Environment, Climate Change and Land Reform Committee

Meeting date: Tuesday, April 24, 2018

Official Report 542KB pdf

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Scottish Crown Estate Bill: Stage 1

The third item on this morning’s agenda is evidence on the Scottish Crown Estate Bill. We are joined by the cabinet secretary, Roseanna Cunningham, and her officials Douglas Kerr, David Mallon and Mike Palmer. Cabinet secretary, do you wish to say anything at the outset before we move to questions?

Yes, convener. I have an opening statement for this agenda item. To set the generality, the Scottish Crown Estate Bill proposes new powers for the Scottish ministers to change who manages Scottish Crown Estate assets and opens up the possibility of local authorities and communities taking control of the management of those assets.

The Crown estate consists of a diverse portfolio, including thousands of hectares of rural land, half of Scotland’s foreshore, urban property and sea bed leasing rights for activities such as renewable energy. We quite quickly came to a view that a one-size-fits-all approach was simply not practical. Therefore, the bill lays the foundation for changes in the management of individual assets. We want to maximise the benefits of the Crown estate for communities and the country as a whole, while ensuring that assets are well maintained and managed with high standards of openness and accountability.

I know that the bill and the proposed arrangements for the Scottish Crown estate are complex, so it is understandable that there will be some misunderstandings. With that in mind, I thought that it might be helpful if I explained how we see the financial flows working, and I hope that members have had circulated to them our attempt to produce a paper that allows a simple explanation in flowchart form. How effective it is will be for members to decide. The paper has not been circulated as a basis for members’ questions so much as with a hope that, by putting it into that form, we have made life a little simpler in terms of understanding what is happening.

The first and most important thing for everybody to understand—by “everybody”, I mean those beyond the committee, given that the committee knows this already—is that the Scottish Crown estate has not brought any new money into Scotland. The UK Government’s block grant to Scotland has been reduced by the estimated annual amount of net revenue earned by the Scottish Crown Estate assets. Under the terms of the Scotland Act 2016, the net revenue from the estate—the income from leasing, licensing and all the other Crown Estate Scotland activities, minus the costs of managing the assets—is paid into the Scottish consolidated fund. We are clear that whoever manages the assets has to

“maintain and seek to enhance”

the value of those assets and the income arising from them, otherwise Scotland as a whole is out of pocket.

However, the money that is earned by the Scottish Crown Estate assets can now be used differently. The net revenue that is generated by the marine assets out to 12 nautical miles will be disbursed to the three islands local authorities and the other 23 coastal local authorities. The local funding will not be hypothecated, but we would expect the local authorities to be transparent and accountable to their communities on how that money is spent. We are in constructive discussions with the Convention of Scottish Local Authorities on an interim mechanism for local authority areas to receive a share of the revenue, and we expect to reach agreement on that soon.

As members know, the bill places a duty on the manager of an asset to

“maintain and seek to enhance”

the value of the asset and the income arising from it. When the management of the Scottish Crown Estate assets was transferred to Scotland, we inherited the pre-existing arrangements, which mean that whoever manages the assets—currently, it is Crown Estate Scotland (Interim Management)—can retain 9 per cent of the gross revenue for investment in the estate, for example for renovations and repairs to farm buildings or the purchase of new assets. Thus, before the net revenue is surrendered by the manager to the consolidated fund, the 9 per cent figure is subtracted. We are keeping that facility in the bill, but we are taking the power to be able to vary in the future the percentage that is subtracted. It might be that some assets need more capital investment than others and that provision in the bill will allow a more responsive approach to be taken.

That is not the only way in which managers will be able to invest in the assets that they manage. At present, the Crown estate is managed as a single estate, although there are many different types of assets. If one part of the estate is not earning enough income to cover its maintenance and management costs, it can be subsidised by the better-performing assets, which we all know as cross-subsidy. We want to keep the ability to cross-subsidise even when there are several managers of the assets. We are taking powers to enable ministers to direct a manager to transfer a sum of money from their account to another manager’s account. In that way, a community organisation should be able to take over the management of a local asset, even if the asset will not in itself generate enough income to cover costs. To be clear, that money would come from a manager’s Scottish Crown estate accounts and not from a manager’s personal accounts. The bill requires a strict separation between a manager’s Scottish Crown estate accounts and any accounts of the manager’s own.

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The bill also sets up a national governance framework that will specify accounting and reporting procedures that should result in openness and transparency about the management of the assets, whether they are managed locally by communities or nationally by Crown Estate Scotland.

I put that statement firmly on the record because there is a bit of confusion out there about what exactly is going on with the devolution of the Crown estate to Scotland.

We will cover some of that as we go along.

To kick off, I have a question about the bill’s vision and purpose. If we came back here five or 10 years from now, what would be used to judge whether the bill had been a success? What would we look for the Crown estate to have delivered for Scotland?

A lot of things could be referred to but, ultimately, the aim is to ensure that the Crown estate operates to the benefit of Scotland and its communities. There has been a long history of concern that the Crown estate has not functioned with community interests at the forefront. That is an old criticism, which the committee’s predecessors took up.

The benefit to Scotland is financial, as I outlined, but it is also socioeconomic and environmental—it encompasses everything. We will look for managers, whoever they are, to emphasise the wider benefits more when making decisions.

In five or 10 years’ time, I hope that at least some local authorities will have taken over direct management. At the moment, most of the interest is from a handful of authorities, such as Orkney Islands Council, Shetland Islands Council, Western Isles Council, Highland Council—perhaps not even that one—and Argyll and Bute Council. Other coastal local authorities have not expressed a strong interest.

