Local authority - General Power of Competence: consultation

The Existing Statutory Framework

This section of the paper summaries the existing legislative powers relevant to consideration of a general power of competence. Annex A provides more detail on the existing legislative provisions.

Local Authority General Powers

The following key pieces of legislation are intended to provide local authorities with the freedom to design and deliver services according to local need. However, some local authorities may be reluctant to rely upon these provisions in the absence of specific statutory powers or duties to perform the action in question, due to concern as to legal challenge and the interpretation of the extent of the powers conferred by these legislative provisions.

The Local Authorities (Goods and Services) Act 1970^[3]

Supply of Goods and Services

This Act allows a local authority to enter into an agreement for the supply of goods and services, including use of property or facilities, and maintenance of land or buildings.

However, this excludes authority to construct any buildings or works; or to be supplied with any property or provided with any service except for the purposes of a local authority’s statutory functions.

Limitations of the Local Authorities (Goods and Services) Act 1970

A local authority can only enter into an agreement up to the value of any statutory limit set by Ministers. For any supply of goods or services above this limit, Ministerial consent is required. As no statutory limit has been set, any supply of goods or services currently requires the consent of the Scottish Ministers. It is open to Ministers, by order, to set a statutory limit if that was thought desirable.

A local authority must also consider whether such activity will contribute to the well-being of local individuals or the local area, thereby precluding a local authority from trading beyond the local area. The concept of contributing to well-being may also be subject to significant disparity in its interpretation, potentially introducing an element of risk in how a contribution to well-being is defined.

Section 69 of the Local Government (Scotland) Act 1973^[4]

Subsidiary Powers

Section 69 of the 1973 Act gives a local authority the power “to do anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions”.

Section 83 of the Local Government (Scotland) Act 1973^[5]

Power of Local Authorities to Incur Expenditure for Certain Purposes Not Otherwise Authorised

Section 83 of the 1973 Act permits a local authority to incur expenditure on contributions to any charitable body, any body which provides a public service in the United Kingdom otherwise than for the purposes of gain; or any fund which is raised in connection with a particular event directly affecting persons resident in the United Kingdom.

Limitations of the Local Government (Scotland) Act 1973

The subsidiary power in section 69 of the 1973 Act does not include power to raise money, whether by means of rates or borrowing, or to lend money, except in accordance with the enactments relating those matters. In other words, it is legislation on those specific topics that governs the extent to which councils can levy rates and borrow or lend money, and section 69 cannot be relied upon for those matters. The powers to borrow and lend money are contained in the Local Authority (Capital Financing and Accounting) (Scotland) Regulations 2016. The power of local authorities to invest money is governed by the Local Government Investments (Scotland) Regulations 2010, under which the consent of the Scottish Ministers is required.

The subsidiary power in section 69 of the 1973 Act ostensibly gives a local authority wide latitude in the discharge of its functions whilst implicitly restricting a local authority’s ability to do ‘anything’ to only those things which facilitate an existing statutory function.

The Local Government in Scotland Act 2003^[6]

Power to Advance Well-being

Section 20 of the 2003 Act gives a local authority a power to “do anything which it considers is likely to promote or improve the well-being of its area and/or persons within that area”. It includes the power to incur expenditure, give financial assistance to any person, enter into arrangements or agreements with any person, co-operate with, or facilitate or co-ordinate the activities of, any person, exercise on behalf of any person any functions of that person, and provide staff, goods, materials, facilities, services or property to any person.

Existing power for Scottish Ministers to extend the meaning of well-being

Paragraph 5 of Section 20 of the 2003 Act permits the Scottish Ministers to extend the meaning of “well-being” by means of a statutory instrument, provided that a draft of it has been laid before and approved by resolution of the Scottish Parliament and that local authorities have been consulted.

Limitations of the Local Government in Scotland Act 2003

The 2003 Act states that the power cannot be used to do something that the local authority is explicitly prohibited or prevented from doing under another enactment. It also cannot be used to unreasonably duplicate the functions of another person (unless the person concerned consents).

This restriction may preclude a local authority from entering into commercial agreements or agreements to provide services beyond existing statutory functions, which could theoretically be provided by another person or entity. In other words, the availability of section 20 of the 2003 Act does not enhance the ability of local authorities to enter into commercial agreements or agreements to provide services.

The general power for a local authority to ‘do anything to advance well-being’ is restricted to its local area and/or persons living within that area.

Section 22 says expressly that the power under section 20 does not enable a local authority to do anything for the purposes of raising money, whether by levying or imposing any form of tax or charge, by borrowing or otherwise. Only the specific power in the 1970 Act can be relied upon to generate revenue through the supply of goods and services.

