Annual Accounts

2021–2022

www.orkney.gov.uk

IMAGE: Cover page featuring the Orkney Islands Council crest above a silhouetted coastal monument at sunset. The cover text reads “Annual Accounts”, “2021 - 2022”, and “www.orkney.gov.uk”.

Contents

• Management Commentary — 1
• Statement of Responsibilities for the Annual Accounts — 23
• Independent auditor’s report to the members of Orkney Islands Council and the Accounts Commission — 25
• Annual Governance Statement — 29
• Remuneration Report — 40
• Statements — 48
  • Movement in Reserves Statement — 48
  • Comprehensive Income and Expenditure Statement — 49
  • Balance Sheet as at 31 March 2022 — 50
  • Cash Flow Statement — 51
• Notes — 53
  • Notes to the Core Financial Statements — 53
  • Note 1 Summary of Significant Accounting Policies — 53
  • Note 2 Accounting Standards Issued but not yet adopted — 65
  • Note 3 Critical Judgements in Applying Accounting Policies — 65
  • Note 4 Assumptions made about the Future — 66
  • Note 5 Material Items of Income and Expenditure — 67
  • Note 6 Events after the Balance Sheet Date — 67
  • Note 7 Expenditure and Funding Analysis — 67
  • Note 8 Adjustment between Accounting Basis and Funding Basis — 72
  • Note 9 Transfer to or from General Fund Earmarked Balances and Other Reserves — 74
  • Note 10 Other Operating Expenditure — 76
  • Note 11 Financing and Investment Income and Expenditure — 76
  • Note 12 Taxation and Non-specific Grant Income — 76
  • Note 13 Property, Plant and Equipment — 78
  • Note 14 Investment Properties — 81
  • Note 15 Financial Instruments — 81
  • Note 16 Inventories — 85
  • Note 17 Short-term Debtors — 85
  • Note 18 Cash and Cash Equivalents — 86
  • Note 19 Assets Held for Sale — 86
  • Note 20 Short-term Creditors — 86
  • Note 21 Provisions — 87
  • Note 22 Reserves — 87
  • Note 23 Trading Operations — 91
  • Note 24 Agency Services — 91
  • Note 25 External Audit Costs — 91
  • Note 26 Capital Grant Receipts in Advance — 92
  • Note 27 Related Parties — 92
  • Note 28 Capital Expenditure and Capital Financing — 94
  • Note 29 Leases — 95
  • Note 30 Impairment Losses — 95
  • Note 31 Capitalisation of Borrowing Costs — 95
  • Note 32 Pension Schemes Accounted as Defined Contribution Schemes — 96
  • Note 33 Defined Benefit Pension Schemes — 96
  • Note 34 Contingent Liabilities — 100
  • Note 35 Nature and Extent of Risks Arising from Financial Instruments — 101
  • Note 36 Charitable and Non-Charitable Trust Funds — 104
  • Note 37 Common Good Fund — 105
• Housing Revenue Account — 107
• Council Tax Income Account — 110
• Non-Domestic Rates Account — 112
• Harbour Authority Account — 113
• Orkney College Account — 116
• Group Accounts — 118
• Glossary of Terms — 132

Management Commentary

The Management Commentary is intended to assist users in understanding the objectives and strategy of Orkney Islands Council, whilst demonstrating the stewardship of the public funds that support its mission and strategic priorities. It also provides a review of its business and financial performance throughout the year, summarising the position of the Council at the end of March 2022. It outlines the principal risks and uncertainties facing the Council and assesses the potential impact of those risks on future developments and performance. The financial position of the wider Council group is also presented, with the format and content of the Accounts prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom.

Orkney Islands Council

Orkney Islands Council is the smallest local authority in Scotland. Established in 1975, the Council was one of the 3 original all-purpose island local authorities in Scotland. Around half of the population live in the main towns of Kirkwall and Stromness, with the remainder in largely rural settlements, giving rise to further cost implications associated with the provision of public services.

Who do we provide our services to?

• Population 22,400
• Male 49.8%
• Female 50.2%
• 83.1% of the working age population are in employment (76.2%*)
• 1,500 businesses

Age

• Under 16: 16% (17%)*
• 16–65: 60% (64%)*
• Over 65: 24% (19%)*

Life Expectancy

• Female: 83.5 years (81.0 years)*
• Male: 80.1 years (76.8 years)*

*Scottish Average, NRS

What do we provide?

…1,802 employees (FTE) who…

• Look after up to 111 people in 4 Residential Care homes.
• Operate and maintain 29 harbours and piers, 7 airfields, 2 Travel Centres and 10 bus routes across Orkney.
• Teach and support 3,165 pupils in 24 Schools.
• Work in Integrated Health and Social care supporting children, families, and adults by partnering with NHS Orkney.
• Collect waste from 14,261 properties, maintain 986Km of Roads and Infrastructure with 238 Council vehicles.
• Provide 989 Council Houses.
• Distribute start-up and support grants to local businesses and much more…

IMAGE: Infographic describing Orkney’s population, workforce, age profile, life expectancy, businesses, employees and principal Council services. It states that Orkney has a population of 22,400, with 49.8% male and 50.2% female; 83.1% of the working-age population are in employment; and the Council operates 1,500 businesses. It also shows age groups, life expectancy figures, and services including residential care, harbours, airfields, travel centres, bus routes, schools, integrated health and social care, waste collection, roads, vehicles, Council houses, and business grants.