Five or 10 years into the future, I hope that more coastal local authorities will have considered and taken on management, and I hope that more community organisations will have done so. I do not want the conversation to be just about devolution to local authorities; it is also about communities. In five or 10 years’ time, I hope that a number of communities will have taken on management, because communities in particular felt that their interests were not being taken into account.

In my opening statement, I outlined the net revenue issue. In five or 10 years’ time, I very much hope that the Crown estate will be contributing to, and not a drain on, the Scottish consolidated fund. That is a fairly fundamental point. I hope that local authorities will use the net revenue from the marine assets out to the 12 nautical mile limit to benefit coastal communities, which is why I made a point about transparency and accountability. We will not hypothecate the money, but its purpose is to enhance coastal communities. In five or 10 years’ time, I hope that a significant percentage of Scotland’s coast, if not the whole coast, will be tied up in such a way.

I am sorry if I went on too long.

Not at all—you have led into my supplementary question, which I ask with my constituency and area hat on. You talked about local authorities securing funding that they have not had in the past and about transparency and accountability. I do not want to put words in your mouth, but would you expect a local authority that inherited a sum of money from such a coastal source to deploy it to address issues such as coastal erosion?

A coastal local authority might very well want to consider that. Depending on which local authority we are talking about, there will be different drivers for what it wants. However, the expectation from the Government—as well, I suspect, as from the people on the ground—is that the money that any local authority obtained through the mechanism would be used for the betterment of coastal communities in some way. The amounts of money that are transferred will be transparent—you will know exactly what the money is—so everybody will be able to track how they are spent. I suspect that it would not be a wise move for any coastal local authority to displace that money elsewhere.

Would it be a recurring sum of money as opposed to a one-off payment?

It would be an annual process. The amount of money will not be exactly the same every year, but it will be roughly the same. There will be a short-term, interim distribution mechanism to get us over the first year or two. The form of distribution may change but there will be an understandable, logical calculation that people can see and significant and specific amounts of money will then emanate from that to each coastal local authority.

You indicated that there is dialogue with COSLA on that. How soon are we likely to get an indication of what the sums of money would be or of the distribution mechanism?

I do not know whether they have had time to do it, but I have asked officials to give us an indication of what it might have looked like last year or the year before on the basis of some of the distribution models that we are discussing for the interim process.

We are still hashing out with COSLA what the final distribution model will look like. I do not know how close we are to determining that. It is a difficult one to gauge. Let me put it this way: the first calculation for payment for the year 2019-20 will be next March. For understandable reasons, that will, of necessity, have to be on an interim distribution model. However, the fact that the payments are annual is a pretty big incentive to stay at the table until a decision is properly made.

You can provide us with information as it becomes available, cabinet secretary.

Yes; we will do that.

You said that, although the Crown estate is a contributor to the consolidated fund at the moment, you hope that, in future, it will not be a drain on that fund. Given the expectations that have been raised, is there a real risk that there will end up being a net loss?

No; I do not think that that will be the case in Scotland-wide terms. However, that is why we want to retain the cross-subsidy. It would be difficult to say that the new managers will have to run some specific assets at a profit when that has not been the case before because those assets were cross-subsidised. That would be an unfair imposition.

Maintaining the cross-subsidy enables us to even out profit and loss across the whole estate. I know that there have been debates about what aspects of benefit are important, but that shows why getting value out of the management of the estate is important. Rather than it being a risk that there will be a net loss overall, the issue might be that people who are managing a local asset forget that they are parts of that national figure. The danger is that they become so focused on their issue that they stop seeing themselves as part of the national picture.

The money is not new. Although it is coming in to the consolidated fund, money has been removed from the fund in anticipation of that. It is absolutely imperative that everybody who manages a Crown estate asset, whether that is Crown Estate Scotland, local authorities or communities, does so to the very best of their ability, with the outcome of success at the forefront of their mind.

Notwithstanding that, it appears that there is a risk that the Crown estate will not be a net contributor to the consolidated fund. However, I will move on.

I declare an interest as a farmer. On the management of assets at national and local levels, in its consultation on the long-term arrangements for the Crown estate, the Scottish Government set out a table that indicated at what geographical level it considered different assets would be managed most appropriately. Does the Scottish Government still hold broadly the same view on that matter as it did at the time of the consultation? What is the Government’s view now on the assets that, at the time of the consultation, needed more consideration?

I do not think that we have made final decisions on the asset split between national and local levels. What we indicated at the outset is sensible and likely to be the basis on which we move forward. We have already had a conversation about not all assets perhaps being sustainable in their own right, and I do not want financial burdens to be placed on communities or local authorities, which would be invidious. Notwithstanding John Scott’s pessimism, I do not see from the national picture there being a risk in that regard. It would be an unfair imposition to put people or organisations in a position in which they have to manage assets that are not sustainable in their own right. What we are doing will give us good information on whether some assets are likely to require cross-subsidy. We should not forget that we have not really looked at Crown estate finances in this level of detail in the same way before.

From a practical management point of view, some issues need to be taken on board. We consider there to be a case for the management of the sea bed, particularly the 12 to 200 nautical mile zone, and leasing for strategic national infrastructure, such as telecoms, cables, pipelines and so on, to be undertaken at the national level. We also heard, as did the committee, very strong submissions from tenant farmers on the Crown estate’s landed estates on what they wanted to happen. We have responded by taking the view that, at this stage, management of those estates should be retained as part of the national management of the Crown estate. That position could change only if the people who are involved actively in the farming on those estates wanted there to be some change and, at this point, there is no indication that they want any change.

Thank you very much.

I am sorry—I have just been handed another note. I am being reminded that the rising income for renewables will mean that overall net revenue is expected to increase; we are back to John Scott’s very pessimistic outlook on the overall picture.

I also flag up that we might charge some assets at less than market value, but overall it is not expected to balance out as a drain. We will keep a constant eye on the matter anyway.

