Local authority - General Power of Competence: consultation

Annex A: Existing Local Authority Legislative Powers in Scotland

Local Authority General Powers

1. 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, due to the ultra-vires rule many local authorities are reluctant to explore the scope of these provisions beyond specific statutory duties 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^[10] (the 1970 Act)

Supply of Goods and Services

2. Chapter 39, section 1 of the 1970 Act allows a local authority to enter into an agreement for:

(a) the supply of any goods or materials;

(b) the provision of any services;

(c) the use of any property belonging to or facilities under the control of the authority and the services of any person employed in connection with the property or facility in question;

(d) the carrying out of maintenance in connection with land or buildings for which the body is responsible and the purchase and store of any associated goods or materials which may be required.

On such terms as the parties consider appropriate.

3. However, the 1970 Act specifically excludes authority to:

a) construct any buildings or works; or

b) to be supplied with any property or provided with any service except for the purposes of a local authority’s statutory functions

4. The 1970 Act also includes a provision that prohibits a local authority from entering into an agreement under the trading operation provisions if the commercial services income accruing to it in any financial year will exceed the statutory limit without the prior consent of the Scottish Ministers. No statutory limit has ever been set and therefore any such activity will require Ministerial consent (regardless of materiality).

5. Further, a local authority is required to have regard to whether entering into an agreement for the supple of goods or services will be likely to promote or improve the well-being of either or both their local area and persons within that area.

The Local Government (Scotland) Act 1973 (the 1973 Act)

Subsidiary Powers

6. Section 69 of the Local Government (Scotland) Act 1973 provides local authorities with 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.

7. However, the Act also imposes limitations on this, requiring that a “local authority shall not by virtue of this section raise money, whether by means of rates or borrowing, or lend money except in accordance with the enactments relating to those matters respectively.”

8. Section 69 also permits two or more local authorities to make arrangements for defraying any expenditure incurred by one of them in exercising any functions exercisable by both or all of them.

9. The provisions of the Act, whilst specifically excluding borrowing or lending powers, which are contained in 2016 regulations, give 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 for which a statutory function exists.

The Local Government in Scotland Act 2003

Power to Advance Well-being

10. 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. This 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.

11. However, this power is subject to some limits and restrictions, as set out in section 22 of the 2003 Act. These include that the power cannot be used to do something that the local authority is prohibited or prevented from doing under another enactment. It also cannot be used to unreasonably duplicate the functions of another person.

12. The power under section 20 contains an express limitation: it states that it does not enable a local authority to do anything for the purposes of enabling the authority to raise money, whether by levying or imposing any form of tax or charge, by borrowing or otherwise.

Section 83 Local Government (Scotland) Act 1973^[11]

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

13. 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

Limitations imposed by the Local Authorities (Goods and Services) Act 1970:

14. A local authority must 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.

15. A local authority must gain Ministerial consent to pursue income through the supply of goods and services.

Limitations imposed by the Local Government (Scotland) Act 1973

16. The Local Government (Scotland) Act 1973 imposes limitations on 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’, requiring that a ‘local authority shall not by virtue of this section raise money, whether by means of rates or borrowing, or lend money except in accordance with the enactments relating to those matters respectively.’

17. The powers to generate income from trade, undertake borrowing and undertake investments are contained in the Local Authorities (Goods and Services) Act 1970, the Local Authority (Capital Financing and Accounting) (Scotland) Regulations 2016 and section 40 of the Local Government in Scotland Act 2003 respectively.

The Local Government in Scotland Act 2003

18. The Local Government in Scotland Act 2003 Act, in which the general power for a local authority to ‘do anything to advance well-being’ is contained, is restricted to its local area and/or persons living within that area.

19. The Act also states that the power cannot be used to do something that the local authority is prohibited or prevented from doing under another enactment. It also cannot be used to unreasonably duplicate the functions of another person. This may preclude a local authority for undertaking activity to utilise the provisions of the 1970 Act to generate income from the supply of goods or services or to benefit the local area beyond specified statutory duties.

20. The power under section 20 also expressly states that it 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.

21. Consideration of the ultra-vires principle may also dissuade local authorities from exploring the full potential of this statute.

Powers to borrow and invest money

Section 40 Local Government in Scotland Act 2003^[12]

Power Of Local Authorities to Invest Money

22. Section 40 of the 2003 Act governs the investment of money by local authorities. It permits a local authority to invest money in accordance with regulations made under that section. The current regulations made under that section are the Local Government Investments (Scotland) Regulations 2010^[13].

23. Regulation 2 of the 2010 Regulations stipulates that a local authority may invest money only with the consent of the Scottish Ministers. Finance Circular 5/2010 provides the current consent of the Scottish Ministers for a local authority to invest money and sets out the requirements attached to that consent.

24. Regulation 3 requires that, when making investments, a local authority must comply with the requirements of any consent issued by the Scottish Ministers and 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.

Finance Circular 5/2010 – The Investment of Money by Scottish Local Authorities^[14]

25. A local authority may invest money for any purpose relevant to its functions under any enactment, or for the purposes of the prudent management of its financial affairs

26. A local authority must produce an Annual Investment Strategy within which it identifies permitted investments for the year and the limits on such investments at any time in the year.

27. The local authority should identify for each type of permitted investment the objectives of that type of investment. Further, the local authority should identify the treasury risks associated with each type of investment, together with the controls put into place to limit those risks. Treasury risks include credit or security risk of default, liquidity risk – the risks associated with committing funds to longer term investments and market risk – the effect of market prices on investment value.

