Council's 'profitable' trading arm had £200,000 deficit!

EXCLUSIVE by DOUGLAS SHEPHERD

External auditors who examined Scottish Borders Council's latest accounts have recommended a 'best value' review of operations within the authority's trading organisation SBc Contracts after the section recorded an unauthorised loss, albeit due to an accounting technicality.

SBc Contracts has been operating for 20 years, and as well as carrying out road maintenance and other services in the Borders it also bids for work in other local government areas as well as serving private customers by laying drives, etc.

Under Scottish Government regulations any council-controlled trading operation must at least break even financially in any three year period. But the latest report from Audit Scotland, the public spending watchdog which inspects SBC's books shows this was not achieved over the three years up to the end of 2021/22.

The report which is being considered by councillors this week explains: "SBc Contracts reported an operating surplus of £0.4 million in 2021/22. However, following technical accounting adjustments for IAS 19 [International Accounting Standard] Employee Benefits (including pensions), the final position was a deficit for 2021/22 of £0.3 million for external works and a three-year cumulative deficit of £0.2 million."

SBc Contracts' website says since its inception in 1992 the organisation has steadily progressed to become a well recognised key player in the construction industry winning contracts in both the private and public sectors in central and southern Scotland and beyond.

"We have the capability to undertake projects ranging from high risk, high value major construction works in the magnitude of £20M to smaller private works such as pavement or road surfacing of around £1,000. 

"Key areas of expertise: Engineering road and bridge works; Streetscape; Surfacing; Sign design, manufacture and installation (we have our own sign manufacturing workshop); Road Maintenance; 
Private roads and driveways; Groundworks; Bond and Tack Coat Spraying; Surface treatment (supply of plant and equipment); Temporary Traffic Management".

A trading operation report for 2021/22 prepared by senior SBC officers warned: "Commercial performance remains challenging for 22-23. We are experiencing the impacts of unprecedented rises in fuel and raw material. Although this had been a recognised issue over the last year. 

"Recently due to the war in Ukraine this has further compounded what was already a challenging position which has created a bitumen shortage across Europe and the UK, and this of course is a main component for anyone undertaking roads construction and maintenance activities. Supply chain issues, which we have been experiencing over the last 18 month, are therefore ongoing, we continue to work with clients, designers and suppliers to overcome delays in delivery which in turn impacts project performance."

The report, submitted to elected members in June, claimed a review of the service, which had been ongoing throughout 2021/22, was close to a conclusion the outcomes of which would be shared with councillors in due course. 

"Critical to this review though has been to consider the ongoing model for service provision within roads, and at this time the review is not suggesting that there are fundamental changes required to the service which it has assessed as delivering value for money to the Council.

"The scale of the operation and some of the business models behind it will need to change to enable a more efficient and effective service to continue to be delivered. We will continue to see issues such as staff recruitment and investment into the operational machinery business case to be considered in the round as part of the ongoing process of ensuring the financial challenges the Council faces are met."

Audit Scotland's report warns there is a risk that the council’s significant trading operation activities do not represent best value for the council. 

The watchdog recommends: "Scottish Borders Council should carry out a review of SBc Contracts to examine the cost effectiveness of the service provided to ensure that it continues to represent best value for the council."

Management at the council told the auditors there had already been work carried out as part of a wider appraisal that looks to improve depot based services that includes SBc Contracts. 

"As part of this work we will undertake some initial analysis of financial trading data to identify key areas for improvement or focus. In addition, work is underway to introduce improved IT software to support the service and to better record and track income and expenditure. This is seen as a pivotal and necessary step to enable a more rigorous review to be undertaken to examine cost effectiveness and best value of SBc Contracts, this is expected to be delivered within 12-15 month timeframe."

SBC's annual accounts show SBc Contracts employs 138 manual workers and 21 management and support staff and utilises a wide range of vehicles and items of plant to carry out its work. 

According to the accounts: "SBc Contracts employs 138 manual workers and 21 management and support staff and utilises a wide range of vehicles and items of plant to carry out its work. The organisation continued to contribute strongly to Council resources both directly and indirectly through: Supporting additional high added-value jobs in the Vehicle Maintenance trading operation; Maintaining very competitive charge-out rates to offer “Best Value” for Council Revenue and Capital projects."