Council Structure

During financial year 2021-22 a review of the Council’s internal management structure was carried out, led by Interim Chief Executive, John Mundell. Phase 1 of the restructure resulted in the creation of 5 main Directorates as follows:

• Orkney Health and Care
• Education, Leisure and Housing
• Neighbourhood Services and Infrastructure
• Enterprise and Sustainable Regeneration
• Strategy, Performance & Business Solutions

IMAGE: Organisation chart showing the Chief Executive at the top, with five directorates beneath: Orkney Health and Care; Education, Leisure and Housing; Neighbourhood Services and Infrastructure; Enterprise and Sustainable Regeneration; and Strategy, Performance & Business Solutions.

In order to improve the delivery of services and to address several pressure points, the respective management teams of each directorate then reviewed their own service areas, to ensure they were in a position to deliver the Council’s priorities and ambitions going forward. The findings of this review process were then developed into Phase 2 of the restructure aimed at improving the corporate capacity of the Council, including the creation of over 70 new posts to address the fundamental shift in the expectations of customers, service users and staff in what they expect from Council services and how they transact with us.

Of the 72.34 full time equivalent posts to be established, 18% - or 13 jobs - are identified as modern apprenticeship, trainee or graduate trainee opportunities across a range of professional disciplines - representing a significant investment by the local authority in employment opportunities for young people looking to remain, live and work in Orkney.

This is the first step in implementing the commitment made by the Council to create opportunities for young people and the corporate leadership team is committed to identifying sustainable resources to continue this level of investment for future years.

In addition to providing employability opportunities this approach is intended to provide professional pathways that will attract, grow and retain new talent – the first step in the Council establishing itself as the ‘employer of choice’ locally.

These proposals were estimated to cost an additional £1.5M funded from the Council’s General Fund and £1.79M funded from a combination of previously ring-fenced budgets and external funding sources and were duly agreed at the close of the last Council term. This represents significant investment by the Council aimed at ensuring the incoming Council could hit the ground running, secure in the knowledge that the staff resource that underpins the decisions we make was in its best possible shape.

Council Mission and Strategic Priorities

What are we aiming to achieve for Orkney?

The Orkney Partnership

The Council works alongside four other lead agencies in Orkney to maintain and deliver Orkney’s Community Plan. The Council, NHS Orkney, Highlands and Islands Enterprise (HIE), Police Scotland and Scottish Fire and Rescue Service all have a statutory duty to facilitate community planning. This group works in partnership with a network of other public, private and third sector agencies across Orkney with the shared mission of “Working together for a better Orkney”.

The aim of Community Planning is to achieve better outcomes than would otherwise be achieved if they each worked separately. The Council supports the long-term ambitions of the Partnership by sharing both its mission and values, and by aligning the Council’s five priorities in the Council Plan with those of the Partnership’s three priorities.

The Community Plan can be found at the following link:

Orkney_Community_Plan_2019-2022_incorporating_the_LOIP (orkneycommunities.co.uk)

IMAGE: The Orkney Partnership graphic presents the shared mission “Working together for a better Orkney”. It shows the partnership’s community outcomes, including Caring Communities, Quality of Life, Connected Communities, Living Well, Strong Communities, Vibrant Economy, Enterprising Communities and Thriving Communities, together with the values Resilience, Enterprise, Equality, Fairness, Innovation, Leadership and Sustainability.

The Council Plan

The Strategic Priorities at the core of the current Council Plan were influenced through the information gathered by Elected Members’ public consultations during the last local government elections in 2017.

The Council Plan also incorporates the priorities of both the Scottish and UK Governments as well as the core services which the Council provides on a day-to-day basis. The Plan, which runs from 2018-2023 also takes account of new duties arising from changes to legislation and recommendations by audit and inspection teams.

A new Council Plan is currently under development and will be consulted on, and to take into account the strategic aims of the new Council, following the elections in May 2022. It is hoped that the Council Plan for 2023-2028 will be presented for approval in November 2022.

The Strategic Priorities of the current Council plan are shown below:

• Thriving Communities — The Orkney Community is able to access work, learning and leisure through a modern, robust infrastructure which supports all our communities and meets the requirements of 21st-century life.
• Enterprising Communities — A vibrant carbon neutral economy which supports local businesses and stimulates investment in all our communities.
• Caring Communities — People in Orkney enjoy long, healthy and independent lives, with care and support available to those who need it.
• Quality of Life — Orkney has a flourishing population, with people of all ages choosing to stay, return or relocate here for a better quality of life.
• Connected Communities — Orkney’s communities enjoy modern and well-integrated transport services and the best national standards of digital connectivity, accessible and affordable to all.

IMAGE: Strategic priorities graphic showing five coloured arrows: Thriving Communities, Enterprising Communities, Caring Communities, Quality of Life, and Connected Communities. Each arrow contains the corresponding description of the intended outcome.

The full Council Plan which details the Council’s top priorities and projects to achieve them can be found at the following link: Council Plan 2018 - 2023 (orkney.gov.uk).

How do we achieve the objectives?

The Council has an integrated Strategic Planning and Performance Framework which specifies the roles, responsibilities, systems and processes that enable the Council to meet its strategic priorities as described above. The Framework helps to ensure that the planned outcomes in the Council Plan are directly aligned to the performance measures that monitor its progress.

The following diagram illustrates how the Council’s objectives are met, in respect of both the Community and Council Plan, through integrating plans, strategies and performance measures down to individual officer level.

IMAGE: Planning and performance diagram showing the sequence Community Plan, Council Plan, Council Delivery Plan, Service Plan, Team Plans and Individual Officer Plans. It also shows How Good Is Our Council, Audit and Inspections; Public Performance Reporting; Performance Management, which measures success and manages underperformance at Partnership, Corporate, Service and Team levels; and Staff Performance Review and Development, which measures success and manages underperformance at individual officer level.

