The Accounts Commission said local authorities should be especially careful since changes to taxation have made the model less attractive.
Although the use of arm’s-length external organisations had brought benefits, the watchdog noted in its publication released yesterday, the potential financial advantages have been undermined by the decision of the Scottish Government to limit non-domestic rates relief for any new charitable ALEOs.
As a result, councils should explore alternatives, such as reorganising existing services, sharing services with other councils or involving the local community, the watchdog said.
There has been a proliferation in the use of ALEOs in Scotland and about 130 are estimated to be currently operating in the country, with an annual spend of £1.3bn.
Although most are used to deliver sport and leisure, cultural and economic development services, three councils provide social care through the ALEO model.
However, the approach is falling out of favour in some authorities, with Glasgow City Council having recently opted to bring social care and facilities management, as well as community safety, back in house.
In its report, the commission stressed that ALEOs had to be sustainable.
“At a time of financial constraints, market uncertainty and policy reform, it is even more important that councils have clear reasons for establishing new ALEOs,” it said.
The views of members of the public and other stakeholders should be taken into account when deciding how services should be delivered, although there was “limited evidence” of that happening.
The report also called for clearer criteria for determining how councillors and officers should be involved in ALEOs, and for potential conflicts of interest to be dealt with effectively.
The risk of such conflicts could become starker if an ALEO encountered difficulties, it warned.
Councils should continue to review how existing ALEOs are performing and how they fit with council and communities’ priorities, it concluded.
Graham Sharp, chair of the Accounts Commission, said ALEOs could, and did, provide significant benefits, including reduced service costs and increased uptake in sports and leisure.
“But they are not without risk and changes in tax relief may make the creation of an ALEO a less attractive option for the future,” he said.
“This is highly complex area. Councils need to give it careful consideration to ensure they make the right decisions for their own communities.”
