The land of Scotland and the common good: report

Section 18 - Community Acquisition Costs

1 The Review Group considers that there is widespread agreement across many different interests in Scotland that increasing the amount of local community land ownership is in the public interest, as part of creating stronger and more resilient local communities.

2 Public sector support, in terms of funding and other forms of practical assistance, has played a key part in enabling the growth of local community land ownership over the last 15-20 years that was described in Section 16. While the types of statutory land rights proposed in Section 17 would improve opportunities for local communities to acquire properties, further growth of community land ownership will continue to depend, in very large part, on practical support from the public sector through various non-statutory means.

3 Funding to finance buying buildings and land is crucial to expanding local community land ownership. As community aspirations grow, there is an increasing diversification of funding sources including not only a range of public programmes, but also commercial, social and philanthropic investment, discussed below.

4 This section starts by examining the level of public funding invested in supporting local community purchases since 1997. It should be emphasised at this stage that while the Group recognises the importance of community controlled housing associations, and the scale of assets they own, particularly in urban areas, this Section does not include the public assistance, much of it from regeneration funding, which has been invested in this sector. This Section does consider the public funding currently available for acquisitions, and the types of arrangements that exist, to facilitate local communities being able to acquire public land. The wider public sector support services needed to encourage the expansion of local community land ownership, are considered in Section 19.

18.1 Public Sector Investment to Date

5 A wide range of sources have been used by local communities over the last 15-20 years to raise the money necessary to buy property. There is no estimate of the total amount raised, but by far the largest contribution has come from public sector grants. This includes grants from the National Lottery which, although it is not part of Government and is funded by people buying lottery tickets, is conventionally viewed as part of public funding.

6 There appears to be no recognised overall total for the amount of public funds invested in helping fund local community acquisitions. However, an estimate can be made for the period 1997/8-2012/13. During that period, the great majority of the public funding for acquisitions came from four sources and together they invested around £27.5m in local community purchases over those 16 years. This consisted of approximately £7.5m from Highlands and Islands Enterprise ( HIE), £12m from the first Scottish Land Fund ( SLF) (2001-06), £6.5m from the Lottery's first Growing Community Assets ( GCA) Scheme and £1.5m from the second SLF (2010 onwards). ^[1]

7 Over and above these capital grants, these main funders have also given grants for revenue funding to help some new community land owners become established, for example, by supporting a development officer for a limited period post-acquisition. These grants were not recorded separately from the acquisition payments until 2006, but there has been a further £1.5m since. ^[2] There has also been an estimated £5m of funding over the 15 years on technical assistance for local communities on matters such as valuations, feasibility plans and legal costs, while it estimated that a further £1m has been provided by grants from other public bodies, including the EU, Scottish Government departments and agencies and local authorities.

8 On the basis of the figures in the two previous paragraphs, there has been around £35m of public funding spent directly on supporting community land ownership acquisitions. There have been no other types of post-acquisition public funding specifically for local community land owners. They may apply like other land owners for public grants, such as EU and Scottish Government funding to deliver particular rural land use outcomes. Community owners which are charities can also apply for a wider range of funds for support with specific projects.

9 The £35m invested in supporting local community land ownership in 1997-2013, is an average of just over £2m a year. During this period, a number of independent evaluations have concluded that the main grant programmes involved in providing this support had been good value for money in terms of the level of achievement in creating stronger and more resilient local communities. ^[3]

10 Over the last 15 years, the Big Lottery has funded just over 50% of the £35m of grant support for community acquisitions. However, the average amount of all support of just over £2m a year can be seen in context compared to the Big Lottery's annual budget, which is £133m in 2012-13. ^[4] Another comparison for context is the £533m a year (or an average of around £1.5m a day) of agricultural subsidies paid to Scottish farmers during 2007-13 through the Common Agricultural Policy. ^[5]

18.2 Funding Acquisition Costs

Main Sources

11 The main current sources of public funding to support local community purchases continue to be the second programme of the SLF, with a budget of £9m for 2012-16, and the GCA Scheme, with a budget of £42.25m for 2010-14, and, in the Highlands and Islands only, HIE.

