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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 325-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE TREASURY COMMITTEE
MANAGEMENT OF THE CROWN ESTATE
MR ROGER BRIGHT, CB SARAH McCARTHY-FRY, MP, MS PAULA DIGGLE and MR JOHN HENDERSON Evidence heard in Public Questions 128 - 297
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Treasury Committee (Treasury Sub-Committee) on Wednesday 3 March 2010 Members present Mr Michael Fallon, in the Chair Nick Ainger Mr Colin Breed Jim Cousins Mr Andrew Love John McFall John Thurso Mr Mark Todd Sir Peter Viggers
________________ Witness: Mr Roger Bright, CB, Chief Executive, Crown Estate Commissioners, gave evidence. Q128 Chairman: Mr Bright, can I welcome you to this evidence session? Could you formally identify yourself for the shorthand writer, please? Mr Bright: My name is Roger Bright. I am chief executive of the Crown Estate. Q129 Chairman: Thank you. We believe this is the first inquiry into the Crown Estate by a committee of either House since the Commissioners were established in their present form 50 years ago. Could you just very briefly explain what you do and why you do it? Mr Bright: The Crown Estate is a large
and diverse property business comprising urban, rural and marine properties
right the way across the Q130 Chairman: You state in your memorandum that you are not the sovereign's private estate; nor are you owned by government. In practical terms, what does that mean for you as a manager? Mr Bright: What that means is that we are entrusted with the management of the properties that are under our management. The Act gives us all the powers of ownership, although we are not owners in our own right. That means that for example we are able to acquire properties and we are able to sell properties. We are not a static estate. We are a dynamic estate and we buy and sell properties in order to maintain the performance of the portfolio over time. Q131 Chairman: Last year the value of that portfolio fell by about £1 billion. What is a reasonable number of years to assess your performance in managing the portfolio? Mr Bright: Probably a ten year time horizon gives you a good feel for that. This is a long term business. This is not a short term business. If you look at our performance over the last ten years, I think we have produced creditable results. We have out-performed the industry benchmark for total return and we have increased our revenue to the Treasury by some 70% over that time. Q132 Chairman: If the capital value of your estate has increased significantly over a period, as you suggest, could the Commissioners realise part of that increase as increased revenue income for the Treasury? Mr Bright: Not directly because the estate is constituted effectively as a trust. This is reflected in the Crown Estate Act. That draws a clear distinction between capital and revenue. What is capital is, if you like, part of the Crown Estate and the revenue goes to the Treasury. The revenue of course is generated by the capital and one of the reasons why we need to be able to buy and sell, to invest in other properties, is in order to try and make sure that we sustain the revenue performance of the estate. Q133 Chairman: It is possible therefore that you could decide or be asked to convert more of the capital into revenue for the Treasury? Mr Bright: We cannot directly convert capital into revenue, but we can invest capital in assets that generate more revenue than they do at present. We think it is very important to have sustainable returns. You can indeed increase the returns rapidly by investing in poorer quality property because poorer quality property carries higher risk and will give you a better return in the short run, but it will give you a poor return in the long run. Q134 Chairman: Who sets your financial target? Is the Treasury consulted or involved in the setting of your financial target? Mr Bright: They are certainly consulted and involved. Basically, how it works is we have an annual budgeting process, as you would expect, and that is conducted in the light of our investment strategy and market forecasts, cash flows and so on. We go through an annual budgeting process, out of which comes the projected revenue surplus that we expect to be able to generate in the coming year. We then discuss that with the Treasury and the Treasury will challenge us. They will test the assumptions upon which we have produced our figures and there will be a debate. Out of that will come an agreed formulation for the budget figure for the year ahead. This is underpinned by a formula that we agreed with the Treasury several years ago which is that our