Scottish Crown Estate strategic management plan: business and regulatory impact assessment

Options for the future management of the Scottish Crown Estate assets

The objectives, priorities and policies in the final Strategic Management Plan are set out above on pages 3 to 5. These have been grouped into three different themes and various options have been identified.

Theme 1 – Delivering Benefits and Realising Opportunities. Options 1 to 3 under this theme correspond with high level objective, priority or policy 5-7 as listed above.

Option 1 (preferred option):

Pursue new opportunities to enhance the value and revenue of the estate and wider benefits outlined in the Strategic Management Plan.

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Description

Scottish Ministers would like any manager of a Scottish Crown Estate asset to consider the potential for increased investment activity for the purpose of regeneration for community or national benefit, including land on the coast around ports, harbours and other infrastructure, to realise opportunities for Scotland and local economies, and for these investments to normally be prioritised over other new commercial land or property investments. Scottish Ministers would also like any manager to consider the potential for investments that contribute to the achievement of Scotland's Climate Change Plan.

Benefits

The primary benefit of this option is to take advantage of new opportunities in a proportionate way with expected financial benefits to the capital value and revenue of the estate and wider benefits to local communities and Scotland. It also allows assets that currently do not have significant commercial values to be managed for other benefits, such as social and environmental, according to the vision for the Strategic Management Plan. The costs associated with the acquisition of new assets could also be lower compared with the alternatives to this preferred policy as a significant element of the policy relates to promoting additional investment in assets that are already owned by the Scottish Crown Estate, so there would be no acquisition costs required before additional investment could be directed at existing assets.

Costs

Like all investments there are associated risks – but there is no evidence that the risks associated with option 1 are higher than option 2 except where investment is being made in novel industries that are not currently being invested in.

Option 2:

Maintain the current structure/content of the estate and current pattern of investment i.e. the "do nothing" option.

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Description

This would involve continuation of the current Investment Strategy.

Benefits

The primary benefit of this approach would be clarity for tenants that the current pattern of investment in the assets would be maintained over the period of operation of the Strategic Management Plan and up to a review of the Plan. It also avoids potential costs that may be associated with changing the structure of the estate.

Costs

The primary cost relates to the opportunity cost of keeping the current pattern of investment constant over this period and not pursuing the new opportunities outlined in option 1 (see above). The costs are likely to:

(a) miss opportunities to further optimise diversification of the estate and the benefits that come from that (e.g. risk pooling).

(b) miss opportunities to better align the estate with the objectives set by Scottish Ministers and therefore to optimise impact.

Option 3:

Go significantly beyond option 1 by focusing investment to an even greater extent on the new opportunities that would be delivered under objectives, priorities and policies 5-7 above.

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Description

This option would involve any manager of a Scottish Crown Estate asset being asked to give an even higher priority to considering the potential for increased investment activity for the purpose of regeneration for community or national benefit, including land on the coast around ports, harbours and other infrastructure, to realise opportunities for Scotland and local economies, and for these investments to normally be prioritised over other new commercial land or property investments.

Benefits

This option could lead to an even greater financial return to the Scottish Crown Estate in terms of capital value or revenue return or the wider benefits that can be achieved compared with option 2. Some assets will not have significant commercial returns and this could create further opportunities for investment to derive higher financial or other direct benefits.

This option could also lead to greater indirect social, economic or environmental benefits to Scotland and communities than option 2. Coastal communities across Scotland would benefit from any enhanced revenue generation under the existing proposed formula to distributing net revenue for coastal community benefit, but the direct social, economic and environmental benefits from the investments are likely to be located in those areas where the opportunities exist, and the skewing of management and investment towards these opportunities would constrain investment in other parts of the estate elsewhere in Scotland (see outline of possible costs below).

Costs

The main cost is likely to be more limited funds being available for investment in other parts of the Scottish Crown Estate, with the consequent risk of some assets not being maintained to a high standard in future. There may also be reduced commercial returns to the Scottish Crown Estate if a more significant proportion of these assets is managed through the further investments to derive wider benefits rather than revenue generation or enhancement of the capital value of the asset. However, policy 1 should ensure that the wider benefits to Scotland are equivalent in scale to any financial benefit to the Scottish Crown Estate that is foregone.