That is the expectation but, of course, that is determined by external factors. For example, offshore wind development will proceed only with contract for difference support, so there are factors at play over which you have no control.

There might be, but that is the purpose of the way in which we have set up the system.

On the risk of a drain on the Scottish finances, I remind the committee that section 7 will place a clear duty on each manager to

“maintain and seek to enhance”

the value of the assets, which reflects the importance that we place on the financial efficiency of the Crown estate in Scotland.

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In that regard, promises appear to have been made and expectations appear to have been raised that much of the income from the Crown estate will now go to local communities and councils. There is a job to be done on managing expectations.

We will come to that in due course.

Thank you for reminding me, convener.

I will let Mr Stevenson in on that point.

I will ask a question about the managers who take over from the Crown Estate, particularly those who represent community interests. In what has been said, it has been recognised that some of the assets that will be managed by community bodies are, in accounting terms, liabilities. Under section 7, managers must maintain the value of the asset, but there might be very limited opportunity to seek to enhance it.

I will ask an accounting question. I presume that the community body will be a limited liability company or be registered as a charity—it will have some formal structure. How will it deal with the fact that its only asset is, in fact, a liability in accounting terms? Who stands behind it to ensure that it meets the legal requirements for it to balance its internal books?

I think that that is a question for Mr Palmer, but I could be wrong.

I am definitely not doing accounting questions.

I will have a first stab at answering; David Mallon might want to come in on some of the detail.

There would be a separation between the Crown estate elements of that organisation’s accounting and any other elements. It is important to understand that at the outset.

That goes to the heart of my question. The Crown estate part is separate and separately accountable but, in some cases, will never be anything other than a drain and there will be no expectation that it will be otherwise.

That is why we want to maintain the cross-subsidy.

I understand that point. I am only asking about what happens in accounting terms. Does that mean that the cross-subsidy has to appear as an asset for the organisation and, therefore, it needs to know what it is before it gets it?

I defer to David Mallon on that.

I will attempt to answer the question. It is a hypothetical question and there is a prior question about whether it would be wise to give a loss-making asset to another body. There may be situations in which that is considered a good thing to do.

In accounting terms, the cross-subsidy is an important part of the framework because the accounts of that manager would show not only what income it received directly, but where there was an injection of funding through the cross-subsidy arrangements to enable there to be a zero balance sheet from year to year. The accounting is designed to be flexible to take account of that scenario.

When it comes to the duty in section 7 to

“maintain and seek to enhance … the value of the assets”,

if the income is zero at present, it is not too challenging to maintain it at that level. Indeed, it might be that the asset has just been underutilised to date because the national manager has focused on bigger assets. Through further devolution, a local community organisation might be able to make more of that asset and, therefore, potentially enhance the value.

That is fine but there will be assets that will always be a negative that you might feel would be better managed by the community but not necessarily to the extent of becoming positive income generators. Who bears the liability, ultimately? In other words, to where does that liability transfer? Is it consolidated with Crown Estate Scotland’s accounts or the Government’s? Obviously, in the circumstances that we are discussing, what appears on one balance sheet as a liability has to appear on another balance sheet with the opposite sign.

That brings in the concept of the Scottish Crown estate. The cross-subsidy could be provided by Crown Estate Scotland, or it could come from another manager on the Scottish Crown estate. In such scenarios, the liability would be covered by the Scottish Crown estate, rather than the community organisation.

Mr Stevenson took us off on a slight tangent—

As he does.

We will stay with the subject for now. Do you have a clear picture of Crown Estate Scotland’s liabilities as things stand?

Before the transfer on 1 April 2017, quite a lot of work was done to better understand the liabilities. In simple terms, they boil down to landlord responsibilities and employer responsibilities. The landlord responsibilities form the more unusual aspects of the liability question; they split into contingent liabilities and residual liabilities.

Contingent liabilities refer to the expectation that, after part of the estate has been used, the landlord will restore it to the condition that it was in before. Through a lease agreement, the requirement to restore is normally for a developer—for example, if farmland were used for mining activity, the developer would be expected to restore the land to a condition that was fit for farming or another use.

Contingent liabilities sit with the manager, because of the possibility that a developer might not be able to honour its undertakings. If that were the case, Crown Estate Scotland, as the landlord, would be expected to pick up the cost.

Residual liabilities arise after an activity has been decommissioned. The Government is responsible for ensuring that a decommissioning scheme is in place for a wind farm, for example, and it is for the developer to complete that scheme. However, at the time of decommissioning, the developer might get approval not to remove all the infrastructure from the marine environment, so some infrastructure might remain in the water. If a third party incurred damages because of that, residual liability would exist.

Those are the main liabilities. There are also less expensive ones, such as maintenance of property and stewardship of the estate.

I will come to that; I note that Mr Stevenson is champing at the bit. A subjective element must exist, because although a tenant farmer’s view might be that there is a backlog of repairs, Crown Estate Scotland might not entirely share that view. It must be difficult to gauge the level of liability entirely.

A difference of opinion might exist, and the estimation of future requirements needs assumptions to be made. A lease agreement between a farmer and Crown Estate Scotland normally makes it clear what Crown Estate Scotland’s responsibility is and what the farmer’s responsibility is. There is usually a mixture of both aspects, but the agreement has clarity. A farmer might sometimes feel that something is for Crown Estate Scotland to undertake, when in fact Crown Estate Scotland has written it into the agreement that it is for the farmer to undertake. However, dialogue usually takes place between the two parties to try to resolve the situation.