revenue surplus should increase at the very least in line with the GDP deflator each year which, as I am sure you know, is effectively a proxy for inflation. We aim to do better than that and, generally speaking, we have done better than that. Q135 Chairman: Can you be directed to do better than that by the Treasury? Mr Bright: The Treasury has a power of direction but to date they have not used it. Q136 Chairman: That is because you have negotiated a target with them each time that they are happy with. Mr Bright: It would appear so, yes. Q137 Sir Peter Viggers: Compared with other property vehicles, you have three substantial inhibitions. You are not allowed to borrow to finance investment. You are not allowed to retain revenue reserves for investment. You are not allowed to invest in land through limited companies, which is a significant disadvantage because you cannot use modern investment vehicles, and yet you have out-performed your peers. How is this? Mr Bright: I would think it is a
combination of the fact that a number of the properties that we own are of a
very high quality. They are prime
properties. They are in many instances
situated in central Q138 Sir Peter Viggers: Is that the view of all of you in the Crown Estate, that there would be advantages in easing some of these restrictions? Is that the general view of your colleagues? Mr Bright: I think it is. We have managed to live within the 1961 Act as it is. As you kindly observed, we have managed to perform reasonably well within that constraint, but as you also mentioned, the property industry has moved on a long way since 1961. It is a more sophisticated industry now than used to be the case. It uses a number of different kinds of vehicles. Having the ability to participate in some of those would, I am sure, be helpful but we are not in the business of for example entertaining high gearing; we are not in the business of getting involved in risky vehicles. If there were to be some relaxation of those constraints, we would want to use them very judiciously and carefully. Q139 Sir Peter Viggers: I was going to put the opposite point of view, which is that when the statutory framework was created these three restrictions must have been imposed for a purpose. Do they give you some benefit? Mr Bright: I suppose there are those who say that the ability to borrow would be a mixed blessing. When the market is going strongly, there are those who say, "What a shame you cannot borrow." When the market has had the sorts of difficulties it has had in the last year or two, there may be a view saying, "Actually, perhaps we are rather fortunate that we have not been able to be highly geared." If we were able to borrow, we would be looking for a modest and sensible level of gearing which would enable us, if you like, to do sensible asset management. Q140 Sir Peter Viggers: I was going to move on to the property joint venture partnerships in which you have become involved. Note 18 on page 76 is the least happy part of the annual report I think. Would you like to comment on the Gibraltar Limited Partnership where your annual report states, "Circumstances give rise to material uncertainty that could cast significant doubt upon the partnership's ability to continue as a going concern." Have you ventured outside your safety zone in this area? Mr Bright: The Q141 Sir
Peter Viggers: Do you think that lessons have been
learned? I am looking at the last
footnote on page 76 which seems rather limp.
It talks about the general partnership - that is Mr Bright: Yes, I think we have learned the lessons of that and fortunately the exposure here is pretty small. It was a useful experience. Q142 Chairman:
Just
to be clear, was the Mr Bright: Yes, it was allowed to borrow. Q143 Chairman: That was the purpose of it, to get round the borrowing rule? Mr Bright: No, it was not the purpose of
it. The purpose of our going into the
partnership was to be able to share some of our assets that we put into the
Gibraltar partnership to retail parks that were in our ownership. We joined forces with the Hercules Fund which
has experience of managing retail parks; it is their core expertise. The other major component that went into this