Theme 1 – Pattern of Investment – Assessment Criteria

Criteria	Option 1	Option 2	Option 3
1. Maximise opportunity to increase return to estate (both commercial and public good)	High	Low	High
2. Maximise flexibility to adapt to changing context (e.g. new opportunities may require purchasing new assets or selling existing ones)	High	Low	High
3. Ensure adequate funds available for all parts of the estate	High	Low	Low

Theme 2 – How the Scottish Crown Estate assets are managed. Options 1 to 3 under this theme correspond with high level objective, priority or policy 8-10 as listed above.

Option 1:

Retain management of all assets at the national level ("do nothing").

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Benefits

Option 1 is retention of management of all assets at the national level and is the "do nothing" approach. It most closely follows the current arrangements which aim to achieve economies of scale, avoid fragmentation, ensure that revenue from one asset can be used to cover maintenance or investment costs for other assets and minimise disruption to the administration and management of the Estate. As a result it is likely to be the option with the lowest associated administrative costs. Minimising change would also reduce costs associated with setting up alternative organisational arrangements for managing the assets. However, it may not deliver some of the additional socio-economic or environmental benefits to Scotland that can be derived from local management of assets.

This option would retain the benefit of economies of scale in the current arrangements, relating to managing assets at a national level. For example, retaining a central body would avoid situations under a less centralised system where similar, duplicate roles could be required across several local managers. It would also ensure a consolidated approach to the management of liabilities. In addition, decision-making would be supported by staff who currently have the most experience in dealing with issues across the Estate.

This option is likely to be the simplest approach for marine industries such as renewables and other marine industries that rely on Scottish Crown Estate leases or services as it would enable them to continue to deal with one manager and involves a consistent approach across Scotland.

Scottish Ministers consider there will be a continuing need to provide for strategic planning and investment strategy development for the Estate on a national basis or for industry sectors in order to co-ordinate work to enhance the value of the Estate in

future. A central body would allow for continuity of investment in strategic research and initiatives including activity to enable new industries to develop, grow and mature to a stage where they become new sources of revenue for the Estate. Examples include the provision of funds to support aquaculture research projects and funding of strategic research to accelerate commercial-scale development of offshore wind, wave and tidal renewable energy. Option 1 would enable the continuation of this approach where the capital value of the land and property can readily provide collateral for investment in new opportunities elsewhere in the Estate.

We consider there to be benefit in retaining a strategic planning or investment strategy role at the national level involving discussion and co-ordination with managers of individual assets at the local level. Examples of functions best retained at a national level include offshore renewable leasing, rights over marine cables and pipelines, and other seabed rights such as gas storage rights and mineral rights contained in the Scottish Crown Estate.

Crown Estate Scotland leases land and property to approximately 2,000 individuals and businesses. Not all assets may generate sufficient revenue for maintenance, investment and development. In addition, there are potential liabilities across the Estate which will need to be managed. Therefore, provision for the transfer of funds is required in order to ensure that legal duties can be delivered to maintain all parts of the Estate. This could be achieved under all three options but retaining all assets at a national level is likely to be the most efficient approach.

There has also historically been a general presumption against selling the seabed so that this national strategic asset does not become fragmented. This presumption could be retained under both this option and the other options under this theme.

Costs

Option 1 would limit community empowerment and control and it would not follow all of the principles of The Smith Commission recommendations. There are dangers in adopting a one-size-fits-all approach which does not allow any opportunity to tailor the approach to the aspirations of communities. This could forego potential benefits of further devolution of management of an asset where there are synergies with local community responsibilities, limiting new opportunities for local control and accountability and the scope for community empowerment. Furthermore, a centralised approach could limit creativity and innovation in the way that assets are managed, thereby limiting the benefits which might accrue to Scotland or local communities.

Option 2:

Devolve management of all assets to local authorities, community organisations or Scottish harbour authorities.

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Description

This option would devolve management of all Scottish Crown Estate assets and liabilities to local authorities, Scottish harbour authorities or community organisations. The bulk of existing functions of Crown Estate Scotland would need to be replicated in each local area. A national framework could set standards and procedures and lease prices could be set at a strategic level for consistency across Scotland.

There are a range of different sub-options plausible within this option such as the potential for some administrative activity to be managed through a shared services model at the national level with decisions taken locally (the degree of which having corresponding implications on the estimated costs and benefits).

