Crown Estate: a consultation on the long-term management of the Crown Estate in Scotland

Chapter 3: Securing the benefits for Scotland and communities

3.1 Current Arrangements for Revenue

The gross revenue from the Crown Estate assets in Scotland that will be transferred was £14m in 2015/16. The estimated annual net revenue from these assets in the year prior to transfer is estimated to total £6.6m, although no audited accounts are currently produced for Scotland and the allocation of costs borne on a UK-wide basis need to be estimated.

A joint venture that includes an interest in Fort Kinnaird shopping centre near Edinburgh provides around £4m of revenue per year to the Crown Estate Commissioners but this interest will not transfer, as the Scotland Act 2016 excludes non-wholly owned assets from the transfer.

Under the Civil List Act 1952, the Crown Estate Commissioners are required to pay net surplus revenue to the UK Treasury. The Crown Estate Act 1961 requires the Crown Estate Commissioners to distinguish between capital and income in their accounts and that revenue is to be apportioned between capital and income accounts in the following manner:

"(a) any sum received by way of premium on the grant of a lease shall be carried to income account if the lease is for a term of thirty years or less, and to capital account, if the lease is for a term exceeding thirty years; and
(b) the gross annual income received, and the expenses incurred, from or in connection with mining leases or the working of mines or minerals shall be carried or charged as to one half to capital account and as to one half to income account."

A separate agreement with the Treasury currently enables the Crown Estate Commissioners to retain 9% of the gross revenue (excluding service charges). ^[5]

Gross and net revenue across Scotland

There are currently no audited figures produced detailing Crown Estate revenue and costs by local authority area for the Scottish assets. The portfolio is not managed or reported on this basis. Any analysis of revenue by local authority will be subjective. Offshore renewable energy projects and cables & pipelines are difficult to allocate - there are no local authority boundaries out to 12 nautical miles and therefore no reliable and recognised way to assign offshore projects / assets / leases to a council area.

To use gross revenue by local authority in isolation as a measure of performance could be misleading - Crown Estate assets in an area with a high revenue may have a high operational cost and therefore contribute a lower net revenue than assets in an area that have a modest revenue but very little direct cost. The apportionment of some costs to local areas is also difficult. Further, The Crown Estate cannot provide figures on net capital investment by local authority nor meaningful detail or apportionment of liabilities.

The financial and management systems being set up for the new interim body, expected to be operational from April 2017, will be able to provide revenue figures broken down by local authority in due course.

3.2 Future Arrangements for Revenue

The Scotland Act 2016 amends the Civil List Act 1952 to require that net revenue from the Scottish assets is to be paid into the Scottish Consolidated Fund after devolution. The Scottish Consolidated Fund is the main fund for the administration of devolved functions in Scotland and includes the block grant from the UK Consolidated Fund and operational receipts of the Scottish Government. Scottish Ministers have powers to pay revenue from the Scottish Consolidated Fund.

The proposed legal framework to govern the interim management of the assets includes provisions for the interim management body to retain a proportion of the revenue and a proportion of mining income. There will be flexibility for Scottish Ministers to vary these amounts under the interim arrangements. These interim arrangements are intended to apply in Scotland from the point of transfer until a new long term framework is introduced.

Scottish Ministers propose that the long term arrangements should include similar flexibility for Ministers to vary the proportion of net revenue that may be retained by the manager of an asset.

Box 14: Current Arrangements

At present, by agreement with the Treasury, the revenue account is charged an amount equivalent to 9% of the previous year's gross revenue after taking into account depreciation of plant and equipment. This is specifically for the purpose of recouping capital expenditure out of revenue. It therefore assists in funding net capital investment and provides a reliable and predictable source of capital.

The Crown Estate Act 1961 provides that net earnings from mineral workings be split equally between the revenue account and the capital account. The Order in Council provisions modify this to enable the Scottish Ministers to direct the apportionment of the net income.

Q38: Should the future framework include flexibility for Scottish Ministers to vary the proportion of revenue retained by the manager?