Local authorities may be reluctant to go too far in relying on section 20 of the 2003 Act, for fear of being held to have acted ultra vires. In terms of constraints on the section 20 power, whilst case law is fairly limited, the case of Portobello Park Action Group Association v City of Edinburgh Council gives some indication of the approach of the courts. It indicates an inclination to interpret the provision in a narrow way. The judgement makes clear that, even though section 20 refers to a power to do “anything”, this should not be understood as conferring a power to act contrary to domestic law, or to breach contractual obligations, disregard third party rights or disregard planning or other administrative constraints. A similarly narrow approach was taken in England, in applying the [now repealed] equivalent power to advance wellbeing, namely that in section 2 of the Local Government Act 2000. This arose in the case of R v Risk Management Partners Ltd ex parte the Council of the London Borough of Brent and the London Authorities Mutual Limited and the Council of the London Borough of Harrow. This concerned a number of local authorities in London which had set up a mutual insurance company, in reliance on section 20, the argument being that this would save considerable sums of money on insurance. The savings could be used to deliver front-line services and so enhance the wellbeing of citizens in the respective local authority areas. It was held that this could not be done in reliance on section 20, given that there was no direct link between delivering savings which could be used to deliver front-line services and the wellbeing of citizens.

Powers to borrow and invest money

The Local Authority (Capital Financing and Accounting) (Scotland) Regulations 2016 (the 2016 Regulations)^[7]

The 2016 Regulations set out the purposes for which a local authority may borrow which include for financing capital expenditure of the authority or certain third parties, to provide grants for use towards capital expenditure, and to lend to common good funds and other statutory bodies.

Limitations of the Local Authority (Capital Financing and Accounting) (Scotland) Regulations 2016

A local authority can only borrow for capital expenditure, in line with the UK budgetary framework, or to lend to other public bodies, as defined in the 2016 Regulations. A local authority may borrow money for other purposes, but only with the consent of the Scottish Ministers.

Local Government Investments (Scotland) Regulations 2010^[8]

These Regulations require the consent of the Scottish Ministers for a local authority to invest money. The consent is provided by statutory guidance^[9] and the terms of the consent must be complied with.

The consent permits a local authority to invest money for any purpose relevant to its functions under any enactment, or for the purposes of the prudent management of its financial affairs.

Local authorities are therefore able to determine what investments they make, both the type of investment and also the duration of the investment.

In taking investment decisions, a local authority must have regard to (a) ‘Treasury Management in the Public Services: Code of Practice and Cross-sectoral Guidance Notes’ published by the Chartered Institute of Public Finance and Accountancy in 2017; and (b) ‘The Prudential Code for Capital Finance in Local Authorities’ published by the Chartered Institute of Public Finance and Accountancy in 2017.

Local authorities are required to produce an Annual Investment Strategy. Within this strategy, a local authority is required to set out the types of investments they will permit in the financial year and the limit set on such investments at any time in the year. Local authorities are also required to identify the different types of treasury risk that their permitted types of investment are exposed to: credit or security risk (of default); liquidity risk (risks associated with committing funds to longer-term investments); and market risk (effect of market prices on investment value). The Strategy should describe the controls in place to mitigate those risks.

Limitations of the Statutory Guidance

In the event that a local authority makes an investment that is not listed as a permitted investment in their Annual Investment Strategy that investment will not be made in accordance with the Consent and as such it will be ultra vires. The exception to this is where the Consent requires the local authority to recognise as an investment a financial transaction that relies on separate legislative powers, for example loans to third parties.

CIPFA Prudential and Treasury Management Codes of practice

Local authorities are required by legislation to comply with the Prudential Code for Capital Finance in Local Authorities and the Treasury Management in the Public Services: Code of Practice and Cross-Sectoral Guidance Notes. These Codes are intended to ensure that all capital expenditure plans and treasury management plans are prudent, affordable and sustainable and that there are effective financial planning, option appraisal, risk management and governance strategies in place to achieve a prudential approach to capital expenditure, investment and debt.

The Prudential Code requires that ‘ The local authority shall ensure that all of its capital and investment plans and borrowing are prudent and sustainable. In doing so it will take into account its arrangements for the repayment of debt (including through MRP/repayment of loans fund) and consideration of risk and the impact, and potential impact, on the authority’s overall fiscal sustainability. ’

The Prudential Code also states: ‘In order to ensure that over the medium term net debt will only be for a capital purpose, the local authority should ensure that gross external debt does not, except in the short term, exceed the total of the capital financing requirement in the preceding year plus the estimates of any additional capital financing requirement for the current and next two financial years . ’

Authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed. Authorities are also required to consider carefully whether they can demonstrate value for money in borrowing in advance of need and can ensure the security of such funds.