12 The SLF is, however, only available to community acquisitions in rural areas. While the GCA Scheme covers both urban and rural issues, the programme is primarily focused on developing and managing land and buildings rather than acquiring them. The first GCA Scheme spent 2-3% of its grant budget of around £50m on supporting acquisitions and the Review Group considers the evidence available indicates that the percentage of the current GCA budget on acquisitions is very unlikely to be higher than this. ^[6] The Big Lottery has also made clear that, with the GCA programme, its policy is "to invest less of our funding on the purchase of publicly owned assets and more on their future development once they are under community ownership". ^[7]

13 In the last two years attempts have been made to rationalise funding for community acquisitions and management. Any community seeking such funding, channels its initial enquiry to BIG who, as well as managing its own GCA scheme, delivers the SLF in partnership with HIE. BIG staff will advise community organisations on the most appropriate route for their applications. At present, the SLF is restricted to rural areas and focuses on land and property acquisition and some time-limited revenue funding. GCA is primarily for investment in project development, in both urban and rural communities, though it does consider assistance with acquisition if it is integral to a well-developed business plan. In terms of acquisition of public sector properties, the Lottery's particular preference, only to support if at a discounted price, can be an obstacle in some urban areas, when local authority properties including community facilities and others are possibly the most common types of property local communities in urban areas want to acquire. ^[8] HIE can assist with acquisition, revenue and development funding where required, but only in its own area.

14 A major implication of this pattern is the potential need to expand the SLF's remit to include urban areas. While this raises issues over the size of its budget, the case for this change would seem to be reinforced by the Scottish Government's apparent intention to expand the scope of the community right of pre-emption in Part 2 of the Land Reform Act to cover urban areas. ^[9]

15 If the growth of local community land ownership in urban and rural Scotland is to continue, and community rights are extended both in type and in geographical coverage, the Review Group considers that there should be a clear, integrated framework of funding to support this process. This requires the following:

• Funding must be flexible, as opportunities for a local community to purchase an important building or area of land can arise at short notice with a tight timeline
• The requirements placed on applicants must remain proportionate to the scale of the proposed purchase, with most communities usually seeking to acquire individual buildings or small plots of land
• While there must be appropriate scrutiny of applications as they are seeking public funds, it is also important to allow for an appropriate amount of risk in supporting purchases

16 The Group acknowledges that community groups do not rely entirely on public funding, especially from a single source, for achieving their asset acquisition aspirations, and subsequent project development investments. All existing public funding programmes require some community contributions, albeit at modest levels in many cases. But as communities' ambitions grow, along with their capacity to manage larger and more complex initiatives, more sophisticated funding packages are being designed. These can involve philanthropic contributions from national as well as local sources (and indeed 'crowdsourcing') but also, increasingly, commercial borrowing from mainstream banks and other social investment. ^{[10] [11]} In addition, the concept of community shares, rather than simple donations, is growing in importance, as public funding continues to be constrained. A clear example of such funding is where community land owners are investing in significant renewable energy projects. The Group concludes that this trend will continue and that legislation and public funding programmes have to be flexible enough to allow legal structures which can use such financing models.

17 The Group understands that there is currently a healthy pipeline of enquiries and applications for SLF funding, but recognises that one successful large scale application would exhaust existing budgets. However, there are two other important funding issues, discussed below, that are currently having a major impact in limiting the number of community projects able to proceed. These are the interpretation of State Aid Rules and the Scottish Public Finance Manual. Demand for capital funding is likely to increase if these obstacles are removed. In addition, a range of factors are likely to stimulate more interest amongst communities in owning buildings and land, for example, measures through the planned Community Empowerment (Scotland) Bill and others associated with the Scottish Government's policy ambition of doubling the area of community owned land to 1 million acres (405,000 ha) by 2020. The amount of public funding available to support local community acquisitions will need to be monitored and potentially supplemented, if policies to increase local community land ownership in the public interest are to be successful.

18 The Review Group concludes that while funding packages for community land acquisitions and development are becoming more diversified, public funding remains critical. The Group recommends that the Scottish Government should ensure that there is an integrated legislative and financial support structure to help local communities in urban and rural Scotland buy and develop land and buildings. The Group further recommends that an adequate level of funding should be available to meet an expected increase in demand for local community land ownership.

State Aid

19 The European Commission ( EC) use the term State Aid to refer to forms of public assistance given to organisations on a discretionary basis which has the potential to distort competition and affect trade between Member States of the European Union. Under this system, the EC sets State Aid Rules covering what aid can be given and under what circumstances.