partnership was the Q144 Chairman: How much have you lost through this partnership? Mr Bright: What we have seen is a depression in value. We have had to make ---- Q145 Chairman: How much? Mr Bright: What we have had to do is put a payment in in order to make sure that the partnership remains honouring its ---- Q146 Chairman: I am asking for a figure. Mr Bright: I am just getting there. Q147 Chairman: We have a lot of other questions to ask today. How much have you lost, broadly? Mr Bright: The figure we have had to put in is 18 million. Q148 Chairman: You benchmark yourself in the annual report against private companies. Do you think the standards of good management for a leading private sector company and a public body such as yourself are the same or are there extra factors for a public body to consider? Mr Bright: As I said in my opening remarks, as a public body, we are acutely conscious of our wider responsibilities, both to our tenants and our customers but also to the areas in which we operate, where we are a major landlord. The best property companies, like in many ways the best businesses, would also have a keen sense of what constitutes good management. Good management is important for good business. If you like, there is a particular expectation on us that we always do the right thing. Q149 John
Thurso: Can I just ask you a question about your relationship
with Government? The 1961 Act confers on
the Chancellor and the Secretary of State for Mr Bright: I suppose the first thing is it is not for me to say whether ministers would wish to issue a direction to us, but we have established very good, close working relationships with the Government and the government departments that are involved in these policy areas, particularly in relation to offshore renewable energy. The relationship at the moment works well. We have very frequent meetings with ministers, both for example in the Department of Energy and Climate Change and in the Scottish Government, and that is underpinned by very frequent contact with officials in those departments, so we work closely with them. We understand, we think, what their policy objectives are and, as I said in my opening remarks, we always seek to work with the grain of government policy, so I think we are clear about what government wants to achieve. Q150 John Thurso: The direction has never been used so it rather seems as if it is regarded as a nuclear option. If it gets used, it almost says you have failed. If you look at a major area of government policy like this, at the moment you listen to what they have to say, you then go away and decide what you want to do and you do it. Is there not a role for government to say, "It so happens that large chunks of the seabed happen to be owned by this quaint leftover from northern Britain" or whatever, "and therefore, we as a government need to say this is what we want you to do." So instead of you listening to their aspirations and then deciding what you want to do, they tell you, "We want you to achieve this." There is a subtle difference. Are you not surprised that they have not taken that kind of an interest? Mr Bright: I do not think so. Perhaps if I could approach this the other way round, if I could go back to our duty under the Act, which is to maintain and enhance the value of the estate and the return we earn from it, it is obviously in our interest to seek to realise a return from our assets where it is there to be realised. That is one factor in all this. In the case of the marine environment in particular, we are of course acutely conscious that we are the monopoly owner of the seabed and therefore, if you like, the need to work with the grain of government policy is even more important here. There is a need for us to make sure that we are not doing anything other than supporting the achievement of government policy in this instance, but also we are realising a return from our assets which is our statutory duty. Q151 John
Thurso: The Calman Commission recommendation 5.8 was
that the Secretary of State for Mr Bright: I know that in the Government's response they said they thought that was not an appropriate recommendation. If the power of direction were to be exercised, the Act says that the Minister has to consult the Crown Estate board before he exercises his power of direction. The other point I think I would have to make is that the power of direction cannot be used to override or to direct us to depart from the requirements of the Crown Estate Act. Any power of direction, if it were to be used, would have to be consistent with the duties imposed upon us by the Crown Estate Act. Q152 John Thurso: Is there a role for a sort of sub-power of direction with a small "d" as opposed to the capital "P" power of direction, capital "D"? Would that not be useful? Mr Bright: I am not entirely sure what form that might take. Maybe you are thinking in terms of some sort of memorandum of understanding. We would obviously be receptive to that if it was felt that that would be helpful. It seems to be working well at the moment. Q153 Chairman:
We
are now going to turn to the different operations you have, the urban estate,
the marine estate and the rural estate.
