Canals could become hotbeds for flytipping and dereliction due to the way the body responsible receives money, according to bosses.

Scottish Canals has been forced to operate on one-year budgets since 2019, leaving it unable to retain profits or funding for longer-term regeneration projects.

Chief executive Catherine Topley said the Forth & Clyde Canal in Glasgow could even slide back into the dereliction from which it was rescued only 25 years ago, undermining its proven health benefits and its key role in reducing flash flooding risks.

The Kelpies equine statues and nearby Falkirk Wheel on the canal each attracted some 500,000 visitors a year pre-pandemic, generating vital extra revenue. Topley said future projects of that scale would be extremely challenging because they “take many years to deliver and that’s a very difficult thing to do when you are working on yearly budgeting”.

A new bridge over the canal being built at Stockingfield in Glasgow is a two-year project, while the Claypits nature reserve at Hamiltonhill, completed in 2021, took five years.

Topley said the Scottish Government had yet to approve Scottish Canals using money from the sale of land for housing beside the canal in Glasgow to fund the upgrading of canalside buildings.

The houses would provide significant rental income and repay the planned £1.3m investment within a few years.

READ MORE: Auditors slap health warning on Scottish quango over £51m accounting 'flaw'

She said: “We need to find a way to operate that allows us to retain our income to grow it, because one-year spending results in one-year thinking. “We have a 250-year-old canal so we need to think much longer than that.

“The canal is a community asset – it instigates business, housing and community projects, and mental and physical health, which is really important.”

Topley said the lockdowns had shown how fast the canal could revert to its previous state, when people used it to dump rubbish such as old couches and doors. She added: “There’s a real risk, without proper investment and utilisation of the canals, that it becomes this space again that isn’t a value to the community, and very quickly it becomes a health risk as opposed to a benefit.

“That would be dangerous because research has demonstrated the canals are taking quite a lot of rainwater and mitigating flash floods as we see changes in the environment.”

Earlier this year, the public spending watchdog has refused to sign off the accounts of the quango in charge of Scotland’s inland waterways because of a £51 million “flaw” in its finances.

Audit Scotland said it had taken the “very unusual step” of issuing an accuracy disclaimer because of multiple concerns about the finances of Scottish Canals.

The watchdog said the way Scottish Canals recorded and valued its assets meant they could not be sure if the 2020/21 accounts contained “material misstatements”.

The £20m-a-year quango falls under SNP transport secretary Michael Matheson. It is responsible for the maintenance, management and development of Scotland’s five canals – the Forth & Clyde, Union, Monklands, Crinan and Caledonian – plus their associated land and property assets.

Scottish Canals last year changed from being a public corporation to a quango, and so had to follow new HM Treasury rules on valuing its waterways and infrastructure.

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Although it conducted the required valuations for investment properties, land and buildings, it failed to get valuations for around £51 million of specialist assets including the Helix park and landscape at the Kelpies, dredging equipment, lock gates and canal basin widening works.

These assets had not been valued before. A subsequent valuation, aimed at estimating the cost of replacing these assets in their current condition and existing use, then raised further concerns about the accuracy of Scottish Canals’ fixed asset register.

Concerns were raised about the qualification of the valuer chosen by Scottish Canals, items being recorded as assets which were not assets, and assets being recorded without proof of ownership.

This forced auditors to “issue a disclaimer of opinion on the accuracy of Scottish Canals’ financial statements”. Auditors also questioned some “management judgments” at Scottish Canals, including recording maintenance work as capitalising expenditure, such as repairing existing towpaths where it was “difficult to identify” the creation of any new asset.

The auditor concluded some revenue expenditure had therefore been mis-recorded, and while “unable to quantify the value of affected expenditure ... concluded it was likely to be material.”

Audit Scotland said turnover in Scottish Canals’ finance team during 2020/21 increased the challenge of fully adopting the HM Treasury rules that newly applied to it.

A Transport Scotland spokesman said: “We fully recognise the benefits which canals offer and we are committed to supporting Scottish Canals to continue to deliver these.

“Like all other public bodies in Scotland, Scottish Canals is operating in a challenging environment where public funds are extremely tight.

“Since 2019, its capital grant has increased by 87 per cent, as well as an uplift each year in resource funding – plus additional funding to mitigate the impact of Covid.”