20 The way that State Aid Rules have become interpreted and applied in Scotland is now proving a major obstacle to expanding local community land ownership, because the Rules are limiting the amount of public funding that can be given to support local community acquisitions.

21 There are five tests to determine whether public assistance would count as State Aid and therefore not be allowed under the EC rules. The first is whether the assistance comes from the State's resources. This covers all public bodies including, for example, local Government and lottery funding as that is under State direction. The second test is whether the assistance is selective, as state-wide fiscal measures and most forms of taxation are not considered State Aid.

22 The other three tests are whether the public assistance would confer an advantage on the recipient organisation or 'undertaking'; whether the assistance would distort or have the potential to distort competition and whether the activity involved is tradable between Member States. If the answer to all five tests is 'yes' the public assistance would therefore count as State Aid. However, there are still two ways assistance can be given. These are, firstly, where there is an agreed EC scheme for a block exemption from the restrictions or secondly, where the amount of assistance to an undertaking does not exceed a set limit, including all forms of assistance, over a three year period. The level of this 'de minimis' funding is 200,000 Euros. ^[12]

23 As submissions to the Review Group's inquiry and much other evidence demonstrates, the way these tests are currently being applied by the Scottish Government and its agencies means that local community bodies are finding it increasingly difficult to obtain public funding to support land acquisitions. ^[13] The conundrum for local communities is that they need to develop plans for economic activities on a commercial basis to be able to manage an acquisition viably, and are generally required to do so as part of applying for public grant support with the acquisition, yet these same activities can prevent them from receiving a grant because of the State Aid rules.

24 The Review Group considers that there is a pressing need for the Scottish Government to address this situation. The current application of State Aid Rules is now a major obstacle to an expansion of local community land ownership, beyond the very restricted scope of 'de minimis' aid. The ways in which this anomaly is frustrating the Government's policies, are illustrated by the difficulty now for local communities trying to acquire areas of woodland through the Government's own National Forest Land Scheme. ^[14]

25 The Scottish Government has acknowledged the need to address this situation and has been considering ways of doing this. However, at the time of drafting this Report, there has yet to be any progress from the point of view of local communities. The Review Group considers the first key task is to establish the extent to which the Scottish Government and its agencies' interpretation and application of State Aid rules in this context is being unduly restrictive, so that the full scope to support local communities buy land and buildings on their own behalf is being utilised.

26 The Review Group recognises that within the Government there are two main concerns about the risk of a challenge by the EC over any breach of State Aid rules. Firstly, with a successful challenge, the recipient might need to refund the support received; and secondly, that the whole funding programme might come under scrutiny. However, communities are currently concluding that officials in public bodies are taking an over-cautious and risk-averse approach to interpreting the rules. The Group considers that the Government needs to provide new guidance to public bodies and their officials dealing with State Aid appraisals, to ensure a full understanding of the scope under the regulations for assistance to be recorded as non-State Aid and to have a risk-aware view of the likelihood of a challenge. The Group agrees with the Big Lottery's conclusion that State Aid regulations " were not put in place to stifle the small scale community 'enterprises' that many community asset ownership projects so badly need to help them become empowered and to renew themselves and their local areas". ^[15]

27 Appropriate Government guidance could potentially immediately ease the current situation. However, the Review Group suggests that the Government should enter into discussion with the EC to create flexibility for assisting non-profit distributing appropriate local community bodies which have clear social and environment objectives as well as economic ones. This should encourage these community controlled 'undertakings', as they are contributing to local community well-being and the wider public good. Such flexibility is part of the normal support infrastructure for the majority of business sectors and without this in the community context, local community land ownership will be heavily constrained from developing to any significant scale. ^[16]

28 The Review Group considers that current interpretation of State Aid regulations in Scotland is inhibiting the further growth and development of community land ownership. The Group recommends that the Scottish Government should publish new Guidance on State Aid to ensure public bodies take a more solution-focused and less risk-averse approach to their interpretation of the Rules. The Group further recommends that the Government enter into a dialogue with the European Commission to improve the scope for public assistance for non-profit distributing appropriate local community bodies.

