Watchdog reports on lessons of failed project costing council £11.5m

All local authorities can learn from a failed power project that cost a Scottish council £11.5m, a watchdog has said.

Highland Council had set up Caithness Heat and Power in 2004 as an arm’s length company intended to provide heat and power to homes in Wick. The scheme had originally been established two years before as a community venture.

However, after major problems it had to be taken back into council ownership in 2008.

Reports by the Accounts Commission issued in June 2010 and February 2011 had highlighted wide-ranging deficiencies in Highland Council’s involvement in the project, with serious weaknesses identified in governance and accountability.

At the time of the second report the local authority estimated that the total cost of its involvement in the project would be £15.4m.

In a final report published last week Audit Scotland said it was “essential that any new arm’s length external organisation has robust governance and accountability arrangements from the outset with clear lines of responsibility for councillors”.

It reminded councils of its June 2011 report How councils work: an improvement series for councillors and officers – Arm’s-length external organisations (ALEOs): are you getting it right?. This document advised on how ALEOs should be set up.

Audit Scotland added that the Caithness Power and Heat case “also highlights the need to ensure sound risk management, a full assessment of the skills required, and a rigorous option appraisal for initiatives that provide council services".

However, the watchdog praised Highland Council for sorting out the legacy of the project and for reducing overall costs. These actions saw equipment and assets sold to a private company that now provides services to more than 160 homes.

The local authority had also reviewed its approach to arm’s length organisations.

Accounts Commission chair Douglas Sinclair said: "Arm’s length external organisations can be an option for delivering council services but only if the necessary safeguards are built in from the start.

"Caithness Heat and Power was an example of how not to do this. Serious deficiencies in the governance of the project have led to significant loss of public money.”

Sinclair added: "Highland Council has learned an expensive lesson but there are lessons for all councils to learn from this project."

A copy of the Audit Commission report can be viewed here.

A spokesman for Highland Council said: “The council fully recognises and deeply regrets the failings of Caithness Heat and Power during the early years of its operation.

“Since taking control of the enterprise in 2008, the council has worked tirelessly to minimise the losses and to learn lessons to ensure that the failings are not repeated in any future venture of this nature. Through these efforts the council has been able to protect the interests of local residents and see carbon emissions reduce.”