We are going to start with your urban estate. Obviously you are now selling off a large
number of properties in Mr Bright: The first thing to say is that we are not suddenly seeking to do this. Over a number of years we have bought and sold properties and this is about making sure we have the balance of the portfolio. Q154 Chairman: On this scale? Mr Bright: Yes indeed. In the last financial year, our net sales and
disposals were in the region, I think I am right in saying, of something like
500 million. If I can just say a brief
word about our investment strategy, which is where this derives from, we have
said that in our investment strategy we are aspiring to have a balanced
portfolio that will produce sustainable returns in the medium to long
term. Specifically in relation to where
the estate is at the moment, we have said that we want to concentrate on core
holdings which, in the case of central Q155 Chairman:
There
is no direct link between this proposed sell off and the commercial
developments that you are undertaking in Mr Bright: When you talk about "this proposed sell off", are you referring to the affordable housing? Q156 Chairman: Yes, the residential sell off. Mr Bright: It is part of a wider strategy. Q157 Chairman: I know, but is it linked to the redevelopment of Regent Street or not? Mr Bright: It is linked to the
investment into Q158 Mr
Love: Let us just be absolutely clear about
that. We are told in various reports
that are before us that there is a need for significant capital investment in
your Mr Bright: There is not a direct link, no, but obviously the capital we realise from any sale - and I would stress that we have not taken a decision to go ahead with the particular disposal you are talking about yet - and the disposals that we make - and this one, which as I said we have not reached a view on yet, is but one of them - the capital then becomes available for re-investment elsewhere in the portfolio. There are a number of priorities for that re-investment elsewhere. Q159 Mr Love: We received a memorandum from the local residents' association and the first point that they made was that the residents are overwhelmingly opposed to this proposal. Do you accept that? Mr Bright: Certainly what we are hearing is that there is obviously a good deal of concern amongst the residents. Perhaps, if I may, I could just say a few words about this because this has happened since our submission was put in to the Committee. I hope it follows from what I was saying about both our statutory duty and our investment strategy priorities, that it is necessary that we review all parts of the portfolio from time to time to see how they are performing and whether it makes sense for us to retain them in the long term. At the same time, this is the particular question of the possible disposal of housing. It is not one of our core assets and it is not a core area of expertise for us. Therefore, we thought it right to explore the possibility of selling it to a more focused housing provider who would have that expertise. We are very keen however - it goes back to my remarks earlier - and we like to see ourselves as a responsible landlord. We do take very seriously the concerns of our tenants. That is why we are conducting a consultation period at the moment where we are very anxious to hear what our tenants feel about this and also to give an opportunity to explain more of the thinking behind this proposal. That consultation process is in train at the moment but I do stress we have not yet taken a decision. Q160 Mr Love: There are suggestions that considerable information that would be of value to those that are being consulted is being withheld, a number of assured short hold tenancies etc., etc. Why is that happening? Mr Bright: I think a certain amount of information has been available. Q161 Mr Love: I am not interested in the information made available. It is the information that has not been made available that is important. Mr Bright: Yes, and I think the reason for that is the need to ensure that we protect personal confidentiality because there are obviously people's individual circumstances at stake here. We have tried to respect that in terms of the information that we have made available. Q162 Mr Love: Is it your intention to take any test of opinion amongst the various groups, leaseholders, tenants etc., before making the decision? In other words, would you either hold a ballot, as is done in the large scale voluntary transfer arrangements for local authorities, or would you undertake to have someone independently carry out a ballot just to gauge opinion on this matter? Mr Bright: These are not, if you like, homogeneous estates. There are a number of different kinds of tenancies involved here - there are Rent Act tenancies, there are assured tenancies, there are assured short hold tenancies, there are a number of long leaseholders. We want to find out what those various tenants feel about this proposal, what their concerns are. We think that a ballot will not give us that. We think that the consultation exercise that we are conducting at the moment, which involves surgeries, hotlines and engagement with the tenants, will give us a better