The Council Delivery Plan is the mechanism which acts to guide the work of services responsible for the delivery of the Council’s priorities over the remaining years of the Council Plan. The Delivery Plan includes a total of 81 key actions and projects supporting the 29 priorities under the Council’s 5 Strategic Priority Themes.

The Council is currently making improvements to the way it monitors performance to help ensure that it is aware of how well it is doing and where it must improve the quality of service, customer experiences and Best Value in line with Good Practice. The Performance section of this Commentary reports on the Council’s performance in terms of delivery of these priorities and ambitions.

Looking back over 2021-22

COVID-19

Throughout 2021-22, the focus continued to be recovery from the COVID-19 pandemic whilst still working from home where possible, in-line with Scottish Government guidelines. This has continued to impact on the progress of the Council Plan as the Council continued to prioritise the delivery of essential services, in the face of escalating cases of COVID-19 both in the community and within the staffing workforce. In February 2022 the Orkney infection levels were over twice the Scottish average, causing disruption in two care settings, multiples schools and other Council establishments. This situation was managed in the main by the individual service continuity plans but, on some occasions, it was necessary to close the schools due to lack of staff.

The Council continued to hold meetings on-line, given the high prevalence of COVID-19 in Orkney and in line with Scottish Government guidance. However, in September 2021, the Council reviewed governance arrangements to support the decision making of the Council, in recognition of changes to legislation in respect of public access to Council meetings which were due to take effect from 1 October 2021 and determined that, subject to Scottish Government guidance being in place at the time, in-person Council meetings should resume in the Chamber but limiting the number of attendees. At the same time the temporary amendment to the governance arrangements to allow meetings to be held at short notice was also withdrawn and it was agreed that the technological equipment in the Council Chamber be upgraded to facilitate the holding of blended meetings. Following the local elections on 5 May, all meetings have now returned to in-person in the Chamber, with the option to join remotely, if requested and at the discretion of the Chair subject to certain conditions being met.

In December 2021, the Council approved the allocation of one-off funding towards the following series of projects considered to provide excellent recovery prospects from the COVID-19 pandemic utilising additional government funding received in financial year 2021-22 to meet the additional costs of operation and to compensate for income lost as a result of the impact of the COVID-19 pandemic.

Highlights

Our People Our Plan

Our People Our Plan was launched in October 2021 by the Interim Chief Executive to celebrate the Council’s successes but also to look at what the Council now needs to focus on going forward, and how we can develop and improve. The Our People Our Plan programme is aimed at involving all Managers at Orkney Islands Council and focusses on the delivery of 7 key priorities, as follows:

1. Delivery Model – Our delivery model for the future is clearly defined, effective, appropriately resourced and understood by all.
2. Inspiring Culture – We have an organisational culture that inspires and enables our people to excel and builds capacity.
3. Drive Innovation – We drive innovation and outstanding performance through inspiring people to excel and builds our capacity.
4. Stimulate Economic Recovery – We stimulate economic recovery by accelerating the council’s social housing new build programme.
5. Improve Connectivity – We improve digital and transport connectivity and enable economic growth by facilitating the delivery of 21st century infrastructure.
6. Strategic Development – We will enable economic sustainability and prosperity by investing in strategic asset development such as renewable energy projects.
7. Enable Full Potential – We will work alongside each other to improve the care, support and protection of all our service users to enable everyone’s full potential.

Priorities 1 to 3 have an internal focus and are designed to develop people and performance. Specific activity includes the design of a new delivery model - including a senior management restructure and effective workforce planning; work on developing an inspiring culture which will enable staff to excel and build capacity; and driving innovation to improve processes and change our approach to performance management.

Priorities 4 to 7 are outwards focused with an emphasis on improving life for everyone in Orkney and supporting economic growth. This includes accelerating investment in affordable housing, improving connectivity – both digital and transport, and pursuing investment in green energy and harbour infrastructure. Priority 7 specifically addresses the vital need to improve the quality-of-care services for children and adults to enable their full potential.

The process to deliver Priority 1 commenced immediately with Phase 1 of an internal management restructure including Corporate Directors, Heads of Service and Service Manager level being approved by the Council in December 2021. Work then began on reviewing the services that sit under those management tiers and the staff resource, or corporate capacity, needed to deliver on these identified priorities. This Phase 2 review of the management restructure was duly approved by the Council in March 2022 and will lead to the creation of more than 70 new posts across all Services.

Islands Deal

The Islands Deal is a joint initiative between the three island Councils (Orkney, Shetland and the Western Isles) supported by the Scottish and UK Governments, which is modelled on the lines of a City or Regional Deal but with elements unique to the islands. Consisting of 18 projects, clustered across three interconnecting themes: Leading the way to a low carbon future; World Class visitor destinations; Supporting growth and future industries and Thriving sustainable communities. The Deal will capitalise on our islands’ unique assets and opportunities to place us at the forefront of the transition to net zero, strengthen key existing industry sectors and develop new industries for the future.

IMAGE: Islands Deal logo reading “OUR ISLANDS” and “OUR FUTURE”.

The Heads of Terms for the Islands Growth Deal was signed on 17 March 2021, securing a £100M investment from the Scottish and UK Governments, with an expected £235M of additional partner funding being contributed from private, public and academic sectors. The Islands Deal is one of many strands of activity in helping achieve our strategic priorities of an Enterprising Community and Connected Community.

The Islands Growth Deal Joint Committee, which will oversee the Growth Deal, consists of two elected members from each of the island councils and will require a significant level of support from all three islands authorities and partner organisations if they are to be successful.