In its submission, Scottish and Southern Electricity Networks said:

“Asset managers should be responsible for the liabilities associated with their assets”,

while Community Land Scotland suggested including

“provisions enabling Scottish Ministers to assume responsibility for liabilities”

when communities manage or own assets. Which view does the Government prefer? When devolving power to community groups, should the Scottish ministers assume responsibility for potential liabilities?

We have included in the bill a power for ministers to assume responsibility for potential liabilities when we devolve assets to local community groups, but we would consider that case by case. We would not want to proceed that way across the board. That is one of the matters that would be weighed up when the application is made, at which point we would look into all the facts and circumstances around a community group that wished to take over the management of an asset.

On a bigger scale, I think of the East Ayrshire coalfields, for which East Ayrshire Council created insufficient bonds, as I recall. There was a huge liability for the extraction of coal when all of that went terribly wrong. Do you envisage a system of insurance such as bonds being established by the bodies that use the assets?

In essence, the bill proposes that such cases be taken case by case. A judgment would have to be made on each business case. In most cases of a community organisation or a local authority making a proposal to manage an asset, we would expect both the assets and liabilities to be transferred to them.

One would normally expect that that would be an incentive behind the organisation’s business case. We would not particularly expect organisations to wish to manage an asset for which they were at risk of taking on liabilities that they did not feel that they could deal with and for which they might need to get into some complex arrangements for bonds. However, we are trying to set up a discretionary system that is open to any kind of case being made. Each case would need to be considered in the round. Issues such as whether it is reasonable for liabilities to be managed away from that community organisation at a more national level and whether that can be agreed to would need to be considered at the point at which the case was advanced.

Basically, the presumption is that the liabilities would pass to the new managers along with the asset. That would be the norm and I expect that that would happen without much discussion or conversation in the vast majority of cases. There may be the odd occasion when a bigger conversation about liabilities has to be had and we have allowed for that. However, the presumption under which we operate is that organisations will take on liabilities as well as the asset, which is what you would expect in the normal course of events.

Absolutely. I just want to be absolutely clear about who the banker of last resort is for the once-in-a-generation, inadvertent liabilities that emerge and could not have been foreseen. I presume that it is the Scottish Government.

Those are issues that we have to deal with all the time. It is a conversation that we have to have in Government across a range of matters, not just the Crown estate. We are talking about trying to put in place a system in which there is a presumption that liabilities will transfer with assets. That is how it will operate unless there is a very particular set of circumstances. No legislation can legislate for the unforeseeable.

I have a small question about what Mr Mallon said about the decommissioning of marine assets. The phrase used was “residual liabilities”. I do not recognise that phrase; I recognise only liabilities and contingent liabilities. I presume that we are talking about those being contingent liabilities—in other words, there being no liability until a future contingency occurs—therefore they would not have to be in the numbers and provided for financially by the manager, although there would need to be reference to that in the notes to the accounts.

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You are right that the liabilities are all either residual or contingent—they are all theoretical rather than actual liabilities. To clarify, “residual liability” is a phrase that has been used by the UK Government in the decommissioning schemes for offshore renewables, which—

Okay. My point is that it is not in the international financial reporting standard.

I seek a brief clarification on the support for community ownership. Organisations such as Community Land Scotland have welcomed the inclusion of community organisations as potential asset managers. What will community organisations need to do to prove that they are capable of running a Crown Estate Scotland asset? What support will CES and others provide to them? What monitoring will be provided to ensure reassurance and to allow community organisations to be in control?

First, we should remind ourselves that it is not ownership of the Crown estate that is being passed over, but management. I worry a little when a shorthand is used that makes it sound as if, somehow, ownership is involved in this.

I very much hope that communities will step forward and take over local assets because, as I said in my opening remarks, in the past, communities were most critical of how things were managed—they felt that things were not managed in their specific interests. Members will also be aware that pilot schemes will be launched, and we will follow their progress and how they work pretty closely. The experience of the pilots will inform some of the decision making on transfer and delegation.

We have in place the existing capacity to support communities at an early stage, in the same way that we support those who come forward with the intention to register an interest in community right to buy. If anyone has been involved with a community that has done that, they will know that an enormous amount of support from officials is available at a very early stage in the process to ensure that a community’s application is in the best shape that it can be. We want to build that into the system for communities becoming asset managers, so that communities that come forward with an idea can have an early conversation and get early support in how they should proceed. I think that I am right in saying that grants will be available to communities that want to come forward with an application, in order to help with their capacity. If I can find the specifics on that point, I will provide them. There will be financial support.

From my perspective in knowing about communities that have wanted to progress a right-to-buy application, the more important support is the support that communities get from officials from the outset to help them through the process. One of Crown Estate Scotland’s jobs will be to be as facilitative as possible with communities that express an interest.

I am just being reminded that section 31 of the bill provides for grants for preparation for management changes.

Different kinds of support will be available for communities and it will be interesting to see how many step forward. Some communities, as opposed to local authorities, have expressed an interest, but not an enormous number. Perhaps publicity about the bill going through Parliament will mean that other communities begin to think about the issue.

I do not want to sound too negative, but I need to ask what would happen if things went wrong with assets that had community managers. The same answer might apply to every other manager that takes on Crown Estate assets.

We very much hope that things will not go wrong, although occasional hiccups are in the nature of things. Crown Estate Scotland and we as ministers will look closely first at defining wrongness. Our earlier conversations were about a community taking on something that can make money or being prepared to take on something on the off-chance that it might make money, which is in a slightly different category. In those circumstances, what is the wrong thing?

The nuclear option would be to take back management from an organisation. We would try not to be in that position, if possible, but we have provided for it if needs be. The bigger picture about financial viability and the Scottish consolidated fund will be the final red line that we must keep in mind.