YES

NO

Don't know

3.3 Fiscal Framework Agreement

The new requirement for the net revenue to be paid to the Scottish Consolidated Fund instead of the UK Treasury will not result in any net increase to the Scottish Consolidated Fund, due to the operation of the Fiscal Framework Agreement ^[6] . The Fiscal Framework Agreement between the UK Government and the Scottish Government included an agreement on the financial arrangements for the Crown Estate transfer. This includes a reduction to the Scottish Consolidated Fund equivalent to the net revenue of the Crown Estate in Scotland in the year prior to the transfer.

Box 15: The Agreement between the Scottish Government and the United Kingdom Government on the Scottish Government's Fiscal Framework (Feb 2016)

"Crown Estate

91. The Governments have agreed that the Scottish Government will take on responsibility for managing the Crown Estate assets in Scotland.

92. The managers of Crown Estate assets in Scotland will continue to receive the same benefits as the Crown Estate Commissioners in terms of exemption from corporation tax, income tax, capital gains tax and other HMT finance rules.

93. Responsibility for the Coastal Communities Fund will be devolved to the Scottish Government.

94. The Governments have agreed that a baseline deduction to the Scottish Government's block grant will be equal to the net revenues ⁴ generated by the Crown Estate assets in Scotland in the year immediately prior to the transfer. A baseline addition will be made for the funding of the Coastal Communities Fund equal to the UK government spending in the year immediately prior to devolution. Neither baseline adjustment will be subject to indexation.

95. The Scottish Government will also assume full responsibility for all associated liabilities relating to the Crown Estate assets in Scotland.

96. The JEC will agree a date for the transfer of the Scottish Crown Estate assets and devolution of the Coastal Communities Fund.

⁴ Gross revenues generated by the Scottish Crown Estate assets in Scotland, net of the costs of managing these assets."

If the net revenue from the Crown Estate reduces in future years, compared with the year prior to the transfer, it will create pressure on the Scottish Consolidated Fund due to the impact of the Fiscal Framework Agreement. If net revenue increases, it will result in less pressure on the Scottish Consolidated Fund, although the revenue from the Crown Estate is very small in comparison with the Scottish Consolidated Fund as a whole.

Unless there is a significant increase in the net revenue from the Crown Estate in Scotland, any distribution of the net revenue to communities, or for any other purpose, will have to be funded from other parts of the Scottish Consolidated Fund, due to the mechanics of the Fiscal Framework Agreement.

There is no guarantee that the net revenue of the Crown Estate in Scotland will grow in future and, indeed, there have been fluctuations in revenue in previous years, based on market conditions and the timing of particular activities.

Any changes to the basis for charges for leasing in future will have an impact on the gross revenue and changes to the management arrangements may increase the costs. Both these factors could have a negative impact on net revenue.

There is some potential for future increases in gross revenue, particularly from renewables developments and sustainable growth of aquaculture but these increases are not certain.

Box 16: Renewable Energy

Renewable energy development outside of 12 nautical miles will almost certainly be in the form of wind farm development. These developments can be expected to be large scale, and would have the potential to generate significant leasing revenue. Being more than 12 nautical miles from shore means that their environmental impact on communities is limited, and impacts on other sea users are more likely to be a concern.

It is important to recognise that these developments would be huge capital projects, investing £millions into the UK and Scottish economy via employment and supply chain opportunities during the construction phase and their operational life. Local economic benefits from this work will be very significant, including from employment.

It will be important to strike a balance between supporting deployment of these developments against the good use that revenue generated from leasing could be put to. Placing too great a financial burden on proposed development through leasing would undermine its chances of being competitive against offshore wind development elsewhere in the UK and therefore could mean it does not actually happen. Alternatively, revenue from leasing could be used to support work to tackle barriers to deployment and therefore improve the competitiveness of Scottish offshore wind developments.

3.4 Maximising Economic Opportunities in our Coastal Communities

Scottish Ministers would like coastal and island communities to benefit from the Crown Estate. Scottish Ministers have committed to giving coastal and island councils the net revenue from the marine estate out to 12 nautical miles, the most significant part of the estate, in terms of revenue. The mechanisms for distributing this revenue will need to be developed. As outlined above, this commitment will create a pressure on the Scottish Consolidated Fund, due to the mechanics of the Fiscal Framework Agreement.

