Council eschews change of tack despite downturn

By NEIL RIDDELL

THE SIC will not consider making any changes to its financial strategy until early next summer in the wake of the “gravest possible set of circumstances” brought on by the global financial crisis, though councillors have agreed not to talk about any new capital projects until existing commitments are seen through.

At a meeting of the Full Council this week, head of the services committee Gussie Angus suc­cessfully pushed through a moratorium on new building projects until those which are in progress have been completed.

Essentially, the upshot of the crisis and attempts to bring the oversubscribed capital programme under control is that no project other than those which are “ready to go” will be countenanced, meaning no care centres, no Bressay tunnel and no other fixed links will be looked at in the foreseeable future.

The projects which will be funded from the capital programme in the next few years include the new Mid Yell Junior High School, cinema and music venue Mareel and the Fetlar breakwater, while the new Anderson High School looks more and more likely to be paid for and leased back to the council by Shetland Charitable Trust.

The community’s oil reserves have lost more than £60m in value since April but in a report which went before the Wednesday’s meeting in Lerwick Town Hall, head of finance Graham Johnston recommended sticking with existing policy until a full balance sheet evaluation is completed next June. Mr Johnston repeated what has been his mantra throughout the current crisis: the council must “ride out the storms” and be thankful it is not in the position of having to liquidate any of its investments.

In the event of a change in tack being necessary, Mr Johnston told councillors that it would have to be a “phased and moderate” one given the importance of the SIC to the Shetland economy as a whole, but in the meantime he feels the policy framework “remains a sound one”. He described the downturn in worldwide investment markets as “the gravest possible set of circumstances” but said he was “sanguine about continuing the way we are going”.

Members backed Mr Johnston’s recommendations, though SIC convener Sandy Cluness said the decision did not preclude any action sooner than next June if circumstances took an unanticipated turn for the worse.

He said: “Graham and his staff can come back at any time if they feel we need to move quicker. I think what the decision came to was to press on with the actual projects we have committed to and go slow on anything new.

“We take these things cautiously – if we have to change we can do, but in the meantime we proceed as we are. We’ve had some huge losses on our apparent downturns in the stock market over the years, 9/11, Black Monday and so on – you have to look at these things on a long term basis. This seems to be a particularly difficult period, but [the] report said we should stick to what we’re committed to.”

Mr Johnston’s report stated: “The council is a major spender, and therefore has a major influence, on the Shetland economy. Any changes in council spending can have a major effect on employment and local suppliers of goods and services, and those knock-on effects need to be carefully considered.

“This is another powerful argument for the council to make infrequent and moderate (ideally phased) changes in the direction of financial policy. If there are significant financial consequences arising from economic turbulence, it is probably better that they are borne by the council’s reserves rather than by jobs, services or projects, which are already under way.”

The latter remark is the strongest hint yet that a revision of the council’s commitment to maintain­ing its reserves – which as of 28th November stood at £220.1m, a substantial fall from the £257.1m which the SIC had in its coffers seven months ago – above a floor of £250m may well be required next year, with the wider economic situation unlikely to see any significant improvement in the next six months. Shetland Charitable Trust’s reserves stood at £146.9m last week, down from £193.1m in April.

The SIC’s agreed policy is to reduce its reliance on the oil reserves by cutting revenue spending by £1m a year for the next four years, a move which could be jeopardised by its need to meet the costs of the single status pay agreement, due to come into force next April at a cost of around £4m a year. From 2009/10 onwards, the annual budget for capital projects is to be cut from £20m to £15m.

Referring to action taken by governments to minimise the effects of the downturn, Mr Johnston wrote: “The council, sadly, cannot anticipate buoyant revenues in the long term, so is probably poorly placed to inject extra demand during a recession. However, the council does at least have the discretion of maintaining spending during a downturn (not making the downturn worse) and in my view should follow that course.”

“There is no short term solution to the current financial situation on a global basis, nor is there one for the council’s investments,” the report continued. “All council, pension fund and trust investments are invested for the long term to help sustain Shetland for many years to come. This investment approach does not alter when the markets are rising and nor should it when the markets fall.”

Shetland Central member Betty Fullerton praised the “very useful” report and said it was vital to “hold our nerve”. “A knee jerk reaction is not going to be helpful,” she said, adding that the council needing to continue looking for savings wherever possible.

Lerwick South councillor Jon­athan Wills said he was surprised to read that the target for income into the council’s reserves from Sullom Voe Harbour next year is £4m, at a time of declining throughput at the oil terminal and when income was only £2.1m this year. Mr Johnston responded that the target was “challenging” and was something councillors would have to consider during the budget setting process for 2009/10.

Dr Wills said he felt the council needed to take “emergency measures” now and is concerned that the revenue budget for the next financial year could be adrift by around eight per cent. “The question I keep asking: is what is the effect of the recession on income from dividends and interest? They haven’t got the answer – where is it?”