The cabinet secretary will be aware that the committee carried out a confidential survey of all Crown Estate Scotland (Interim Management) staff to seek their views on the bill. Staff expressed many fears in the survey, such as fear of fragmentation, and a number of people said that they believed that the bill would lead to their jobs being lost and made other comments that were not very positive. What reassurance can the cabinet secretary give the current staff?

Change always creates uncertainty and I do not expect Crown Estate staff to be excluded from that feeling. They know that the way in which they work will change. However, as we have discussed, the staff will have a continuing role for the foreseeable future. I have taken the time and trouble to visit them on a number of occasions, because I was conscious that the policy change could take place without reference to them at all—although that is not how we have proceeded. I very much hope that potential new managers will think about that aspect, as we have done.

The uncertainty is of the nature that arises whenever change is coming, regardless of what that change is. I suspect that the continued retention for national management of a significant part of what the Crown Estate does will mean that the change is far more minimal than staff might have feared at the outset.

Whatever the concerns about the fragmentation of management were, the experience so far has been that the number of bodies that are prepared to take on management and are asking about the transfer of management has not been as high as I expected. The attractiveness of the option for some organisations and local authorities remains to be seen. We could be many years down the line before the final verdict is passed on internal devolution of the Crown estate.

I am sure that the staff will find that reassuring. Do you envisage any jobs being lost? Is a policy of no redundancies in place?

We will ask Crown Estate Scotland to comply with the policy. It is not legally obliged to comply; it is one of the groups that can choose to comply. Most of the bodies that are not legally obliged to comply do comply. We will look at that.

It is obvious that I cannot foresee the future. It is important to remember that staff terms and conditions always need to be borne in mind and that contractual arrangements such as pension provisions absolutely have to be catered for.

I hope that the change will have as little impact on staff as it can. How things are managed will change, but reference has been made to the feeling that the management of smaller community facilities has not been as hands on as it might have been, which we hope that the internal devolution of management will change. I do not see that having a significant impact on the staff in Edinburgh.

I hear what you say, and I am sure that you would seek to allay staff fears, but it appears from what you have said that a preponderance of other experts will be invited to advise communities and local authorities on how to manage assets. What will be the role of those in Crown Estate Scotland who have hitherto managed those assets? Given that they will no longer deal with those assets, how will their jobs change?

I know of no organisation anywhere in the country that does not have to deal with change at some stage. That applies to Crown Estate Scotland as it does to anywhere else. Perhaps the way in which management is done will change. The body will still produce a strategic plan, and significant parts of the Crown estate are likely to remain under national management.

To be honest, I do not foresee an enormous amount of change for the staff in the foreseeable future. Can I promise that there will be no change for any staff at any point? Of course I cannot, but I cannot say that about any organisation. In that sense, Crown Estate Scotland’s position is no different from that of other organisations that are in the purview of my portfolio.

We will move on. I remind members that we still have a lot of ground to cover.

In parallel with the financial obligations, which we explored in considerable detail, there are the wider social, economic development and environmental duties on which sections 7 and 11 focus. The cabinet secretary will know that the committee has heard no outright opposition to the inclusion of the wider duties that those sections highlight, but some stakeholders have called for the duties to become mandatory or for the wording to be strengthened. Some have argued for the word “must”, which is used in connection with the financial obligations, rather than the word “may” to be used. Should the wider duties be mandatory? How could they be strengthened?

I gave a fairly reasonable explanation of why we chose to make the financial duty mandatory, because of the pretty significant impact. When we talk about a mandatory duty to maintain the value of an asset, it is also important to communicate to managers the fact that their fulfilment of that duty includes the promotion or improvement of the socioeconomic factors that section 7 lists. That provides a good reason for using the terminology “may” rather than “must”. In many instances, such factors have to be borne in mind to maintain the value, which is a must.

The duty in section 7(1) is not to maximise value but to maintain value and, where possible, improve it. I do not want there to be a false understanding that it is a duty to maximise value at the expense of everything else. That is clearly not what we have in mind, as is borne out by the language of the bill.

It is also important to see this legislation within the broader context of the principles of sustainable development. Crown Estate Scotland has been asked to look at that extra line and it is working with it effectively so far. We think that that will continue to be the case.

At the moment we do not feel that we need to make everything a “must” in the way that some have suggested. For the reasons that I have already given, we do not see the conflict that some people see. In order to maintain and improve the value of assets, some of those other things will have to be brought on board anyway.

12:00  

If that is the case, surely the use of the word “must” should be considered in relation to environmental duties, for example, as the Crown estate is a public interest.

Any environmental duties that are imposed by statute will have to be complied with anyway; managers are not exempted from any of those formal duties.

Another of the issues that we need to take into consideration is that those factors might not be relevant to absolutely everything that a manager does. If we use the word “must”, and a manager then has to take into consideration something that is not relevant to a particular decision, that becomes an exercise in futility. I do not see that particularly helping managers to make the decisions that they need to make.

In truth, the reason why communities will want to take on the management of the assets will be to maximise a range of benefits. The traditional criticism has been that that has not happened. We are not in a position to judge whether that is a fair criticism, but the precise reason why communities will want to take on the management is to maximise a range of benefits. I do not see those things as being in conflict.

I return briefly to the points that you made in your opening statement about disbursing net revenues to communities. Would you like to add anything more about the process and the mechanism for doing that? For example, is it the intention that some of the financial benefits to communities will go through participatory budgeting, or could they go through council budgets? Are there any restrictions on that? Do you have any thoughts on how that should or should not be done?

The point that I made in my previous remarks is that, however the distribution is done—whatever the calculation and the formula for that distribution will be—the money will not be hypothecated, because of the nature of the settlement that we have with local government.

