislative provisions requiring local authorities to scrutinise the performance of their ALEOs to ensure that they remain the optimum way to deliver best value for the services provided.
ALEOs can be companies, trusts or other bodies which are separate from a local authority but are subject to their control or influence, through the local authority having representation on the board or being the main funder/shareholder. Examples include delivering leisure and waste services, economic development, social care, property development or as a vehicle to deliver a particular project. While the ALEO is responsible for the services, the local authority remains responsible for the public money it gives to the ALEO and the quality of the services provided.
The drivers for creating ALEOs include cost savings through greater flexibility, service delivery improvements, qualifying for tax reliefs (although following the Barclay Review of Business Rates in Scotland it seems likely that rates relief for ALEOs will end), qualification for grants that the local authority may not have access to and, in some cases, the ability to trade and generate income.
However, along with these potential benefits, there can also be downsides including complex governance structures and financial arrangements, conflicts of interest and, of critical importance, the loss of direct control by the local authority leading to a lack of accountability for both finance and performance.
ALEOs have divided opinion. The Scottish Parliament's Local Government and Regeneration Committee carried out an inquiry into them which reported in March last year. Additionally, Audit Scotland plans to publish a report in Spring next year entitled "Are ALEOs improving council services?".
The principal concerns are whether ALEOs are really a more efficient and cost effective way of delivering public services or simply a way of shifting accountability.
There is no statutory definition of 'ALEO' and local authorities have a wide discretion in relation to creating them, limited only by the statutory duty to ensure best value in the discharge of their functions in terms of the Local Government in Scotland Act 2003. Once created, an ALEO is governed by the relevant Company or Charity legislation.
This has led to differences in the approach to the creation, use and oversight of ALEOs across Scotland, with examples of good and bad practice. There must be clear reasons and a sound business case to create an ALEO. It needs appropriate governance and the ability for the local authority to seize back control in the event that things go wrong.
If Councillors are appointed to an ALEO board the local authority should ensure that they have the skills and training to undertake the role. That includes understanding and dealing with the competing interests of being on the board and an elected Member. It’s about identifying conflicts of interest as they arise and dealing with them whilst balancing the duties of being a Councillor and the duties owed to the ALEO as a board member.
An ALEO board should be composed to ensure that there is a good balance of expertise and experience across the public and private sector and community. Leadership from the board can promote an ethos for the ALEO to ensure that services are provided innovatively.
Any risks should be identified at an early stage through regular monitoring and scrutiny, with action taken on any shortcomings and underperformance. The local authority should be on the front foot in taking action to withhold funding or to review or terminate the agreement in place with the ALEO particularly where public services or public money are at risk.