feel for what the tenants' concerns are. Could I also add that my chairman, Sir Stuart Hampson, and I have also said that we want to meet the chairs of the residents' associations on these four estates before the board takes any decision on that. That meeting has been arranged for early April. Q163 Mr Love: Let me ask you about the protections that are being suggested in letters that have been given to residents on the estates. For example, currently assured tenants' rents can only be set at somewhere between 40% and 60% of commercial rents. How will that be enforceable if you sell the properties? In other words, what reassurances can you give them on that matter? Mr Bright: The rent regimes on all the different types of tenancies are secure when and if a new owner takes over. The way in which it works is that we have a tenants' handbook which sets out the rental regimes for those types of tenancies and the tenants' handbook and the assurances it contains have to move across to any would-be purchaser. The Rent Act tenants will continue to have their rents set by the rent officer as they do at the moment. Essentially, the bottom line is that for existing tenants the security of tenure and the rent regime that they currently enjoy would transfer to any new purchaser. Q164 Mr Love: We understand that and we understand that right up until the day of transfer they will be protected in the way that the handbook suggests. What I am asking you is: what is to stop whoever purchases these properties from, over a period of time, either doing away with the handbook entirely or doing away with those portions that it finds unreasonable in terms of its commercial interest? Mr Bright: My understanding is that existing tenants' rights in these respects are protected even if a landlord who bought these properties from us were to decide to sell them on. Q165 Chairman: You say that is your understanding. Is that not something you should be crystal clear about? Mr Bright: Yes. Q166 Chairman: You are crystal clear? Mr Bright: Yes. Q167 Mr Love: Can we have that in writing? Mr Bright: Yes, of course. Q168 Mr Love: I think that would be of interest to everyone involved in this particular issue. I would remind you that you indicated that, as well as good management, you should take into account the wider responsibility you have as an organisation to tenants and communities. You said there was a particular expectation on the Crown Estate. I think you have used the words "focused housing organisation". Perhaps you could explain what you understand by the words "focused housing organisation"? Mr Bright: In our minds we are looking at a housing provider whose mainstream business is managing and owning this kind of housing. That is our understanding. If we decide to go ahead - I keep stressing we have not taken the decision yet - we will pay very close attention to the nature of the purchaser. We are looking for a purchaser who has a track record in running this as a core part of their business and who is sympathetic to this kind of housing. We hope to see that there will be housing association involvement in this. Q169 Mr Love: You mention housing association involvement. What are the estimates of the difference between selling the estate to a housing association who would accept the conditions laid down in the tenants' handbook and a sale to a professional, commercial housing organisation which may wish to change those conditions and sell off properties as they become vacant? Is there a huge difference between the value that you would realise from a sale to those two different types of housing organisation? Mr Bright: I think it is impossible to say at the moment. We are exploring whether there are housing providers who would have an appetite to take on this kind of housing. Also, we want to explore their credentials. At this stage - and we are still engaged in that process - it is too early to say what the outcome might be. Can I just be quite clear? If we do decide to go ahead, the commercial factor would not be the sole factor. We are very concerned, if I can put it like this, that if we do go ahead with this, this housing goes to a good home, to a provider who has a track record in providing this kind of housing and is sympathetic to the kind of housing that this is. Q170 Mr Love: Who has a track record? Certain names have been bandied around in the press as commercial housing organisations that may be interested in this, some of whom have a track record that would be of great concern to those who live on these estates. Can they be reassured that some of those will not be actively considered as possible purchasers of these properties? Mr Bright: I can give you an absolute assurance that we will only contemplate a sale to a provider who we believe will manage the properties in a way that is sympathetic to the way in which they have been managed before. That is what we are seeking to achieve. It is too early to say this or that provider is acceptable or not acceptable, but I can give you an assurance that that is what we seek to achieve. Q171 Mr Love: Can we be given an assurance that you as an organisation, living up to the particular expectations that you