However, the amounts of money that will be involved will be known. I anticipate that any managers—in this sense, we are talking mostly about local authorities—will want to account for how they use that money. How they choose to do that is a matter for them. At the moment, we are not thinking about mandating a mechanism by which a local authority makes its decisions about what it considers the best way to spend that money, but we expect the money to be spent for the betterment of coastal communities, however that might be defined.

Given the nature of the local government settlement, I do not think that it would be right for us to send the money to local authorities and attach a set of strings to it. Doing that would require a change in the way in which the relationship between the Government and local authorities works. However, the amounts of money that will be sent to local government will be known. I hope and expect that people will hold their local authorities to account on spending that money.

I turn to the 9 per cent figure. Thank you for the revenue chart that you helpfully provided. My question is simple: should Crown estate asset managers be able to retain and invest more than 9 per cent of the revenue that they earn? How do you see that story unfolding? You have said that you expect to introduce flexibility to the 9 per cent figure in the bill.

Yes. That relates to the flat rate that comes with devolution. The flat rate is applied by the UK Government to the Crown estate in the UK as a whole, and it will be applied to what will be the residual England and Wales Crown estate.

Our view is that we should start with 9 per cent, simply because that is what is used now, but we will keep the situation under review. We will consider whether 9 per cent should apply across the board or whether there might be occasions on which we should allow managers, depending on the area and the asset, to retain more than 9 per cent, because more management might be required for some assets than for others. However, that means that the likelihood would be that other managers would get to retain less than 9 per cent. It is not just about retaining more, because in some areas the management function might not be as great and, therefore, the figure might be less than 9 per cent. All that we are doing is trying to retain flexibility so that we are not tied across the board to the 9 per cent figure, which might not apply in every case.

That approach will enable us to respond to the different kinds of management that there are. I refer back to our earlier conversation: a community group that wants to step up might think, “That asset is not generating what it could for the community. We think that we can do better, and we want to set out a plan that does that.” In such circumstances, the Government might take the view that the community group would be able to retain a greater percentage because it would be putting more effort into the management compared with a different group that might just want something to take over. It is about allowing ourselves flexibility.

We do not have any immediate plans on the issue; I have nothing in mind at the moment. The 9 per cent figure is what we will inherit, and it would be a big thing to axe when we might be able to deal with the issue more flexibly.

I appreciate the need for flexibility. I understand perfectly well that the figure will depend on good years, the income that is available to managers, the need to return money to the Scottish consolidated fund and the potential to invest more in the Scottish Crown estate.

My second question is, if the Scottish Crown estate becomes fragmented, and if a higher proportion of asset managers are able to retain a higher proportion of their revenues, rather than the Crown estate managers retaining them, what impact will that have on the ability of Crown Estate Scotland to invest in, for example, farms in the rural estate?

That is a specific example of why we want to retain cross-subsidy. As unpopular as it might make a minister to step in and tell one set of managers that they will have to transfer money to another set of managers, that is nevertheless how we wish to be able to proceed, because otherwise the estate as a whole would begin to be in difficulty. The cross-subsidy part of the bill has been well understood. There has been an active stakeholder advisory group all the way through the process and we have never hidden that part of the conversation from them, so people are well aware that that is a possibility.

Bearing in mind that we have already discussed the cross-subsidies, how will the potential impact on other assets be taken into account when you are making the initial decision to transfer or delegate the management of assets? If you have to make a decision on transferring assets, what part will those considerations play?

Do you mean what part they will play if I have to make a decision about a community taking on responsibility for management?

Yes.

I was using the word “transfer” in a different sense.

Cross-subsidy is one way in which we can support the non-profit-making parts of the estate; will you assess the potential financial impacts prior to transferring or not transferring the management of an asset?

Every single one of the applications for taking control of management of an asset will have to be looked at carefully on its merits. There will be a lot of factors to be considered, and that may be one that we will look at. As discussed with John Scott, it may be the case that some organisations, whether they are community organisations or not, will feel that they can make a far better fist of running an asset than has been the case. If so, they can turn an asset into one that does not need transfers of money in but which might be in a happier position in a few years’ time.

That is a conversation that we would need to have with the organisation at the time of application, because we expect people who come forward to consider taking on the management of assets to have a clear plan and proposals. It is not simply a case of signing a brief form and getting the management transferred; it is too important for that. That will be part of the conversation. If the asset is one that the prospective managers do not realise is not actually making money, they will be made aware of that as part of the application.

My officials are reminding me that managers, or prospective managers, will have to show three-year plans, so when we are talking to people about taking over management, they need to be thinking about it not just on day 1, or even six months down the line, but over the whole period. All of that will be part and parcel of the conversation. I anticipate that it will sometimes happen that a group comes forward and then decides that there is not as much potential in the proposition as it thought there was. I hope that we will also get communities that come forward and say, “Look, we want to do this, because we think it could be better run, and here’s why, and here’s our plan for how it can be better run.” That is a conversation that I hope that Crown Estate Scotland will be having with more people, rather than fewer people, and it will turn assets into income-generating assets, rather than those that do not generate income. That does not necessarily apply to some of the bigger assets, but it might in future.

Has any thought being given to the idea that there may be parts of the estate that you do not want to allow communities to take over because they are key to the overall performance of the estate and its ability to support those parts of the estate that are not so viable?

12:15  

We have not looked at it in quite those terms. We have been thinking about national strategic priorities and the pressure from the tenant farmers in the four tenanted estates. Rather than considering the issue from the perspective of whether an asset is income generating or not, we have been thinking about the bigger picture and considering what is a more appropriate approach. It is perhaps understandable that things such as the big telecoms and renewables should not get chopped up, because it would be harder to see how they would work if they were chopped up and they are also some of the really big income-generating sectors.

