The local authority spending watchdog in Scotland has acknowledged the benefits of arms-length external organisations (ALEOs) but warned they require ‘careful consideration’ before adoption.

There are an estimated 130 ALEOs - ranging from companies to community organisations and charities - in Scotland, with an annual spend of more than £1.3bn.

The majority of these arms-length external organisations run sports and leisure centres or cultural services like museums and theatres. But others provide social care services, property management, and commercial activities.

A report from the Accounts Commission published today found ALEOs help councils reduce their costs, as well as increase uptake in sport and leisure activities and improve standards of care.

The report also noted local authorities had strengthened their oversight of ALEOs and were showing improving practice in evaluating them as an option.

However, the report said councils could do more to involve the public and wider stakeholders in that evaluation process.

The Commission also warned local authorities needed to guard against potential conflicts of interest that might arise from councillors sitting on ALEO boards as well as carrying out their council role.

There has also been a change in the Scottish government’s tax code which will affect these organisations, the Commission said.

An estimated half of ALEOs are registered charities and this allows them relief from non-domestic rates. Under the new rules, this will not be available to new ALEOs.

‘ALEOs can and do provide significant benefits,’ said Graham Sharp, chair of the Accounts Commission.

‘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.

‘This is highly complex area. Councils need to give it careful consideration to ensure they make the right decisions for their own communities.’

Rory Alexander, partner and local government lead at Morton Fraser, said: 'The reality of the Accounts Commission report is that ALEOs are likely to be used less now by Local Authorities, the tax implications as well as the need for improved governance and scrutiny making them less appealing.

'The question that now remains is if local authorities are still looking to use ALEOs do the benefits outweigh the risks, especially when essential public services and the taxpayer's money are both at stake.'