Benefits

Option 2 would provide for local control and it would be a way of delivering on the Smith Commission's recommendation relating to local authority areas such as Orkney, Shetland, and Comhairle nan Eilean Siar or other areas who may seek such responsibilities for the management of Scottish Crown Estate assets in their area. It would allow for potential synergies with local authority community planning functions and their environmental responsibilities for the foreshore, and provide greater community empowerment. Local management would also enhance local control and accountability in decision-making, and would offer the flexibility for local managers to tailor the management of assets in ways which best serve their local communities.

Costs

Not all local authorities or communities may have the desire to manage the assets in their area. The skills and expertise may not be available locally in all areas to manage assets and these may take time to be developed to ensure efficient management in the near future. It is also not clear that all the individual assets will be self-funding in future so there may be costs for local authorities or community organisations.

Large scale further devolution would also have significantly higher administrative as well as public sector costs than option 1. The current national manager has around 40 staff working on management of Scottish Crown Estate assets. It is reasonable to expect that the number of people needed to manage the assets would have to increase should existing functions of Crown Estate Scotland require replicating in each local area. Thus it is likely that economies of scale will be lost, resulting in costs such as replicating the expertise of the existing manager in each local area.

Fragmentation of the Estate and loss of economies of scale and duplication of administration costs could risk the realisation of net revenue in the future. This would impact on the net revenue available for coastal communities and Scotland as a whole.

Not all the assets may be sustainable in their own right in future which could result in financial burdens being placed on councils or communities and there is uncertainty surrounding the value of each standalone asset. There is good reason for the manager of the asset to take on associated liabilities (i.e. the person taking on the responsibility for management of an asset or for controlling use of the asset should take on the responsibility for managing the associated liabilities). However, this may result in local managers taking on significant contingent liabilities. 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 their contingent liabilities. Under this option the future viability of parts of the Estate could thus be endangered if they failed to be maintained.

There is also uncertainty surrounding how certain assets would be apportioned to local authorities or communities. For example it is unclear how best to divide up a pipeline that runs between two local authority areas or how to apportion marine areas. To take a more specific example, there is a risk that increased complexity affecting transboundary transport of carbon dioxide (CO2) by pipeline, or of CO2 storage across a number of areas of local responsibility, could discourage carbon capture and storage (CCS) developers from considering CO2 storage in the Scottish offshore area. There may be other potential institutional issues that require management such as potential conflicts of interest between leasing decisions for the Scottish Crown Estate and planning or licensing applications at a local authority level.

In the absence of a national framework, this approach to local management is more likely to lead to fragmentation, competition between different parts of Scotland and reduced net revenue for communities. Whilst there is the opportunity for competition between local authorities or communities to increase the attractiveness of the assets being managed by them to spur investment in their area, such competition between local authorities or communities that results in lower lease prices would result in less net revenue across the board for no wider economic benefit. It would also result in inconsistency across Scotland which may result in higher transaction costs for industry sectors having to deal with a substantial number of different managers, which may in turn limit external investment. A shared services model could reduce some of the administration costs compared with separate regional or local management arrangements, but it could still result in higher administration costs than the national level approach outlined in option 1.

Option 3 (preferred option):

There will be different levels of control based on the diversity of the Scottish Crown Estate with the manager of the asset to be decided on a case-by-case basis in line with policies 8, 9 and 10 and based on future opportunities for communities to outline their ambitions for local management and how that will lead to greater benefits or efficiencies.

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Description

The Scottish Crown Estate Act 2019 provides the potential for different approaches to management in different parts of Scotland. (This was the option which received the most support from respondents to the 2017 Consultation on the Long Term Management of the Crown Estate in Scotland, to consider managers on a case-by-case basis).

Functions that could potentially be further devolved to councils or communities include: foreshore rights; leasing for wave and tidal energy out to 1 nautical mile, 3 nautical miles or 12 nautical miles; and land in local authority operated ports. In contrast Scottish Ministers consider there to be a strong case for the management of the seabed, particularly the rights to the 12-200 nautical mile zone, and leasing for strategic national infrastructure such as telecommunication cables, pipelines and offshore wind farms to be undertaken at the national level. Other functions would require more consideration on a case-by-case basis.

Under this option Scottish Ministers expect prospective local managers to make a case for further devolution of management to the local level in relation to particular property, rights and interests of the Scottish Crown Estate. They should also demonstrate that they have the capability to take on the management of these assets or parts of assets to maintain service delivery to customers and deliver increased benefits.

