15th August 2018
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Gray: squandering of oil money since 2000 caused SIC spending crisis

James Gray

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Shetland Islands Council would not be facing any school closures or cuts to its ferries budget if it hadn’t squandered tens of millions of pounds from its oil reserves since 2000.

That is the message in a stark report from finance chief James Gray outlining how the local authority came to be overspending to the tune of £30 million a year.

Members of the audit and scrutiny committee will hear on Thursday that some £325 million was drawn from reserves in the last 10 years. Their value has plummeted by 59 per cent since the turn of the century.

Councillors who took office one year ago have already ushered in huge cuts to deal with the spending crisis. Mr Gray’s report comes as the SIC prepares to embark on fresh consultations which could result in numerous school closures.

He states: “Had the council adhered to a policy of a sustainable draw on reserves since they peaked in 2000, it would mean that the council would have over £8 million per year more to spend each year on services in perpetuity. This could have meant that no savings would now be required from schools or ferries.”

While the report’s findings will come as little surprise to many, council sources say it is a damning indictment of key figures including ex-convener Sandy Cluness and Morgan Goodlad, who was chief executive from 2000 until he retired in May 2009.

The main factor causing spending to rocket was staff costs, which rose from £54 million to £93 million between 2003 and 2012. That was mostly a result of taking on more staff in education and social care.

Many islanders point to the many millions wasted on costly fiascos such as the Bressay Bridge (£7 million), Smyril Line (£4.2 million), a new Anderson High School (£5.5 million) and SSG Seafoods (£7 million).

But Mr Gray points out that those regrettable failures were not the main cause of the SIC’s monetary woes.

He writes: “The overwhelming reason that the council is in its current financial difficulty is because of overspending on day-to-day services which is a drain on the reserves year after year, rather than because of one-off expenditure items such as the Norröna or Bressay bridge projects, despite them being ill-fated.”

There did not appear to be any clear strategy in the aftermath of the 2008 global financial crisis, he suggests.

“The level of revenue spending in 2009-10 was 16.5 per cent higher than the previous year despite the onset of a global financial crisis that has been deeper and more protracted than the great depression of the 1930s,” Mr Gray writes.

That led to its spending deficit tripling in three years from £10.4 million in 2009 to £31.8 million last year. In that period, spending rose by 22 per cent while income increased by just three per cent.

Mr Gray suggests previous financial reporting had failed to “explicitly set out” the extent of the SIC’s reliance on its reserves – “masking the scale of the overspending that was developing”.

He lays out an eight-point plan designed to ensure such profligacy does not happen again. With the likelihood that there will be no real-terms increase in funding from the Scottish Government for the rest of this decade, he says it is important that the council recognises the importance of introducing new charges to plug the budget gap.

Oil industry income has averaged less than £3 million a year since 2003, and “it is anticipated that over the next three years the surpluses generated will be close to zero”. That may change once the new gas plant at Sullom Voe is up and running.

Financial scrutiny is being bolstered: Mr Gray says individual departments were traditionally asked to “identify their own cost pressures and have these included in the budget without appropriate independent scrutiny”. Finance officials will now examine each department’s case.

He notes that over £37 million was spent on the Yell Sound ferries project between 2003 and 2006.

Mr Gray highlights the importance of taking into account any new maintenance costs arising when councillors agree to embark on big capital projects.

Capital spending is liable to be much lower than it has been historically, and priority should be given “to those projects that result in revenue savings … over those that create a new ongoing cost pressure”.

He suggests the oil reserves’ fluctuating fortunes on the volatile stock market have “skewed” spending.

Mr Gray states: “When there has been a large return in the past, this has led to a view in certain quarters that it justifies a large level of spending from the reserves. However, the council has suffered years of large losses too.”

* See this week’s Shetland Times for councillors’ reaction to Mr Gray’s report.

