SCOTLAND’S arm’s-length external organisations (ALEOs) turnover £1.3 billion a year – but financial pressures mean councils are finding it harder to fund them, a public spending watchdog says.

The Accounts Commission for Scotland reviewed the use of ALEOs connected to councils around the country, which now number an estimated 130.

While some of the bodies deliver leisure and janitorial services, others are responsible for construction or social care.

In a report prepared for Audit Scotland, assessors listed uncertainty over future taxation and non-domestic rates benefits was identified by Audit Scotland which could challenge their work.

Last year the Scottish Government rejected a recommendation to end charity relief from non-domestic rates for ALEOs following a review.

However, Finance Secretary Derek Mackay said he would offset any further charity relief benefit to councils to “deter future ALEO expansion”.

A report published today says taxation advantages for registered charities had been a “strong driver” for councils establishing ALEOs. It goes on: “Following a Scottish Government review, these benefits are now less certain and some councils are exploring other options.”

Aberdeenshire Council was cited as one example, with a proposal for a culture and leisure ALEO rendered non-viable after the local authority found its grant funding would be reduced to offset any non-domestic rates relief.

The report states: “The ALEO model has brought benefits but challenges remain. Financial constraints are impacting on the ability of councils to fund ALEOs.

“In the culture sector, for example, reduced council funding has led to library closures in some communities.

“One leisure ALEO from our sample group was also consulting the public over the impact of reduced funding from the council.

“Other councils indicated that they may need to limit their funding to areas of most need.”

In a statement, the Accounts Commission said: “Councils see ALEOs a half-way house between providing services themselves and contracting out entirely to the private sector.

“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.”

ALEOs have long been dogged by allegations of a lack of transparency from critics and concerns about value for money.

However, the report found they have “brought benefits including reduced service costs, increased uptake in sports and leisure, and improved standards of care”.

It also credits local authorities with having “improved and strengthened their oversight of ALEOs”, but calls on them to “set clearer criteria for how councillors and officers are involved with ALEOs, and demonstrate more clearly how ALEOs secure best value”.

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.”

Sharp went on: “This is highly complex area.

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