In December 2021 the Joint Committee approved the submission of Outline Business Cases for a further four projects to the UK and Scottish Government for the following projects:

• ShellVolution, which will support significant expansion in the mussel farming sector in Shetland and throughout Scotland.
• The TalEntEd Islands Programme, which will create opportunities for education, skills, entre and intrapreneurship and commercialisation, supporting the increase in sustainable ‘green’ jobs across all three island groups.
• Scapa Flow Future Fuels Hub, which will enable the supply and distribution of low and net zero fuels to be established in Orkney.
• The second phase of the Orkney Research and Innovation Campus (ORIC2) at Stromness, enhancing existing facilities and creation of new spaces to further enable academic and commercial activity, collaboration, and business incubation.

Finance and Performance

Financial information is a key part of the Council’s Strategic Planning and Performance Framework with Council Services’ financial performance regularly reported to members and their respective Committees. In reviewing the financial performance of the Council, the trading activities including the Housing Revenue Account, Harbour Authority including Strategic Reserve Fund, and Orkney College all need to be recognised in addition to that of General Fund Services.

The Strategic Reserve Fund, held as part of the Harbour Authority Account, has been applied to supplement the General Fund services as part of an agreed medium-term financial strategy. For the financial year 2021-22 it was agreed that £7.470M from the Strategic Reserve Fund be used as a funding source to supplement the General Fund Services revenue budget. The purpose and strategy of the Strategic Reserve Fund is detailed under the Harbour Authority Account section.

Revenue Expenditure

General Fund

Most day-to-day income and expenditure on service provision is accounted for in the Comprehensive Income and Expenditure Statement (CIES) which includes all activities associated with the General Fund Services, the Housing Revenue Account and Harbour Authority.

The revenue outturn position was reported to the Policy & Resources Committee on 20 September 2022.

The following table shows the linkage between the budget figures reported to committee and the figures in the Annual Accounts.

Note 7 provides a reconciliation of the £29.810M of accounting adjustments that are made to the net expenditure chargeable to the Fund Balances to arrive at the amounts in the CIES.

Explanations of major spend and variances throughout the year

• Education – Reduced expenditure on staff costs due to vacancies not being filled.
• Roads and Transport – Winter maintenance costs for 2021-22 were high. Quarries had supply issues during the year that prevented them from making their planned surplus.
• Other Services – Underspend on Corporate Contingency funds and on loan charges due to slippage on the planned delivery of the capital programme.

Overall, the additional cost pressures associated with the maintaining the provision of Council Services, while COVID-19 restrictions were still in place for most of the year, were more than offset by underspends on staff costs as most Services experienced as a higher-than-normal level of vacancies throughout the year.

Principal sources of finance

• Government Grants: £67.581M
• Council Tax: £10.092M
• Capital Grants: £7.400M
• NDR: £9.788M
• Total Resources: £94.861M

IMAGE: Principal sources of finance diagram showing Government Grants of £67.581M, Council Tax of £10.092M, Capital Grants of £7.400M and NDR of £9.788M combining to produce Total Resources of £94.861M.

Savings

As government funding continues to reduce in real terms, the Council recognises the financial challenges that come with the ongoing reduction in resources. The graph below shows the level of savings that Orkney Islands Council has delivered over the last five years and also the contributions taken from the Strategic Reserve Fund over the same period. It is projected in the Council’s 10-year Long Term Financial Plan that the Council will face a best-case scenario cumulative funding gap of £23.6M over this period, with a worst-case scenario of £145.6M, with the most likely scenario at £65.7M. This includes a planning assumption that the financial contributions from the Strategic Reserve Fund will be maintained over this period. The ongoing budget reductions highlight that the current approach of only using financial contributions from the Strategic Reserve Fund to supplement the General Fund is unsustainable in the long-term. This is compounded further by the unknown rate and level of the recovery from COVID-19 over the medium and long-term. The Council has developed a Medium-Term Resource Strategy and Long-Term Financial Plan which aims to ensure the sustainability, feasibility and practicalities of the Council’s spending plans and investment over the longer term.

IMAGE: Chart titled “Savings Relative to Strategic Reserve Fund Contributions”. It compares savings and contributions from the Strategic Reserve Fund for 2017-18, 2018-19, 2019-20, 2020-21 and 2021-22. The green line for contributions rises from approximately £4.0M in 2017-18 to approximately £7.5M in 2021-22. Blue bars show savings of approximately £0.8M, £1.7M, £0.3M, £1.0M and £0.6M respectively.

Reserves

Use of the Council’s Reserves is an important component in assessing the Council’s ability to deliver effective services, as they support financial stability and provide flexibility to assist in the delivery of change and transformation. Within the Council’s useable reserves, there are both uncommitted and earmarked reserves, with uncommitted reserves held to ensure the Council can manage any unexpected financial demands without disrupting delivery of Council services. The existing policy is to make a substantial financial contribution from the Strategic Reserve Fund each year to maintain the level of Council services currently provided within the county, while keeping the Council Tax on or below the national average for all Scottish local authorities.

The Movement in Reserves statement shows an overall net increase of £2.734M in usable reserves.

After taking into account those funds earmarked for specific projects and purposes, a balance of £10.044M remains available for General Fund purposes, equivalent to 11% of budgeted expenditure.

The higher than target level of unearmarked reserves in the current financial year is indicative of the risks and uncertainty that the Council continues to face as it supports the provision of essential services and plans for the recovery from COVID-19.

A review of the Council’s Reserves Strategy during the year set a target for the unearmarked General Fund balances at 3% of budgeted expenditure. It also recognised a need to allocate £4.002M of General Fund balances towards specific purposes, including an allocation of resources to priority projects such as the Islands Deal and setting the General Fund revenue budget for financial year 2022-23. This has reduced the available General Fund balance to £6.042M, equivalent to 6.5% of budgeted expenditure.

