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Councils' bottom line

The Treasury has plans to make it easier for local councils to balance their budgets - and not before time, reports Paul Gosling
Most local authorities fail to plan properly, manage, or account for their use of capital assets, according to a new report from the Audit Commission. But the failings are at least as much the fault of central government as of the councils themselves, which are discouraged from adopting corporate approaches to asset use by the fragmented character of the bidding process for national and European public money.

Local authorities face enormous difficulties in planning capital programmes because central government habitually approves councils' permission to borrow just three months before the beginning of each financial year. Approval for borrowing for additional specific projects is often given half-way through the year.

These borrowing approvals normally lapse at the end of the financial year, placing the onus on a council to spend money quickly rather than to ensure that projects are properly designed, built and accounted for. The Audit Commission has called on the Treasury to change its rules, to encourage greater lead-in times on capital projects - recognising that many schemes need to be built over a longer period than is currently permitted - and to accept some slippage from one year to the next.

There is an obvious conflict between the desires of central and local government as regards the priorities of councils' capital programmes. During the years of Conservative governments the emphasis shifted towards more centralised control over capital programmes, with more use of earmarked schemes that councils could bid for.

While these various "Challenge" schemes have been highly effective in persuading local authorities to attract private finance, to meet the schemes' criteria they have skewed local spending towards central government priorities. Spending on the maintenance of schools and housing has decreased, with money going on more glamorous transport and economic development projects.

It had been expected that poor asset management by local government would be transformed when, three years ago, councils moved on to capital accounting systems - similar to commercial accounting practices and Whitehall's resource accounting system. The Audit Commission has found, though, that the impact has been much less than was expected.

Capital accounting has changed the behaviour of direct service organisations (DSOs), which are forced to win tenders against the private sector and produce a profit if they are to continue in operation. DSOs have to account for their use of capital assets as part of their trading costs. Those parts of local government not subject to compulsory competitive tendering do not have to operate separate cost-centre accounts. Consequently, neither do they have to show the cost of their use of fixed assets. Many capital assets are, instead, shown as part of the general cost of running a local authority.

As a result, few councils properly account for their use of capital assets, and this discourages them from managing their fixed assets effectively. Many council-owned assets are under-used and could be disposed of. Local authorities currently hold pounds 120bn-worth of assets, but many councils do not regularly review their assets portfolio. Similarly, with the exception of their housing stocks, most councils do not produce stock condition data on their capital assets, and this undermines their ability to plan maintenance and capital programmes.

The Audit Commission believes that creating a statutory obligation on local authorities to maintain stock condition data on all fixed assets would be a good starting-point for a new capital assets management system. Councils might also be obliged to set priorities in consultation with local partners and central government, account for the revenue implications of those priorities, and investigate the potential for private sector funding for the capital programme, suggests the commission.

Greg Wilkinson, associate director of local government studies at the Audit Commission, and one of the report's authors, says he is disappointed that accounting reforms have not led to better asset management. "The new arrangements for asset accounting haven't had the bite that many expected and hoped," he concedes.

"The way in which you account for assets can either hide the consequences [of asset retention] from the outside world, or make them apparent, leading councils to shed assets that are no longer wanted," says Mr Wilkinson. Local authority accounts remain too opaque, with assets seldom allocated to their appropriate cost centres, and the potential benefits are thus not realised.

"Councils continue to hold assets which are under-utilised, or downright unemployed," Mr Wilkinson believes. "Asset accounting doesn't apply to school buildings, so they are treated as a free good, and it doesn't matter if only half the properties are being used. If you had to pay rent for the unused property you were holding, you would quickly realise you needed to do something about it."

Similarly, council-owned buildings that attract an income, such as swimming- pools, often fail to be used to their commercial optimum. The failure of councils' accounts to show the cost of asset under-use encourages councillors and managers to ignore this.

"Information brings problems into focus better," says Mr Wilkinson. "Members should be assisted to recognise the opportunity costs that are forgone."

As the Private Finance Initiative becomes more widely used by local authorities, many of these problems will be overcome. "It is almost inconceivable that a council could enter into a PFI deal without information on asset use," explains Mr Wilkinson. "Or, if they did," he warns, "a decision would not be a good one"n