A 'shared services' approach for assets managed at the local level could be adopted, involving either a national administration to support local decision-making or a similar administration at a wider regional level to provide support services for clusters of council areas or communities. This approach would enable local areas to take democratic decisions on the use of an asset even if the council or community has no prior experience, or limited experience, in managing similar assets.

Benefits

Option 3 will involve a case-by-case assessment and enable a geographic or functional approach to be followed. This will enable the principles of The Smith Commission to be delivered while recognising the diversity of the Scottish Crown Estate portfolio.

This option is the most appropriate and efficient to allow arrangements to be put in place for the management of each asset based on The Smith Commission principles and an understanding of the ambitions of local authorities, local tenants, local communities and others who have an interest in or depend on the use of Scottish Crown Estate assets. The option has been designed to make it possible to increase local control over decision-making with support arrangements for decision-making which reduce duplication and fragmentation, with efficiencies emerging as local management structures develop according to good governance procedures, and new expertise is gained. It provides the opportunity to seek the views of tenants of the rural estates on whether they would like to be responsible for management, before any change of the management arrangements for these national assets. It will also ensure stability and continuity for some customers that rely on Scottish Crown Estate leases or services by enabling them to continue dealing with one manager in Scotland for some activities.

This option avoids the imposition of a 'one-size-fits-all' approach across Scotland, provides scope for further devolution opportunities to be tailored to the aspirations of communities and provides space for alternative solutions if some assets or interactions with industry are challenging to run appropriately on a fragmented basis. There is the potential for local employment and enterprise opportunities to reduce costs or increase revenue, and for improved infrastructure supported by re-investment of revenue into local areas.

A national manager for some assets would also enable a lead organisation to be identified to ensure continuity of investment in strategic research and initiatives including activity to enable new industries to develop, grow and mature to a stage where they become new sources of revenue for the Scottish Crown Estate.

A phased approach under option 3 would allow Ministers to make better informed decisions on the future of the Estate based on greater understanding of the individual assets and liabilities as they are managed in Scotland. In addition, a more considered approach to devolution of assets on this basis will help reduce administration and public sector costs. A phased approach is also possible under option 2.

Costs

Devolving management of assets to local communities on a case-by-case basis where there is a strong rationale to do so and when the appropriate desire, knowledge and expertise is in place will help minimise the potential costs that are outlined in option 2. There will be the opportunity to build up local institutional capacity before appropriately apportioning management of assets and liabilities to communities that wanted them. This will help limit diseconomies of scale and duplication of effort, and ensure that the skills and expertise of staff currently employed by Crown Estate Scotland could still be employed to the fullest.

In the short run there may be transitional costs in establishing management at a local community level. Whilst a shared services model could reduce administration costs compared with regional or local management, the introduction of such a model would still result in higher administration costs than the national level approach in option 1.

Further information is contained in the Financial Memorandum which sets out the costs associated with the measures introduced by the Scottish Crown Estate Bill.

Theme 2 – Summary of key criteria and assessment of each option

The options are ranked 'low, medium or high' in terms of their ability to meet the criteria:

Criteria	Option 1	Option 2	Option 3
1. Administration costs (whether likely to be higher/lower relative to baseline)	Low or zero	High	Medium
2. Ability to share risk across portfolio of assets (opportunities to offset short-term losses on assets)	High	Low	High
3. Opportunity to take advantage of synergies across assets (this could be phrased as economies of scope)	High	Low	High
4. Opportunity for local influence	Medium	High	High
5. Opportunity to focus on individual asset/s and use local knowledge	Medium	High	High
6. Maximise opportunity to keep seabed unfragmented	High	Low	High

Theme 3 – Guidance. Options 1 to 2 under this theme correspond with high level objective, priority or policy 13 and 14 as listed above.

Option 1: (preferred option)

Scottish Ministers develop guidance or directions for a manager of a Scottish Crown Estate asset that is tailored to the Scottish Crown Estate and aligns with the Scottish Government's Purpose and the National Performance Framework.

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local

authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Description

In 2014 The Smith Commission recommended responsibility for management of the Crown Estate's economic assets in Scotland, and the revenue generated from these assets, should be transferred to the Scottish Parliament.