As inflationary pressures built up towards the end of financial year 2021-22 and are forecast to rise further throughout financial year 2022-23, it was felt prudent to put on hold the practice of accelerating debt repayments, carrying forward the underspend of £3.359M on General Fund Services to provide the additional flexibility needed to manage these recurring pressures going forward. This also in part recognised the effect that recurring slippage on the capital programme has had on the Councils’ capital financing requirement.

Full details of the Council’s Movement in Reserves are shown in Note 22 Reserves.

IMAGE: Reserves chart comparing usable reserves at 31 March 2021 and 31 March 2022. The figures are: earmarked balances £22.747M and £24.216M; uncommitted balances £6.684M and £10.044M; Harbour Authority £239.550M and £239.090M; and Other £13.931M and £12.296M.

Harbour Authority Account

The Harbour Authority Account is made up of 3 separate ring-fenced operations under Miscellaneous Pier and Harbours, Scapa Flow Oil Port and the Strategic Reserve Fund. Overall, the Harbour Authority generated a loss of £1.323M from income on its harbour activities due to the ongoing COVID-19 restrictions limiting the number of cruise liners that visited Orkney in summer 2021. The Scapa Flow Oil Port achieved a break-even position, with the surplus on operations transferred to the Strategic Reserve Fund. Investment activities through the Strategic Reserve Fund generated a gain of £5.966M for the year and after netting off grants and other investment expenditure there was an overall loss on the Harbour Authority Account was £0.460M.

Investment activities include externally managed fund investments plus a range of local investments in the form of property, direct investment and loans to businesses.

Financial assets include the following externally managed investments, held as part of the Strategic Reserve Fund on the Harbour Authority Account:

• Global Equity Fund: £106.9M, 41%
• Multi-Asset: £43.8M, 16%
• Alternatives: £39.1M, 14%
• Private Loan: £8.8M, 3%
• Property: £27.9M, 10%
• Bonds: £44.1M, 16%

The Council aims to achieve the optimum return on its investments commensurate with proper levels of security and liquidity. The risk appetite of this Council is low in order to give priority to security of its investments. This is in keeping with the nature of the Council’s Strategic Reserve Fund, which is to provide for the benefit of Orkney and its inhabitants, whilst having regard to the Fund’s long-term commitments in terms of the decline and decommissioning of the Flotta Oil Terminal in the future.

The prime objective for the managed fund investments is to maintain or increase their value in real terms over time, after allowing for disbursements or spending commitments on the Strategic Reserve Fund. To achieve this, external fund managers are incentivised to outperform the benchmarks for their respective mandates, in order to meet the targets set by the Council.

The performance of the Strategic Reserve Fund externally managed fund investments is measured against a range of indices reflecting the weighting or concentration of individual asset classes within the approved investment strategy with a target to outperform the aggregate benchmark over a rolling 3-year period. The following table indicates how managed fund investments have collectively performed relative to benchmark as at 31 March 2022:

IMAGE: Managed funds performance chart comparing the Fund, Benchmark and Variance over the last 3 months, last 12 months and last 3 years. The figures are: last 3 months, Fund -3.5%, Benchmark -0.5%, Variance -3%; last 12 months, Fund 2.4%, Benchmark 9.1%, Variance -6.1%; and last 3 years, Fund 5.5%, Benchmark 7.3%, Variance -1.7%.

The Strategic Reserve Fund managed fund investments increased to a total of £270.898M, representing a gain of 2.4% on the year, with further analysis provided at Note 15.

After allowing for amounts required by statute and non-statutory proper accounting practice, including the use of reserves during the year, which included net contributions of £7.470M to support General Fund services, the net effect has been a reduction of £0.460M on the Harbour Authority Account Reserves for the year.

Housing Revenue Account (HRA)

The HRA returned a loss on its operations of £3.041M which can largely be attributed to depreciation of fixed assets (surplus £3.632M for 2020-21). After allowing for accounting for fixed assets and employee pension benefits, accelerated debt repayment and transfers to/from Reserves, the HRA achieved a surplus position of £0.027M for the year resulting in a balance of £0.677M as at 31 March 2022 (£0.650M as at 31 March 2021).

Orkney College

The range of higher and further educational activities provided by the College returned a deficit of £0.784M for the year (deficit of £0.511M for 2020-21). A large proportion of this accounting deficit can be attributed directly to the requirement to account for fixed assets and employee pension benefits. On a funding basis, the net effect of the Orkney College activities resulted in a surplus of £0.375M for the year resulting in a balance of £0.481M as at 31 March 2022 (£0.106M as at 31 March 2022).

Orkney Integration Joint Board

The Orkney Integration Joint Board was established as a body corporate by order of Scottish Ministers with effect from 6 February 2016. The main purpose of the OIJB is to plan, resource and oversee the delivery of high-quality health and social care services for and with the people of Orkney. The Council and the NHS are jointly accountable for the delivery of services by the OIJB. As the OIJB carries a material level of reserves this has now been included as a joint venture within the Group Accounts on the basis that the parties have joint equal rights to the net assets.

Capital Expenditure

Capital expenditure represents money spent by the Council for buying, upgrading or improving assets such as buildings and roads. The difference between capital and revenue expenditure is that as the Council receives the benefit from capital expenditure over a period exceeding one year, and the expenditure is financed and accounted for over the useful life of the assets. Further details, including the comparative figures are provided in Note 28.