18.3 Public Asset Transfer

29 The great majority of the expansion of local community land ownership over the last 15-20 years has resulted from communities acquiring properties from private land owners. In HIE's database of 232 community acquisitions, around 20% involved public sector property with these divided nearly equally between land (11%) and buildings (9%). ^[17]

30 With the current overall total area of community owned land of around 180,000 ha (450,000 acres), approximately 11,247 ha (27,780 acres) or 6% has come from public bodies. Nearly 60% of this results from the West Harris Trust's purchase of the Scottish Government's West Harris crofting estates (6,580 ha), under the terms of the Transfer of Crofting Estates Act 1997. Most of the rest of the area of community owned land has come from communities purchasing land from Scottish Ministers through Forestry Commission Scotland's non-statutory National Forest Land Scheme ( NFLS).

31 The public sector can also support the expansion of local community land ownership, in the public interest, through other non-statutory arrangements. These can both create opportunities for communities to acquire properties that are important to their development and to do so at a negotiated price on the basis of an independent valuation, rather than through open market competitive bidding. In some cases, local communities may also be able to acquire these properties for below what might be considered their open market value or indeed, where the public interest outcomes are substantial, at no cost.

Scottish Government Land

32 The Review Group's view is that when the Scottish Government and associated public bodies plan to dispose of property, consideration should be given to how the disposal could best be done to optimise its contribution to the delivery of public policy. The interests and wellbeing of the local community should be an important factor in that.

33 The Group considers that the Scottish Government should also ensure that there is a clear framework in place to ensure that public bodies notify local communities, over what might be described as significant disposals, in terms of their possible relevance to the community. The Group recognises that the pattern of local community representation remains variable, in terms of a functioning Community Council or other local 'appropriate community body', as defined in the 2003 Land Reform Act and discussed in Section 15 of this report. However, there should be consistent arrangements in place across government and associated public bodies, including the processes to be followed if a local community expresses an interest in acquiring the property.

34 The Government's most developed property disposal scheme is the National Forest Land Scheme ( NFLS). This provides a mechanism by which local communities, non-governmental bodies and social housing bodies can apply to buy or lease land managed by Forestry Commission Scotland ( FCS), even where the land has not been declared surplus or for sale. The Scheme was introduced in 2005 and by the time of the most recent FCS Progress Report in 2012, there had been 12 community purchases involving 1,735 ha, as shown in Fig. 18. The overall total of 22 land sales under the Scheme also included land for 81 affordable houses.

35 The Review Group regards the NFLS as a good mechanism for local communities that want to acquire FCS managed land. The Group considers that FCS should continue to monitor and refine the NFLS where appropriate, for example, to ensure that the application process has suitable flexibility to be proportionate to different scales of community acquisitions. At present, the issue over State Aid rules described in Section 18.2 above is the main obstacle to further sales to local communities through the NFLS.

36 State Aid rules apply whether the public assistance is by direct financial assistance towards a purchase or, in the case of public land, by discounting the price. However, resolving the position satisfactorily over State Aid will still leave wider issues over determining the price to be paid by local communities to buy property from the Scottish Government and associated government bodies. The rules governing this are set out in the Scottish Government's Scottish Public Finance Manual ( SPFM) in the chapter on Disposal of Property, Plant and Equipment. ^[18]

Scottish Public Finance Manual

37 The SPFM stipulates that the disposal of property assets by the Scottish Government and associated public bodies should normally be at the open market value as defined in the Royal Institute of Chartered Surveyors Appraisal and Valuation Standards. The Group understands that there is some flexibility to allow for disposals at less than market value, but each requires Ministerial approval. ^[19] Any reduction counts as a gift and in addition to the State Aid implications of this, it can give rise to VAT charges to the recipient. The amount of any reduction also has to be accounted for in the budget of the pubic body involved, potentially reducing its future spending power.

38 At present the impression given to community bodies is that there is no flexibility over the open market value as assessed by an independent valuer, allegedly constrained by 'Treasury Rules'. The Review Group recognises the clear importance of appropriate systems to ensure that the public receives value for money if they dispose of an asset. However, the Group considers the current lack of flexibility over the price in disposals to local communities can work against the public interest, especially when the public 'asset' could actually be incurring recurrent losses. This position is also in contrast with the flexibility given to local authorities over disposals for less than market value.

39 One aspect to the current situation over local communities trying to acquire public land is simply the circularity of the funding, given the dominant role of public funds in financing local community acquisitions. A local community wanting to acquire, for example, part of the National Forest Estate from Scottish Ministers has firstly to go through the demands of the NFLS application process to obtain approval on behalf of Ministers that the disposal is in the public interest. The local community will then have to go through the requirements of the application process to the Scottish Land Fund ( SLF), as set up by Scottish Ministers with public funds, as the SLF is the only public sector funding body likely to grant aid for the purchase of public land. The community might receive a grant of up to 95% of the price of the land and essentially, the community collects this money from Scottish Ministers to give to Scottish Ministers. Thus, with this example, Ministers would have actually sold the property to the community for 5% of its open market value from the point of view of Government funds.