Following this recommendation, Scottish Ministers consulted in 2016 to establish the interim body to manage the Crown Estate in Scotland, post devolution. Scottish Ministers established Crown Estate Scotland (Interim Management) (as they were then known) to manage the Scottish Crown Estate assets from 1 April 2017. Interim arrangements were then put in place to ensure a smooth transition from the point of devolution.

Scottish Ministers consulted in 2017 on the proposals for the long term management of the Scottish Crown Estate. The consultation sought views on how the Scottish Crown Estate should be managed in future and what reforms were needed. It focused on the future purpose of the Crown Estate in Scotland and what changes were needed to the existing legislation to deliver that purpose.

An emerging theme was that the strategic framework developed for the Crown Estate in Scotland should make explicit links to the key National Outcomes and other related national policies. Many respondents emphasised the need for the framework to provide guidance.

The Scottish Crown Estate Bill was introduced in Parliament on 24 January 2018 and built on The Smith Commission recommendation on the management and revenue of the Crown Estate in Scotland. The Bill was approved by the Scottish Parliament on 21 November 2018, and the Scottish Crown Estate Act 2019 received Royal Assent on 15 January 2019. The Act includes provisions on guidance and directions.

Scottish Ministers plan to develop guidance or directions on how a manager should comply with the requirements of the Scottish Crown Estate Act 2019 relating to furthering sustainable development.

Under Section 7 of the Scottish Crown Estate Act 2019, the manager of a Scottish Crown Estate asset must maintain and seek to enhance the value of the assets and the income arising from them. The manager must also take into account wider considerations in a way that supports sustainable development and economic development, regeneration and social and environmental wellbeing specifically. Section 11 includes equivalent provisions for sales, leases and the granting of another right in or over the asset and the requirement on managers to obtain market value.

Benefits

General guidance in relation to socio-economic or environmental factors exists but has been developed for a wider purpose than the management of the Scottish Crown Estate Act 2019. It may not be practical or appropriate for a manager of a Scottish Crown Estate asset to be asked to contribute to the full range of possible benefits that are covered in other guidance. Development of complementary and more specific guidance that is tailored to the legal framework for the Scottish Crown Estate would better describe the requirements of a manager and avoid suboptimal decisions on how the estate is managed in future. It would also promote greater consistency in decision-making where there is more than one manager of Scottish Crown Estate assets.

Costs

There will be minor costs to central government associated with the time required by officials to develop the guidance but these are likely to be less than the total costs of each manager having to develop their own guidance separately, or the potential costs of sub-optimal decisions being taken because of the lack of tailored guidance.

Option 2:

Scottish Ministers do not produce specific directions or guidance for a manager of a Scottish Crown Estate asset using the powers under sections 37 and 38 of the Scottish Crown Estate Act 2019 i.e. the "do nothing" option.

Sectors and groups affected

The Scottish Crown Estate is a diverse portfolio and stakeholders include local authorities, tenant farmers, marine industries and other tenants and users of the Estate.

Description

Instead of developing guidance on these concepts that is specific to the management of the Scottish Crown Estate Act 2019, the Scottish Government could choose to expect a manager to rely on existing general guidance in relation to socio-economic or environmental factors that has been developed for a wider purpose.

Benefits

The primary benefit of this option would be to central government in terms of minimising or avoiding in the short term the costs outlined in option 1 associated with Scottish Government officials developing new guidance (but additional costs are likely to be incurred by a manager to develop their own guidance to assist with complying with the legal duties in the Scottish Crown Estate Act 2019, including section 11 of the Act).

Costs

If no specific guidance on these concepts were to be produced in relation to the Scottish Crown Estate Act, this could potentially result in inconsistencies and each manager interpreting the requirements of the Act differently. This could increase the transaction costs for businesses that deal with more than one manager.

This approach is also likely to be more costly to managers of the assets and lead to them being required, for practical reasons, to develop their own detailed guidance on such issues separately, which could potentially duplicate effort and lead to inconsistency in how decisions are taken for similar assets.

Theme 3 – Summary of key criteria and assessment of each option

The options are ranked 'low, medium or high' in terms of their ability to meet the criteria:

Criteria	Option 1	Option 2
1. Alignment with Scottish Government objectives	High	Low
2. Administrative costs	Higher in short term	Lower in short term but higher in medium and long term
3. Maximise flexibility – ability of estate managers to respond to changing context	High	High