It is recognised that in setting an ambitious capital programme, it was not deliverable due to weaknesses in the forward planning process, and this has resulted in a significant amount of capital programme slippage in previous years. Slippage is defined as capital projects which have not progressed in accordance with provisions made within the capital programme – this has been further compounded during the last 2 financial year by the reduced construction activity as a result of COVID-19 pandemic, including further shortages and delays with delivery of materials during 2021-22. Although there can be positive consequences of slippage this is recognised as a weakness on the basis that these delays are likely to result in higher costs for the council to deliver the approved capital programme.

IMAGE: Capital expenditure infographic stating actual capital expenditure incurred in 2021/22 of £13.294M and underspend of £4.582M. The largest capital spending projects are education £2.873M, roads, transport and infrastructure £2.583M, housing £2.067M, social care £0.172M, plant and vehicles £1.070M, IT £0.446M, museums £1.573M and other £2.510M. Funding comprises £5.087M General Capital Grant, £0.766M Specific Grants, £1.547M Other Capital Grants, £2.976M Borrowing, £1.224M Funded from Revenue Contributions and £1.693M Capital Receipts.

Performance against Prudential Framework Indicators

The Prudential Code for Capital Finance in Local Authorities allows greater local flexibility for investment decisions that are informed and supported by a suite of performance indicators. The indicators for 2021-22 were approved by Council on 16 February 2021. The Council’s overall performance against these indicators provides a firm basis for the monitoring and control of capital investment and borrowing and for determining that it is prudent, affordable, and financially sustainable.

The key performance indicators are:

Treasury Management

The borrowing strategy is prepared in accordance with the Code of Practice on Treasury Management in Local Authorities and with the Council utilising a borrowing facility from the Public Works Loan Board (PWLB).

Following on from the PWLB Consultation in July 2020, HM Treasury has published revised lending terms which restricts the use of PWLB funds, by disallowing councils use of the funds as a means to purchase investment assets primarily for yield. These new restrictions also extend further to ensure that no lending to councils will be approved if there is the intent to buy assets for yield in the capital plans. As a result of these changes to lending terms, the Council may face additional challenges in securing borrowing for future capital projects.

The Council’s Treasury Management Strategy is approved by the Policy and Resources Committee and ensures that decisions are scrutinised sufficiently to mitigate potential risk. This can be found at the following link: Treasury Management Strategy

Balance Sheet

The Balance Sheet represents a snapshot of Orkney Islands Council’s overall financial position as at 31 March 2022. It brings together the year-end balances of all the Council's accounts and presents money owed to and by the Council, assets owned and the reserves at the level of Reserves Council's disposal.

In financial terms, the Council remains in good health, however its net worth has increased from £657.841M to £703.594M for the financial year to 31 March 2022, being an increase of £45.753M or minus 6.95%.

Explanation of the main changes to the Council’s Balance Sheet

• Long term assets – The reduction reflects the depreciation charged in the current year which was not impacted by any rolling programme of revaluations, with only Investment properties revalued during this financial year.
• Current assets – The increase is mainly due to a gain in the value of externally managed investments of the Strategic Reserve Fund, which has offset a large reduction in cash balances at the balance sheet date.
• Current liabilities – The increase is mainly due to £5M due to be repaid to the PWLB within 12 months moving from a long-term liability to a current liability.
• Usable Reserves – The increase on usable reserves can be attributed to the increase on both earmarked and unearmarked reserves.
• Unusable Reserves – The increase on unusable reserves can be attributed to the impairment review that was carried out on non-current assets, with a large increase in values attributed to the effect of increased material prices on the assets held on a depreciated replacement cost basis.

IMAGE: Assets and liabilities infographic showing total assets of £768.750M and liabilities of £65.156M. Assets comprise Council Dwellings £70.125M, Vehicles, Plant and Equipment £22.975M, Infrastructure £80.890M, Land and Buildings £236.626M, Cash and Cash Equivalent £22.700M, Investment Property £20.649M, Other Assets £43.887M and Short-Term Investments £270.898M. Liabilities comprise Borrowing £35.465M, Short Term Creditors £18.283M, Provisions £32.168M and Net Pension Fund Liability/(Asset) (£20.760).

Key Financial Ratios

The Chartered Institute of Public Finance and Accountancy (CIPFA) Directors of Finance Section recommends that certain “financial ratios” are included in the Management Commentary to assist the reader to assess the performance of the Council over the financial year and the affordability of its ongoing commitments. The following table provides details of those indicators with an explanation of each, grouped into CIPFA categories for the various areas of financial activity.

Group Accounts

In accordance with the Code of Practice on Local Authority Accounting in the United Kingdom the Council has prepared Group Accounts to reflect its interests in subsidiaries, associates and joint ventures. The Council has identified 2 “subsidiary” companies where the Council has a “controlling interest”, as follows: Orkney Ferries Limited and the Pickaquoy Centre Trust.

The Council has also included the results of Hammars Hill Energy Limited as an “associate”, as the Council holds 28% of voting rights which is considered a “significant influence”.

The Orkney Integration Joint Board and the Orkney Research and Innovation Campus are included as “joint ventures”. The effect of recognising the Council’s interests in subsidiaries and associates on a group basis is a decrease in net worth of £1.779M to £701.815M.

Council Plan Targets, Outcomes and Planned Actions

The table below summarises some of the 81 action points contained within the Council’s Delivery Plan that have been progressed during this financial year. The first section shows the action points that have been progressed to completion during 2021-22, followed by a section on some of those that are experiencing underperformance or are at risk of not meeting their target. The planned actions to mitigate this risk are also included. Whilst the focus during 2021-22 was still to continue essential services, planned action in the coming financial year will be to continue progressing the outstanding actions in the current Council plan and seek to deliver the desired outcomes for the Community.

Actions progressed during the year

“Commissioned Provision” opportunities for education and care

A service to meet the needs of those currently on the edge of care by the establishment of a partnership framework identifying partnerships, approved providers and details of services provided, along with a commissioning protocol for the framework.