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6 comments

  1. JohnTulloch

    Successive SIC Finance Directors, starting from Mr Gray’s predecessor and going all the way back to the late Malcolm Green, warned councillors repeatedly about the need to moderate their spending ambitions so I’m afraid the responsibility lies at the very top, the Chief Executive and the political leadership.

    There are always ways found to avert crises after they arrive – “hindsight is wise counsel” – and improved financial reporting and scrutiny are doubtless, among them however it doesn’t take a “Philadelphia lawyer” to look annually at the reserves remaining and ascertain whether they are dwindling, in particular, any spending above the reserves’ income is eating into the capital, along with inflation.

    The Victorians had a useful simile for it, “like bankrupts, living off their capital” – and having one last big spending spree!

    “The longer the party, the bigger the mess” and now the new council is having to clean up.

    Reply
  2. Johan Adamson

    A lot of it is to do with the funds invested. Accounting rules mean that you recognise the whole of any gain on investments in the year as income. Maybe there should be an amount taken in reserves each year, to set against future losses, so that you dont think you can spend it all and get the same again.

    Reply
  3. JohnTulloch

    If retired people with investments can work out whether they are living off their capital by overspending their investment income and/or not allowing for inflation, surely to God the council leaders can do the same and if they can’t work it out because they don’t understand the rules, ask the accountants to explain.

    They were warned repeatedly in public, as reported in the local media, so goodness knows how many private warnings were ignored as well.

    I hear what you are saying about accounting rules however the top people should be aware of stuff like that.

    They didn’t even have to ask “are we spending our capital,” they were told repeatedly and ignored the advice.

    We can have all the improved reporting procedures of the day and it will make no difference unless the leadership has the maturity and the guts to make the necessary cuts which we all know is a pretty disagreeable experience for all concerned.

    Whether we agree or disagree with the present round of cuts, at least, the new council has the guts to tackle the situation before it gets any worse.

    Reply
  4. Johan Adamson

    I agree with you John but I do think it is easier to criticise than to do and if you are faced with a surplus on your accounts year after year, even if it is just because of the stock exchange, you believe you are ‘rolling in it’, and some of the officials still think this is the case. This has happened to large companies, not just the SIC. And for example the Health Board couldnt historically carry a surplus (not sure if this has changed or not), they have to give it back, thus encouraging the spend spend mentality – so if they had had the same capital as the SIC to invest, they would be in the same predicament, forced by the legislation. Most of Shetland’s additional cash was put aside in the Charitable Trust, which was right, but it is also causing problems there – what to invest in, who to give it to, accusations of mis-management and lack of accountability, etc, etc

    Reply
  5. JohnTulloch

    Johan,

    Certainly, it’s easier to criticise and personally I think it’s reasonable to expect a high standard of competence at the top of the SIC. Mercifully, we appear to have that now.

    I hear all that you are saying in mitigation and I know it’s never easy, politically, to make cuts, especially if you prefer to act irresponsibly for the sake of popularity.

    I exempt the present council from that criticism.

    I accept the economic crisis has had a bad effect both on investment and government funding, however;

    It has been reported many times that councillors were warned publicly to restrain spending by a succession of Finance Directors.

    It isn’t rocket science. If you spend your capital on revenue items – or on depreciating assets with no return to boost income you will have a dwindling resource. The Norwegians realised that when they rightly put statutory spending limits on their sovereign wealth fund.

    I understand this and I’m not at the top of the SIC – there’s no excuse.

    Reply
  6. Jerry Mciver

    It doesn’t make a very strong case for those who desire Shetland independence from Scotland, or any other large economic region. Like kids in the sweet shop, all self discipline goes out the window as justification for every bit of spend gathers it’s own importance, and possibly a bit of personal self interest starts to creep in.

    Many complain bitterly that the sooth moothers don’t care about Shetland because they don’t give them everything they want. This is a perfect example of what happens when you don’t have some dispassionate external oversight and control in place.

    Reply

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