We must not lose sight of the fact that although we might want to focus on smaller assets that are not such big income generators, there are some big income generators in the mix. That is why it was important to keep the cross-subsidy idea. There will also be a strategic management plan to give a national perspective. We are not losing sight of the bigger picture in the individual conversations that we are having.

At this stage, I do not have a clear idea whether the Crown Estate could point to every single asset and say with certainty whether it was income generating. That information will probably emerge over the next year or two. I make a shrewd guess that it will tend to be the smaller assets, which are more localised, rather than the bigger, strategic ones that are considered. However, that is a guess at this stage.

Historically, the coastal communities fund has been tied at UK level to revenues generated by the Crown estate and has been delivered by the Big Lottery Fund. Even in my constituency in the industrial heartland of central Scotland, some groups have managed to tap into the coastal communities fund. What are the plans for the fund from now on?

The short answer is that we are considering the best way forward. The member is correct. We inherited the scheme from the United Kingdom Government along with the various financial pressures created by the fiscal framework and the reduction in the Scottish block grant, which is also linked to the devolution of the Crown estate.

The coastal communities fund is currently competitive and there is no guarantee of success. There are many coastal parts of Scotland that have never received coastal communities fund funding. Traditionally, it has been administered by the Big Lottery Fund. We are looking at in the context of the changes that are being made in the Crown Estate. We are absolutely committed to following current projects through to completion, but no final decision has been made about the coastal communities fund, because of its link to the formula for the Crown Estate funding.

Given the different set of funding circumstances at a national level and given that coastal communities will now receive moneys that are directly disbursed by the Crown Estate, we need to consider whether, in Scotland, the coastal communities fund should be continued. No final decisions have been made because we need to work through several issues. I remind everyone that the commitment to all coastal local authorities getting money will mean that money will go to several local authorities where communities have never been given any money from the coastal communities fund. We are now in a different set of financial circumstances.

I understand that there is a suggestion that the funding formula will be revised from 50 to 33 per cent of the revenues from marine activities—

That is the Treasury—

Yes, the UK Government.

Yes. I am not sure whether the officials know more about that and what impact it might have on us, if any. I think that it is about the coastal communities fund.

That is correct. It is our understanding that the Treasury recently reduced the amount of money that it makes available under the coastal communities fund from an equivalent of 50 per cent of Crown Estate marine income to 33 per cent of marine income. The fiscal framework agreement on the devolution of the coastal communities fund was based on expenditure in the year prior to the transfer, so all that should have worked through the system.

Thank you.

During our consultation, we received a submission from Grangemouth yacht club, in my constituency, which told us:

“the only regular contact we have with”

the Crown Estate

“is an annual demand for £640.”

As a matter of principle, the Crown Estate and other asset managers have to provide a service for what they charge their tenants. Is there scope for smaller community organisations such as Grangemouth yacht club to be exempt from charges?

Well, the rent of a property is the service. The club is paying rent for something; it is not paying rent for nothing. That is the short answer. I think that the club will have the exclusive use of the mooring, so that is what the rent is for.

On the wider point about exempting smaller community organisations, we must bear in mind the duty in section 7 to

“maintain and seek to enhance—

(a) the value of the assets, and

(b) the income arising from them.”

Managers are empowered to do what is considered appropriate in that regard. There will be no blanket exemptions; exemption will be very much a matter for managers locally. A different set of managers might decide to exempt an organisation if they felt that there was a bigger picture that they wanted to pursue. I am sceptical as to whether that is likely in the shorter term, to be frank, given the duties on managers.

We cannot blame the yacht club for trying. [Laughter.]

It can ask, but whether it is successful is another matter.

I refer to my entry in the register of members’ interests; I am a landowner in the Highlands.

I have two questions. The first is about cross-subsidy, which we have discussed a little. We talked about giving Crown Estate Scotland financial flexibility. Forgive my ignorance: is the Crown Estate currently able to, for example, borrow or enter into joint ventures or other arrangements that would give it financial flexibility, and does the bill change the current position?

At present, the Scottish ministers can give loans to the Scottish Crown Estate, and the bill extends that to include other managers. The Crown Estate Act 1961 provided for a limited number of situations in which a manager could enter into borrowing. It could happen only in a very narrow set of circumstances, and Crown Estate Scotland—in its nascent form—viewed that as a constraint on viability, so the Scottish ministers decided to extend the facility to provide loans. Beyond that, there is no intention that wider loans be taken out, because of the risk that that could pose to the monarch’s ultimate ownership of the estate.

The bill was specifically designed not to preclude joint ventures from being entered into. We continue to discuss that with Crown Estate Scotland on an operational basis to see whether there is a need for that.

That is very helpful. I want to move on to delegation and the transfer of management responsibilities. It is right that sections 3 to 5 of the bill set out the processes for transfer and delegation. Is the panel satisfied that those processes will be effective? Are they transparent, and do they allow proper parliamentary scrutiny? Will they give asset managers clear lines of accountability that they can work to? Is there an effective dispute resolution process?

Yes. Broadly, the bill’s provisions are appropriate and allow for what has been raised. Transfers will be made by Scottish statutory instruments, which will be subject to parliamentary scrutiny, and the terms and conditions of the transfer will be set out in the SSI. Details will therefore be available. Similar provisions will be made in respect of delegation, but it will not be subject to a parliamentary procedure because, in effect, Crown Estate Scotland will retain aspects of management that have not been delegated to another manager. Our position is that that part of the bill does exactly what it should do.

It is being flagged up to me that there will be annual reporting and that dispute resolution will be part of the SSI or the delegation agreement. That will be built into what will be seen up front when the management is being transferred.

Do you see a potential conflict of interest for local authorities given their function as planning authorities in relation to aquaculture and the fact that they will be net receivers of revenues under the bill? Do you see a similar conflict of interest in relation to harbour authorities, which arguably have less stringent democratically accountable governance processes in some cases, compared with those of councils?

