The use of ALEOs (arms-length external organisations) by Scottish local authorities has reduced costs and improved standards of care issues of governance and accountability can still exist, the Accounts Commission has said.

A report published today by the local authority spending watchdog looks at how councils are using the estimated 130 ALEOs in Scotland, which have an annual spend of more than £1.3 billion, and the impact they are making.

ALEOs can take many forms - such as companies, community organisations or charities. Most run sports and leisure centres or cultural services like museums and theatres. Others provide social care services, property management, and commercial activities.

The Accounts Commission report says they have brought benefits, including reducing costs, increased uptake in sport and leisure and improved standards of care.

Councils have strengthened their oversight of ALEOs. They are showing improving practice in evaluating them as an option but could do more to involve the public and wider stakeholders in that process.

The report also highlights issues in councils’ use of ALEOs. It stresses the need to continue to follow the principles of the Following the Public Pound code agreed by the Commission and the Convention of Scottish Local Authorities. The Commission has since published updated guidance on governance, accountability and potential conflicts of interest, such as councillors sitting on ALEO boards as well as carrying out their council role.

Councils see ALEOs a half-way house between providing services themselves and contracting out entirely to the private sector, the Commission said. They can operate flexibly to improve services for local people and bring in more income and benefit from tax breaks while allowing councils to retain some control and influence.

Around half of ALEOs are registered charities and this allows them relief from non-domestic rates. But the Scottish Government has indicated this would not be available to new ALEOs.

Graham Sharp, chair of the Accounts Commission, said: “ALEOs can and do provide significant benefits. 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.

“This is highly complex area. Councils need to give it careful consideration to ensure they make the right decisions for their own communities.”