3.5 Net Revenue from Other Assets

The Crown Estate receives revenue from other parts of the estate including from the offshore zone seabed rights (12-200 nautical miles) urban property, rural property interests, minerals, mines Royal, salmon fishing rights (Table 1). Some of these amounts are very small, such as those from salmon fishing rights. Some activities are concentrated in particular parts of Scotland, such as urban property in Edinburgh, while the revenue from the offshore zone is not easily attributed to local communities. In addition, the rural estates require significant maintenance expenditure and it is not clear that these produce a net revenue surplus and may in fact need financial injections from other parts of the estate in future to ensure the manager can comply with the duties under the Scotland Act 1998 relating to maintenance of the estate. For these reasons Scottish Ministers do not consider it efficient to distribute this revenue to individual councils.

Table 1: Crown Estate Gross Revenue and Property Value in Scotland (£ million)

Activity	Gross revenue (£m)		Property value (£m)
	2015/16	2014/15	2015/16	2014/15
Coastal	3.1	3.5	25.9	24.4
Dredging	0.1	0.1	0.7	0.8
Agriculture	2.3	2.3	96.3	98.7
Aquaculture	3.5	3.4	19.5	18.0
Minerals	0.3	0.4	3.4	4.1
Forestry	0.2	0.3	13.5	12.1
Residential (Rural & Coastal)	0.5	0.5	10.8	12.9
Rural & Coastal Total	10.0	10.5	170.1	171.0
Cables/pipelines	2.5	2.5	21.5	21.3
Renewables	0.7	0.7	65.2	54.4
Energy & Infrastructure Total	3.2	3.2	86.7	75.7
Urban retail	0.8	0.9	15.0	14.8
Total	14.0	14.6	271.8	261.5

3.6 How to Invest Capital Proceeds in Future

The Scotland Act 2016 does not prevent the assets being sold but requires - through insertion of section 90B(8) of the 1998 Act - that all capital receipts from the sale of assets to be reinvested into the estate. This reflects the way in which the estate has been managed to date. The management of the assets as a single entity has also enabled the capital value of one part of the estate to be used to enhance opportunities elsewhere in the estate. A decision needs to be taken on whether to continue this arrangement in the future.

The proposals for a national framework in chapter 2 include a duty for managers to obtain Ministers' approval for sale of a significant asset and planned use of the capital proceeds. A decision needs to be made on whether to set out principles to govern the reinvestment of capital in the estate or provide discretion to local managers to put forward proposals, on a case by case basis.

There could be an expectation that the proceeds from a sale of an asset in a particular area are reinvested in that area. The property included in the estate has, however, tended to be accumulated over time based on opportunities for investment at any one time and there is no particular reason why the capital must be reinvested in the same area. This may also not represent the best commercial or social opportunity and this question needs to be considered in the wider context of what duties should, in future, govern decisions on management of the estate. For example, the current duty of maintaining the value of the estate, and the return obtained from it, could be compromised by restricting re-investment to one particular area.

Q39: Should the arrangement where the capital value of one part of the estate can be used to enhance opportunities elsewhere in the estate be continued?

YES

NO

Don't know

Q40: Should the current duty of maintaining the value of the estate and the return obtained from it be continued or amended for the investment of capital proceeds?

Continue

Amend

Don't know

Q41: Should capital proceeds from a sale in one area be invested in the same area, or should there be discretion to invest anywhere in Scotland?

Invest in same area

Discretion to invest anywhere

Don't know

3.7 Maintaining the Estate and Future Investment to Secure the Future Benefits

The administration and capital costs of maintaining the estate and planning to secure future benefits are currently funded from the gross revenue budget or the capital budget (depending on the type of expenditure), including any receipts from the sale of capital assets. The Scotland Act 2016 inserts section 90B(8) of the 1998 Act which requires any capital proceeds from sales of assets in the future to be reinvested in the Crown Estate.

