Action needed now or oil funds could be gone in five years

If the SIC does not take decisive action to address its financial woes, it will run down its reserves by 2017 and be forced into laying off hundreds of staff and making abrupt spending cuts, senior local authority figures are warning.

Convener Malcolm Bell told this newspaper that if some pretty drastic surgery is not performed to balance the books in the next two or three years, the Scottish government is liable to take the matter out of Shetland’s control.

“If we don’t demonstrate that we’re capable of running the council sustainably, then there is no doubt that it will be taken out of
our hands one way or another,” Mr Bell said.

The value of the SIC’s oil reserves on the stock markets stood at £193 million at the start of April. Head of finance James Gray has made it clear to councillors that if they carried on raiding those funds to the tune of around £30 million a year they would simply run out of money.

Though the mammoth budget-slashing task is an unappetising one for the new council, Mr Bell said that having people living here who care deeply about the islands making cuts in a “measured” fashion was infinitely preferable to the “uncharted territory” of them being im­posed from outside.

The Accounts Commission is keeping a close watch on the SIC’s performance follow­ing a two-day public inquiry in 2010.

Mr Bell said: “I think it’s vital that govern-ance and decision-making remains on the islands, and we don’t end up reduced to a situation where we’re subsumed into some form of strategic Highlands and Islands authority where we’re sending perhaps half a dozen councillors to Aberdeen or Inverness for meetings.”

In an indication of some fairly apocalyptic language coming out of council headquarters, it is understood that parallels are being drawn internally with the fate of NHS Argyll and Clyde.

That health authority was dissolved in 2006 and its functions split between two other NHS boards after the then Scottish Executive ruled it could not “justify allowing a publicly-funded body to spend so much more than its income”.

Having taken up the post of finance chief this spring, Mr Gray has spent the past few months elbow-deep in the local authority’s accounts dating back to the formation of the SIC in 1975.

As far back as 1996, chief executive Malcolm Green warned councillors that the reserves would be totally depleted by the middle of this decade if spending was not brought under control. Mr Gray has reached a similar conclusion: the difference is that now councillors only have five years, rather than 20, to do something about it.

He has unearthed some stark figures, including one showing that the direct financial benefit the council now derives from oil is just one per cent of its peak level in the early 1980s.

Officials are in the middle of drawing up a five-year spending plan and Mr Gray’s indicative figures show that, if no cutbacks were made, the reserves would have run dry by 2017. Even accounting for the massive £30 million planned spending cuts in the next two years, his provisional estimate is that the reserves would decline to around £132 million in five years’ time.

With the historic policy of maintaining the reserves at or above £250 million now looking like a pipe dream, councillors and officials will spend the months ahead trying to settle on a new level at which the reserves ought to be maintained. That will dictate the extent to which further spending cuts might be required in the second half of this council administration.

The figures were presented at recent behind-closed-doors seminars, which some members had wanted held in public so the wider population could grasp the full extent of the task councillors are facing.

At a seminar on 27th June, just before the summer recess, Mr Gray told councillors that in 2011/12 the council was spending £100,000 a day more than it took in. If all of this year’s £15.4 million cuts go ahead that will drop to around £68,000 a day, but councillors were left in no doubt that remains unsustainable.

There has been clamour, most notably from the trade unions, for the pace of the cuts to be slowed down to avoid creating “chaos”. Privately, some sources are voicing concern that the sheer volume of reviews departments have been asked to carry out is impinging on the ability of staff to do all their day-to-day tasks.

A number of senior sources acknowledge privately that pushing through such large cuts in only two years simply won’t be feasible, and that the timetable will inevitably slip by a year or two.

However, Mr Bell did point out that each time £1 million is taken from the reserves, the council also loses the interest that money would have earned on the stock market “forever and ever”. He said: “The return on the £1 million annually is enough, for example, to run the Freefield Centre.”

Historically, the reserves have generated over five per cent of their value each year on the markets. But with global financial uncertainty set to continue, Mr Gray has scaled back the projected returns to around two per cent for the foreseeable future.

He also points out that in 1982/83, the council received payments totalling some £40.3 million from the oil industry. That works out at over £116 million at 2011 prices – more than the entire annual grant the SIC currently receives from the Scottish government.

This year the council’s oil earnings are expected to be £1.2 million. Much-reduced Sullom Voe rental payments now go to the charitable trust, which bought the land from the council for £23 million in 1997. When Total’s gas plant is up and running in a few years, the council coffers will receive a boost – though that is unlikely to amount to more than £1-2 million a year.

Mr Gray said that last month the SIC had to call up its stock market fund managers in Edinburgh to ask for money in order to pay staff salaries. “We’re having to borrow out of this pot of money, which councillors in the past had the intention would be used to support Shetland when the oil finally stops.”

Though many of the new councillors have made plain their fury that successive councils failed to get spending under control before now, Mr Bell sees little point engaging in a “blame game”. He also rejects any notion of “scaremongering” to persuade the public to accept the cuts.

Exacerbating the problem, he said, was the expectation that government spending on local authorities would not return to 2008 levels until sometime in the early 2020s. Every other council in Scotland was facing that problem, but Shetland has a colossal “in-built local deficit” to tackle as well.

Mr Bell said: “In previous councils there’s always been enough to see us through to the next election. Clearly we’re now in a position where we know that if we continue on the current path and do nothing, the reserves are gone.”

He accepts it will be difficult to get people to accept cuts to valued services like ferries, education and social care. He has received a large petition signed by over 2,000 people objecting strongly to proposals to cut back ferry provision to the isles.

“People are aware that change is inevitable,” Mr Bell said, “but I think there’s still concern that change in services is done in a way that protects the most vulnerable in the community.

“Looking on the bright side, we’ll still have a level of service in Shetland that’s way beyond what’s enjoyed elsewhere.

“We’ve got to try and avoid the doom and gloom – I honestly do believe there is a brighter tomorrow. We are going to have four or five hard years, but once we’ve achieved that what we’ll have is something that’s sustainable.”