28. Local authorities must not borrow more than or in advance of their needs primarily to profit from the investment return of the extra sums borrowed.

29. Local authorities must be able to demonstrate that borrowing is for a legitimate purpose such as the exercise of day-to-day cash management or the management of borrowing for capital purposes, as set out in the CIPFA Codes.

30. The statutory guidance states that borrowing in advance may be taken for risk management reasons subject to sound justification. When considering borrowing in advance authorities should balance investment risks, such as the credit and interest risks resulting from the temporary investment of the proceeds of borrowing, against the risk of adverse interest rate movements if borrowing is deferred. Consideration should also be given to the existing debt maturity profile over the medium term.

31. Before any borrowing in advance is permitted, a local authority is required to state this in its policy for borrowing in advance in the Annual Investment Strategy, with justification and reasons why borrowing in advance is considered desirable, the criteria which would be applied in deciding to undertake the borrowing in advance, the maximum extent to which borrowing in advance would be undertaken, and the implication of any borrowing in advance on the Annual Investment Strategy.

The Local Authority (Capital Financing and Accounting) (Scotland) Regulations 2016 (the 2016 Regulations)^[15]

32. Part 2 of the 2016 Regulations permits a local authority to borrow:

(a) for financing capital expenditure of the local authority;

(b) to give a grant to any person, whether for use by that person or by a third party, towards expenditure which would be capital expenditure of the local authority if incurred by it;

(c) for expenditure incurred on works to any land or building in which the local authority does not have an interest, which would be capital expenditure of the local authority if it had an interest in that land or building;

(d) for treasury management activities;

(e) to lend to other statutory bodies

(f) to lend to its common good funds (only in respect of expenditure which would be capital expenditure of the local authority if incurred directly by the authority); and

(f) for any other purpose for which the local authority is authorised under any enactment to borrow.

33. A local authority may borrow money for other purposes, but only:

(a) with the consent of the Scottish Ministers;

(b) for expenditure or lending that the authority has power to incur in the exercise of any of its functions;

(c) for expenditure or lending of such a nature that the Scottish Ministers are satisfied should be met by such borrowing; and

(d) on such terms and conditions as to repayment as the Scottish Ministers allow.

34. Two or more local authorities may combine to exercise their powers of borrowing money jointly.

35. Part 3 permits a local authority to borrow to lend only to other statutory bodies that are authorised to borrow by virtue of being listed in regulation 10, or being so authorised by another enactment.

36. A local authority may borrow to advance money to any of its common good funds, but only in respect of expenditure by such a fund which would be capital expenditure of the local authority if incurred directly by the authority. This is in accordance with regulation 11.

Limitations of powers to borrow and invest money

Scope of borrowing powers

37. A local authority can only borrow for capital purposes, 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.

The Islands (Scotland) Act 2018^[16]

38. Part 3 section 15 of the Islands (Scotland) Act 2018 requires the Scottish Ministers to establish a scheme for a local authority to request legislation devolving a function to the authority.

39. The Scottish Ministers must also make a scheme for additional powers requests^[17][18].

40. A local authority may request that additional functions, duties or responsibilities are transferred to the authority, and the Scottish Ministers are required to consider what action, if any, should be taken, and to publish a statement setting out how and when such action is to be taken.

41. A local authority can request a review of the Scottish Ministers' determination, as long as reasonable cause for making the request can be demonstrated and the Scottish Ministers must not unreasonably refuse to grant the request.

42. There are no equivalent statutory provisions in relation to mainland councils.

43. In relation to the Islands (Scotland) Act 2018, the consultation seeks to establish whether the introduction of similar provisions in relation to mainland councils would be sufficient, in place of a general power of competence, to enable councils to request specific legislative powers whilst avoiding the potential financial risks of a general power of competence and conflict with the statutory purpose of a local authority.

Competition Law

Local authorities & competition

44. Local authorities interact with markets in four main ways^[19]:

a) As a buyer of goods and services, local authorities can benefit from reduced prices, higher quality and innovation that are often the result of healthy competition. Local authorities can help drive healthy competition through effective design and execution of public procurements.

b) As a shaper of markets, local authorities can seek to introduce competitive pressure between buyers and sellers in order to deliver wider policy objectives over the longer-term.

c) As a supplier of goods and services, particularly those that would otherwise not be provided at the desired level.

d) As a regulator of markets, local authorities help make markets function effectively for the benefit of local consumers.

45. A local authority is required to ensure that, when competing alongside private firms, they do not distort the market in ways that might harm the interests of service users and taxpayers.

Competition Act 1998^[20]

46. Competition law applies to any body which is: “(a) supplying a good or service, and (b) that supply is of a commercial nature.”

47. Activities of a commercial nature include:

a) Profit-making activities in competition with private sector companies.

b) Non-profit making activities if they are or could be provided by the private sector.

c) Upstream purchasing if the purchased goods/services are subsequently used to conduct an economic activity downstream.

48. Conduct does not amount to economic activity if it is of a “wholly social nature”, defined as:

a) Activities that could not conceivably be carried out for profit by a private sector body.

b) Redistributive activities carried out according to principles of 'solidarity'.

49. This is consistent with existing powers in the 1973 Act which limit the scope of an authority’s ability to generate income to being relevant to a statutory power, and which would not unreasonably duplicate the functions of another person or body.

50. Section 2 sets out that agreements between undertakings and decisions by associations of undertakings which may affect trade within the UK and have as their object or effect the prevention, restriction or distortion of competition within the UK are prohibited unless exempted within part 1 of the 1998 Act.