Our view is that councils already have to make a huge range of decisions across a number of areas in which it could objectively be argued that they have conflicts of interest. Councils’ planning authorities have to make the planning decisions when it comes to building schools. Handling conflicts of interest is already part and parcel of what local authorities have to do. To my knowledge, they already have pretty rigorous governance arrangements to manage that, and I do not see why things would be any different under the bill. I cannot imagine that any council would intentionally try to mismanage.

I do not want to be drawn down the road of talking specifically about aquaculture, because what I am saying could apply to almost anything. Councils will try to ensure that their management is as well done as the management of any aspect of their duties. Councils in particular are well versed in managing conflicts of interest.

If a harbour authority becomes a manager, it will need to comply with the duties that are legislated for in areas such as reporting. It will need to bring itself into compliance in those areas. The situation is manageable, because these things have had to be managed for decades. Single local authorities do that work regularly, and I do not imagine that Crown estate assets will be managed any differently from that.

12:30  

Will there be a tension, particularly with harbour authorities? For example, there is a commercial incentive to develop ship-to-ship oil transfers, but a harbour authority also has a regulatory function to discharge.

Any manager that takes on the management of an asset, regardless of what it is, will need to comply with all the statutory requirements that relate to that area of endeavour. Perhaps I am misunderstanding the issue that you are trying to raise, but all those matters will be part and parcel of the management.

The Crown Estate has to abide by the requirements, which it does. We are not bringing in anything new by asking devolved managers to also comply with any legislative authorities. The explanatory notes state:

“Section 18 requires managers to exercise their functions in a way that is transparent and accountable”.

Any harbour authority or other manager that makes a decision—for whatever reason—will need to be clear about why it is doing so. Managers will also need to comply with a range of other statutory obligations that are required in any area of endeavour.

I was just referring to the potential conflict in that harbour authorities have their own regulatory functions.

I do not know what potential conflict you have in mind. If a harbour authority wants to take over the management of the harbour, it will need to manage the harbour in a way that delivers all the objectives that we have set out. It will do that—

What will happen in relation to the appropriate assessment under the habitats directive, for example?

Harbour authorities will still have to comply with that directive, which will still be in place. None of the regulations will fly off because an authority has become a manager of a Crown Estate property.

As I understand it, harbour authorities already have functions that relate to ship-to-ship oil transfers. The Crown Estate’s functions relate to sea bed ownership—primarily maintenance dredging, other forms of dredging for navigational purposes and the dumping of spoil that has been collected through dredging. The bill’s provisions are about the control of those activities. As the cabinet secretary says, those activities would have to be undertaken by any manager because of the wider regulations that exist.

The Law Society of Scotland has expressed concerns about the drafting of section 6, stating:

“We do not consider that the meaning of ‘relates to a community’ where it appears in section 6(1)(a) is clear.”

What is the definition of “relates to a community” in that section?

Furthermore, the requirements that are set out in section 6(2) do not appear to be inclusive—particularly those in paragraphs (c) and (d). The Law Society considers that there would be

“merit in amending the requirements for a community organisation to fall within the terms of the Bill.”

Does the Scottish Government agree with the Law Society that sections 6(2)(c) and 6(2)(d) could be amended to be more inclusive?

The provisions in section 6 on community organisations are similar to those in the Community Empowerment (Scotland) Act 2015. In my view, that means that they are sufficiently inclusive. We have to recognise that evidence of community control is important, but given that, in effect, the definition has been imported from existing legislation, we believe that it is sufficiently inclusive. I am not sure whether the Law Society was aware of that, but that is where the definition has come from.

Section 6(2)(f) mentions

“promotion of a benefit for that community”.

The Law Society says:

“We note that the concept of public benefit is already recognised in the law, for example in section 8 of the Charities and Trustee Investment (Scotland) Act 2005. It would be helpful if there was some consistency between these statutes particularly when section 17 of the Bill refers to the ‘public benefit’ provisions under the 2005 Act.”

On the one hand, we have

“promotion of a benefit for that community”

and on the other hand we have “public benefit”. Should there be more consistency around the terminology of public benefits, as the Law Society suggests?

Again, we have replicated the definitions in the Community Empowerment (Scotland) Act 2015. In our view, that provides sufficient consistency. I have not seen the specific Law Society evidence to which you refer and I do not know whether the Law Society was conscious of that. I cannot think of a better example of consistency than to use definitions that are used in other legislation.

Perhaps that is something that you will reflect on. Thank you for your answers.

Some of the evidence that the committee has heard has argued for the strengthening of protection against the sale of the sea bed. Can the bill be strengthened to prohibit sales of the sea bed, and should it be? Do you agree with COSLA, for example, that there are circumstances in which the sea bed might be sold?

We are not convinced by the COSLA position. This Government’s view is that the presumption against selling the sea bed should be maintained. We have talked a lot about cross-subsidy. The fact that a bit of sea bed is a loss-making asset is not a reason to sell it, because there is the capacity to cross-subsidise. Given that we are maintaining the element of cross-subsidy, we think that the presumption against selling the sea bed should remain. I have no doubt that the debate will continue, but at this stage we are not convinced that the COSLA approach is correct.

I thank the cabinet secretary and her officials for coming to the committee. It has been a long morning, but we have covered a lot of ground.

At the committee’s next meeting, on 1 May, we will consider subordinate legislation relating to the Loch Carron marine conservation order, which we considered last year. The committee will also consider draft correspondence on the national performance framework, consider its approach to the gender diversity of witness panels and review its work programme.

As agreed earlier, the committee will now move into private session.

12:39 Meeting continued in private until 13:00.