Establish Crown Estates Marine Management Pilot Status

The pilot scheme is now established, and recruitment is complete, allowing this function and income to be transferred to a dedicated professional Marine Planning Service.

Public Bus Services

There are now new contracts in place and new buses have arrived. This has allowed for more integrated and better-connected communities, with improved access to services and business/tourism opportunities through better transport integration.

Supported Accommodation Services

The new Learning Disability Core and Cluster was operational from December 2021, with all tenants moved in by the end of January 2022, resulting in an improved service delivery model that creates additional capacity and is more cost effective.

Waste Management

The Stage 2 Capital Project Appraisal in respect of the proposed Integrated Waste Facility, identifying additional options for waste/recycling in Orkney has been approved, subject to the availability of Scottish Government funding.

Recycling and Waste Reduction

Education and awareness raising around single use plastics is now standard within the Council and reflects the proposed Scottish Government legislation banning the use of those items. The climate change officer has also taken on consideration of these issues as part of their role.

Actions experiencing underperformance

Digital Connectivity

Details of the Scottish Government’s Reaching 100 broadband scheme have been released. The project is running late and will not deliver superfast broadband to all premises in Orkney.

The Council continues to lobby Government, is developing an Orkney Digital Strategy and will consider additional measures to support the roll out of gigabit capable broadband in all premises in Orkney. The Council is now working with a consultant to establish all options with a view to moving this forward. It is likely this action will require to be included in the next plan but will only include what is in Council control.

Inter Isles Strategic Transport Appraisal Guidance strategic business cases

The outline business case is progressing with a draft report presented to the Senior Management Team in October 2021 who have raised some concern. A seminar with Elected Members took place in January 2022, with a report subsequently coming forward to Development and Infrastructure committee in February 2022.

Development and Infrastructure Committee in February 2022 approved the appointment of a project officer. During 2022/23 recruitment will take place and work will continue on the delivery of a final business case for improvements to the transport links in islands.

Day Care Services

The review and redesign of the approach to day care services for adults has been delayed due to staffing capacity issues within Orkney Health and Care and as a result of delays in progress on the capital project to replace St Rognvalds House.

Service redesign will continue in due course when capacity allows and in line with the replacement for St Rognvald House.

Policy and Provision for School Staffing, Curriculum and Financial Management

The review of the policy and provision for staffing, curriculum and financial management to ensure resources are more effectively targeted at “raising the bar and closing the gap” have been delayed to due staff shortage.

Staffing policy is to be linked to the new Devolved School Management policy and guidance, with a new anticipated date for completion in August 2022.

Progress on the 81 Council Plan actions can be summarised below:

IMAGE: Bar chart summarising progress on 81 Council Plan actions. Blue, closed and/or complete: 39. Red, experiencing significant underperformance, with medium to high risk of failure to meet target: 10. Amber, experiencing minor underperformance, with low risk of failure to meet target: 4. Green, likely to meet or exceed target: 28.

Local and National Statutory Performance Indicators 2020-21

The Council is an active participant in the Local Government Benchmarking Framework (LGBF) despite being identified as a significant outlier, along with our counterparts in the other island authorities, in a number of indicators including cost per pupil; self-directed support; residential care and democratic core costs.

The Council has mapped the LGBF indicators against the OIC target outcomes and priorities in the Council Plan. The most recent LGBF performance data is for the year ending 31 March 2021 as the councils do not receive this information until the following year.

The most recent LGBF data for the Council is available at the following link: Local Government Benchmarking Framework

Looking ahead

Factors affecting future development and plans

At the forefront of factors affecting the future developments and plans of the Council is the ongoing recovery from the COVID-19 pandemic. The areas of the local economy that continue to be affected are the building, manufacturing, and servicing sectors with issues surrounding material delays, shortages of supplies and shortages of staff resources affecting all those sectors during 2021-22. The income from the cruise industry continued to be reduced significantly during the summer of 2021, however this situation is forecast to improve considerably during 2022-23.

The Council also faces difficulties arising from an ageing population resulting in increased demand on services, and the challenges for some in accessing essential services in our remote and rural communities. These pressures are met alongside increasingly stringent financial circumstances facing the Council as a result of real term cuts in core Government grant allocations and heightened regulatory requirements.

Internal factors having the most significant influence include the ongoing workforce planning challenges surrounding recruitment and retention of employees, to ensure there are adequate resources of skilled staff to meet the demands of services. The Corporate Workforce Plan for 2019-2022, approved in April 2019, is a mechanism designed to meet these challenges as is the restructure which was agreed in 2021-22 which will lead to the creation of over 70 new posts at OIC to ensure delivery of services at the level expected by the community.

The Independent Review into Adult Social Care (IRASC) in Scotland published its report on 3 February 2021, recommended the establishment of a National Care Service (NCS), with Scottish Ministers being accountable for the delivery of health and social care services. The Scottish Government then undertook a public consultation on the proposals from 9 August 2021 until 2 November 2021, with feedback from the consultation process used to develop new legislation. The National Care Service (Scotland) Bill was introduced to Parliament on 20 June 2022.

Introduction of the NCS has the potential to be the biggest public sector reform in Scotland for decades, affecting the planning, commissioning, procurement and delivery of social care support and services. Integration Joint Boards and public bodies are being asked to review their Strategic Commissioning plans, portfolio of social care contracts and pending procurement process and take action now to support a transition to an NCS. Considerations include how to integrate with the National Health Service (NHS); implications for the NHS; impact of proposals on equality groups and others, including businesses and island communities the local community. The Scottish Government intends to establish a National Care Service by the end of the Parliamentary term.