These maintenance and investment costs can include the need to maintain property on the estate and new capital investment. This can be either to ensure that the assets are run as a going concern or to enhance their value or to ensure that the assets do not present a safety hazard, including maintenance and investment of jetties and harbours. Other costs include staff costs and overheads, including administrative support for the delivery of the services that are currently out-sourced, such as legal advice and managing agents. The costs associated with management of liabilities also need to be paid from the gross revenue.

The intention is to continue funding these costs from gross revenue or the capital budget (depending on the type of expenditure). However, where management of assets is further devolved, we cannot guarantee that those individual assets will generate sufficient revenue to cover the costs, or that the capital base associated with those assets will be sufficient for future investment requirements. A potential solution would be a national shared service to support the administration of the estate, while providing for local control of decision-making on the use of assets. Alternative arrangements to ensure access to revenue and capital funding from other parts of the estate may be needed, if a shared service model at the national level is not followed.

Q42: Should it be possible for the capital or maintenance requirements for an individual asset to be funded from another part of the estate, even if management of the assets are devolved to the local level?

YES

NO

Don't know

3.8 Funding for Strategic Initiatives and Other Uses

The current manager has operated grant schemes and also provided funding for strategic initiatives such as the Scottish Aquaculture Research Forum and funding of strategic research to accelerate commercial-scale development of offshore wind, wave and tidal renewable energy. Scottish Ministers see value in enabling these types of expenditure to continue to be funded from the gross revenue, and consider that some, or all, of these activities may need to be managed at the national level.

Q43: Should funding of strategic activities from Crown Estate resources continue?

YES

NO

Don't know

Q44: If YES, should these strategic activities be managed at the national level?

YES

NO

Don't know

3.9 Management of Liabilities

The devolution of the management of the property, rights and interests of the Crown Estate in Scotland will be accompanied by the devolution of the liabilities. This is prescribed in the Fiscal Framework Agreement and the Scotland Act 2016. These potential liabilities include those associated with maintenance of the estate, including maintaining property and ensuring health and safety regulations are met, as described above. There are also other potential liabilities.

These other potential liabilities include responsibilities for remedial work such as restoration of land leased for mineral extraction or residual liabilities after decommissioning of marine infrastructure on parts of the seabed leased for telecommunications cables, oil and gas pipelines and offshore wind development. The policy of the current manager is to normally place obligations on the lease to complete such work either through the lease agreement or a separate process, such as the requirement under the Electricity Act for renewable energy developments to agree a decommissioning plan with the Government Department that acts as the consenting authority for the licence, under the Electricity Act.

However, this can create contingent liabilities for the manager of the Crown Estate. If, for some reason, a leasee cannot complete the remedial work on land forming part of the estate, this may fall to the manager of the Crown Estate. Also, if marine infrastructure is left on the seabed after decommissioning work is complete there can be a residual liability for the manager of the Crown Estate from claims of damage to third parties.

The intention is to continue the current policy of requiring the leasee to put in place appropriate arrangements for management of these liabilities but the residual liabilities would still rest with the manager.

There is good reason for the manager of the asset to be normally responsible for the lease agreement to cover the management of liabilities i.e. the person taking on the responsibility for management of an asset, or for controlling use of the estate, should take on the responsibility for managing the associated liabilities. However, this may result in local managers taking on significant liabilities and it is not possible in advance to be sure that the revenue from individual assets or groups of assets at the local level will be able to cover these liabilities.

There may, therefore, be merit in consideration of either those assets with significant liabilities being managed at the national level or for pooling the liabilities at the national level. Any liabilities sitting at the national level could potentially be managed in closer alignment with other liabilities of Scottish Ministers to insulate against risks.

Scottish Ministers consider there to be a strong case to cover the costs of management of liabilities from the gross revenue, irrespective of whether these responsibilities sit at the local or national level.

Q45: Should the person taking on the responsibility for management of an asset normally take on the responsibility for managing the associated liabilities?

YES

NO

Don't know

Q46: Should the liabilities for land restoration and residual liabilities after decommissioning of marine infrastructure be managed:

Locally

Nationally

Don't know

Q47: Should the costs associated with management of liabilities be included in the overheads for estate management?

YES

NO

Don't know

Q48: Do you have any other views on the devolution of the management or revenue of the Crown Estate? ( Please provide details in the space below)