40 The Review Group considers that there is scope for the Government to have clearer internal integration between disposals of Government land to local communities that are judged in the public interest and Government funding to support such acquisitions. This should reduce the onus on local communities and make it a more straightforward process to acquire public land where that is judged to be in the public interest. One potential arrangement is for the Government to have its own internal 'community land fund' to which a Government body could apply for a disposal, at less than market value, to a local community that it has judged in the public interest. This could mean that any reduction from the market value did not result in that Government body's budget being affected by the amount of the reduction, as required by the SPFM.

41 There are other issues for local communities over the open market basis used for the valuation of government land which they are trying to acquire. The local community bodies involved are often registered charities and disposals of public land to them are approved as being in the public interest because of the wider public benefits they deliver, including improved local economic and community development and more resilient local communities. These wider benefits are not reflected in open market valuations and the community bodies also do not enjoy the tax concessions that are factored into land prices, as discussed in Section 25. There is thus a disparity between the value of the land in the public interest and the basis upon which the public body is valuing it. This position is also illustrated when land is leased to local communities. While a community's plan for managing the land could be approved as being in the public interest because of the public benefits it will deliver, the open market basis of the rent to be charged can mean the community would not be able to afford to manage the site for its approved public interest purposes.

42 The Review Group considers that assets should be transferred to local communities at a reduced cost or no cost where that is judged in the public interest because of the wider public benefits it will deliver. To achieve this, the Government should establish a more integrated and flexible approach which will involve it examining the SPFM and providing clear guidance on the scope to use the flexibility in it for below market value disposals. The Review Group understands that the Cabinet Secretary for Finance has instructed the Scottish Government's Director General of Finance to examine the SPFM to enable a greater transfer of assets from the public sector to the community sector, including looking at the scope for disposals at less than market value by taking more account of the wider public benefits of transfer to a local community. However, the Group is not aware of any outcome of that review by the time of writing this report.

43 The Review Group concludes that the Scottish Public Finance Manual need not prohibit the transfer of public land at less than market value. The Group recommends that the Scottish Government should have a clear policy framework for the disposal of public property to appropriate local community bodies by the Government and associated public bodies, including a more integrated and focused approach to disposals for less than open market value where that is in the public interest.

Local Authority Land

44 There is a clearer framework for local authorities to sell property to local communities at less than market value, than is the case with the Scottish Government and associated public bodies. In addition the Scottish Government funds DTAS to provide the Community Ownership Support Service to assist this process. ^[20]

45 The starting point is the same in that, under the Local Government in Scotland Act 2003, it is a legal requirement for local authorities in disposing of land to secure "the best consideration that can be reasonably obtained". However, Section 11 of the 2003 Act also amended Section 74 of the Local Government (Scotland) Act 1973, to set out that Scottish Ministers may, by regulations, provide circumstances in which local authorities may dispose of property for a consideration less than "the best consideration that can be reasonably obtained".

46 Subsequently, the Disposal of Land by Local Authorities (Scotland) Regulations gave local authorities discretionary powers to dispose of property at below market value where (a) the local authority is satisfied that a disposal for such a consideration is reasonable; and (b) the disposal is likely to contribute to the promotion or improvement of economic development or regeneration, health, social well-being or environmental well-being.

47 As a result of this new flexibility, an increasing number of local authorities have also established procedures to set out the basis on which they may transfer properties to local community bodies, including transfers below market value. The Review Group recognises that there is a need for these types of arrangements, usually known as Community Asset Transfer Schemes, to establish and follow best practice standards. ^[21] However, they are a very positive development to encourage greater local community ownership. Taking over the ownership of a local authority building is most often important for communities in urban areas, where Councils usually own local community centres and other community facilities.

48 The Review Group considers that there is significant potential community benefit in the transfer of selected local authorities' assets to communities. The Group recommends that all local authorities should have a 'Community Assets Transfer Scheme' to encourage greater local community land ownership, and that the arrangements in these Schemes should all follow the same consistently high standard of best practice.