The Orkney Harbours Masterplan Phase 1 was approved in April 2020 with work underway to develop plans for a proposed deep-water quay in Scapa and the extension of Hatston Pier. These projects represent the first steps in a review of the Harbour Authority assets to create a base for innovation and the move away from fossil fuels, while continuing to generate revenue and job opportunities for the community. The Scapa Deep Water Quay proposal has been included in the Islands Deal list of projects that has received a funding commitment from the Scottish and UK governments.

Principal risks and uncertainties facing the Council

The oversight of risk and financial monitoring is the responsibility of the Chief Executive, the Corporate Directors and the Heads of Service, as Chief Officers. The Council has a risk management policy and strategy, which is reviewed biennially, and is designed to support the identification, evaluation and mitigation of risks which may impact on the Councils ability to meet its objectives. The Corporate Risk Register is reviewed and updated every six months, following evaluation by the Corporate Leadership Team of the principal risks facing the Council and consideration of the means by which those risks can be controlled. It is also reported to Council every year and can be found on the Corporate Risk Register.

The following risks have been identified as the most significant and uncertain to the Council:

Council services – inability to maintain services and meet changing demands

This is due to many combined factors including reduced funding, increased cost of essential service delivery as a result of COVID-19 which may persist for an indeterminate period. Income streams that seemed secure have completely stopped and may take a long time to recover and a lack of capacity in both Council staffing to deliver the capital programme as well as a lack of capacity in the local contracting market to carry out the projects. The mitigating actions for this risk include:

• ownership of the Budget Setting Process by the Extended Corporate Leadership Team with openness and transparency around the identification of potential areas for re-provisioning of services.
• an agreed programme of budget savings and efficiencies; delivery of the budget savings will be monitored within Services and reported to Policy and Resources Committee.
• acknowledgement of reality with the focus on continuation of the delivery of minimum Statutory Provision versus Statutory with Discretion, Non-Statutory but Essential or Discretionary Expenditure whilst having regard to the Council Priorities.
• improved project planning with much longer lead in times and additional capacity within the Neighbourhood Services and Infrastructure to manage the capital programme.

Failure to secure agreement with Scottish Government on appropriate funding arrangements to deliver the Scottish Ferries Plan in relation to ferry and terminal replacement for Orkney

The Ferry and Terminal replacement programme is currently unfunded with ageing infrastructure. The risk is that the Ferries reach the end of service life with no solution in place, and with annual revenue costs that are unaffordable. This is likely to result in a reduction in lifeline provisions for the community that will fall below the Scottish Ferries Plan standards. The mitigating actions for this risk include:

• ongoing dialogue with the Scottish Government emphasising the difficulties of a small authority providing the range of public services within reduced budgets across a wide and diverse geographical area.
• working with COSLA and Transport Scotland has seen the rationalisation of local authority ferry funding with Ferries Grant Aided Expenditure (GAE) moved within the finance settlement to be a specific grant in 2022-23 which means between fare income and specific grant, the revenue costs should be fully funded in 2022-23.
• continuing to seek additional specific funding sources to protect lifeline services in Orkney and its outlying communities to ensure they are not significantly disaffected.

Inability to sustain and enhance economic opportunities

Commercial sectors are vulnerable to market forces and changing national and international economic circumstances. Orkney also has an ageing population leading to a range of challenges and opportunities in managing the impact of this demographic shift in terms of service provision. There is a risk that the Council fails to support a diverse economy or ensure community benefits arise from developing industries or secure long-term benefits from the renewables sector. The mitigating actions for this risk include:

• where unavoidable pressures are identified these are managed through an allocated ‘contingency’ or capacity within the Development and Infrastructure Directorate given positive trading performance.
• to ensure the delivery of approved plans is achieved, there has been additional investment in people resources in roads, waste, fleet and soon to be the quarry and property team (as part of workload analysis and mini restructuring).
• to ensure the size and scale of the capital programme is realistic in terms of affordability, pace and thereby resources, members have agreed the 2018 to 2023 programme. This considers the Council’s internal and external people resource, contractor capacity and how it is funded (internally or externally, noting island deal possibilities).

Pandemic

The spread of a pandemic virus is likely to significantly hamper the ability of the Council to perform its statutory function and could lead to the cessation of non-urgent and elective work, inability to provide certain services, delays to capital programme and affect the ability to successfully resolve emergency incidents. The mitigating actions for this risk include:

• ongoing monitoring of workforce to give early indication of potential issues.
• Business Continuity Plans.
• redeployment to move staff from non-critical areas to more front-line roles.
• amended operational procedures to reflect physical distancing and enhanced hygiene requirements to control/minimise spread of the virus within ongoing operational activities.
• consideration of issues within Strategic, Tactical and Operational environments.
• positive staff leadership.
• continued use and development of remote and flexible working to encourage retention of key staff and inclusion of staff in the re-design of operations.

Conclusion

Overall, the Management Commentary reflects well on both the efforts and professionalism of officers and on the Council’s financial management, scrutiny and monitoring procedures.

We would wish to take this opportunity to acknowledge the team effort required to produce the accounts and to record our thanks to both the Enterprise and Sustainable Regeneration Service and colleagues in other services for their continued hard work and support. Further information on the Annual Accounts or on the Council’s general finances can be obtained at the Council Offices, School Place, Kirkwall, Orkney, KW15 1NY, or by telephone on 01856 873535.

Councillor James Stockan — Leader

John W Mundell, OBE — Interim Chief Executive

Gareth Waterson, BAcc., CA — Corporate Director of Enterprise and Sustainable Regeneration

17 November 2022

17 November 2022

17 November 2022