indicated earlier on, would not sacrifice the interests of those who are currently residing on your estate or indeed some of the people in the future who may, through key worker initiatives, and others reside on the estate simply to maximise the amount of value that you receive from these properties? Mr Bright: Let me say right away, this is not purely about value maximisation. This is about finding a good home for these properties. Certainly as regards the existing tenants, I can give them a categorical assurance. When it comes to deciding who might take over these properties, if we go ahead, we are going to be looking very closely at the management prospectus that they hold out to us. We will certainly want to take that very much into account before we reach any decision. Q172 Jim Cousins: On the basis of what analysis did you decide that retail parks were a core activity and providing housing was not? Mr Bright: We already own a number of retail parks. In terms of looking at our investment strategy, we are looking for assets that will provide a good, sustainable, long term return. Part of that involves taking into account what you might call supply and demand. Retail parks, particularly in the south east, are in short supply; there are not many of them. Therefore, if the opportunity arises to invest in a good one, that seems to us to be a sensible investment decision to take. Q173 Jim
Cousins: Do you not find it a bit odd that at this time
in society a government organisation says that providing retail parks in the
south east of Mr Bright: With respect, we are not a government organisation. We are a public body and we are governed by our duty under the Crown Estate Act, which is to maintain and enhance the value of the estate and the return that we obtain from it. That is what we are required to do. We are very conscious of our responsibilities to our tenants absolutely. Q174 Jim
Cousins: Have ministers approved your strategy of
developing retail parks in the south east of Mr Bright: We have discussed our investment strategy with the Treasury, that is part of the normal business that we undertake with them. They are aware of the investment strategy. To the best of my knowledge, they have no quarrel with the investment strategy. I think they can see that it is directed towards meeting our statutory objective which is to earn a good and respectable return, which goes to the Treasury for the benefit of the taxpayer. Q175 Jim Cousins: No, it goes to the Treasury for the benefit of the British people. This is an important point of some constitutional significance. It goes to the consolidated fund, which is there for the benefit of the British people. Your use of the term "taxpayer" is wrong in statute; it is wrong in constitutional form. Do you accept that? Do you accept that the benefits of your organisation go to the consolidated fund and that has a different constitutional position? It cannot be just regarded as "the taxpayer". Do you accept that? Mr Bright: It certainly goes to the consolidated fund. That is absolutely correct. Q176 Jim Cousins: That is not just the taxpayer. Have you been hoarding vacancies in your housing stock? Have you been reletting vacancies? Mr Bright: Up until very recently when we decided to explore this option, we were letting vacancies but at the moment we are not. Q177 Jim Cousins: You are not reletting vacancies? Mr Bright: Not at the moment. Q178 Jim Cousins: That of course has a big financial gain to the people you hand it on to. How many vacant properties have you at the present time? Mr Bright: At the moment out of 1,220 units we have I think a total of 32 vacancies. Q179 Jim Cousins: You have 32 vacancies, you think? It would be useful to have that checked because that number will increase over time. Mr Bright: It will increase. Q180 Jim
Cousins: You provide affordable housing and you provide
key worker housing for a number of specific organisations, for a number of
specific purposes. You have been doing
it for a considerable number of years, not as long as the Queen has been in Mr Bright: We have not cleared it with them, no, but we have obviously informed them that that is what is happening. Q181 Jim Cousins: You have not discussed it with them or got their approval? Mr Bright: We have not got their approval but we have informed them. Q182 Jim Cousins: Your housing management function, which so far as we can tell from all the evidence appears to have been very creditable to you, you have wound up and brought back to headquarters and changed the nature of its operation. Mr Bright: That is not entirely correct. What we have done is consolidate the management of our estates. There are four estates and the management was divided up between the four estates. We consolidated that into one central point on one of the estates about two years ago and we have also strengthened the links between the management on the estate itself and also headquarters because that had become a bit attenuated at the time. Q183 Jim Cousins: Last year you did an open market valuation of your property portfolio, on an open market basis. Did you do that for your residential properties? What was the outcome? What was its value? Mr Bright: We did a valuation. We value the estate every year. The value of this particular group of properties with a couple of other blocks that are not included in the sale, as at September last year, was £247 million. Q184 Jim Cousins: What is its value on an open market basis? Mr Bright: We valued it on the basis of current use and current occupation. We have not done an open market valuation. Q185 Jim Cousins: There is no open market valuation. In answer to our Chairman, you said that the protection of the existing tenants' rights would be built into the paperwork in any disposal. Mr Bright: Yes. Q186 Jim Cousins: In your discussions with the various bodies you have been talking to, that has always been quite clear: that the existing tenants' rights would be protected? Mr Bright: Yes, that is correct. Q187 Jim Cousins: It is not correct that you have withdrawn the tenants' handbook? Mr Bright: We have withdrawn the tenants' handbook. Q188 Jim Cousins: The tenants' handbook is the expression of those rights from the standpoint of the existing tenants. That is how they know. Mr Bright: We have withdrawn it in the sense that we are not issuing it to any new tenants. Q189 Mr Todd: Can I go into some of the figures? Turning to page six of your report which summarises the urban estate, the property valuation set at the end of 2009 was £4,231,000,000. Mr Bright: Yes. Q190 Mr Todd: Elsewhere we find that 15% of that valuation was the housing stock. Am I right in thinking that? Mr Bright: I think that may be the total of our residential stock. Q191 Mr Todd: That is what I am looking for first. The total would be, on my reckoning, 635 million as a valuation of your residential stock? Mr Bright: Yes, I think that must be correct. I am sorry. I did not have the figures immediately to hand. Q192 Mr Todd: You are proposing to sell £250 million-worth of your urban stock, the housing stock valued at 635 million? Mr Bright: We are considering it. We have not taken the decision yet. Q193 Mr Todd: Give me an idea of how that decision was made as to how to proceed. Obviously not all stock has exactly the same value or indeed the same rental characteristics. I am not clear what proportion of your stock is actually being proposed or suggested for sale. You are obviously retaining a substantial element. I am not clear whether that is for a further disposal at a later stage or if it is seen as having a different purpose. I am not clear as to the strategy really. Mr Bright: The bulk of the remaining
residential property that we hold is predominantly property let on long
leaseholds in the area in and around Regent's Park and in Kensington Palace
Gardens. There are some other smaller
areas of residential housing but the bulk of the remainder is around Regent's
Park and Q194 Mr Todd: What one could possibly conclude is that you are selling the less attractive part of your residential portfolio. If I just go to the revenue ---- Mr Bright: I would not describe it as the less attractive part of the portfolio. Q195 Mr Todd: I am just going to explore what I think you think is less attractive about it. The revenue by activity on the same page - and this does exclude service charge income - says that £12 million was achieved from residential property on a valuation of, as I said, four billion overall, which would suggest a rate of return on really a trivial level almost. Could you break that down because I am not clear how that 12 million equates to the total valuation of the asset that is here or indeed to the asset that you are suggesting may be sold? Mr Bright: In relation to the property that may be sold, the gross revenue is of the order of about £7 million and the net is of the order of about £3 million. Q196 Mr Todd: You have a £3 million net revenue on a valuation of 250 million? Mr Bright: Yes. Q197 Mr Todd: If one compares that to other parts of your portfolio, that is where I meant less attractive in terms of returns. This is a less attractive asset within the stock. Mr Bright: It has a relatively low return, yes. Q198 Mr Todd: And also presumably its return does not change over any long period of time. Turnover on the estates is lower? Mr Bright: Yes. Turnover on the estates is low, that is correct, yes. Q199 Mr Todd: I am also interested by the legal framework of the protection of your tenants. You are not covered by some aspects of the law relating to tenancy. I believe that the arrangements for buying the freehold, extending the leasehold, enfranchising, is not the same as shared by any other tenant. Is that right? Mr Bright: Perhaps I could just explain that. As a Crown body, we can be exempt from the law on leasehold enfranchisement. What in fact happened is that some years ago we agreed with the Government that we would abide by the law on leasehold enfranchisement except in certain selected areas which might be described as ---- Q200 Mr Todd: You mentioned some of them in an earlier answer, I think. Mr Bright: Yes, that is correct. Predominantly, that is ---- Q201 Mr Todd: The tenants that you are discussing in this suggested disposal have always been aware that leasehold enfranchisement is an option available to them. Is that right? Mr Bright: Yes. Q202 Mr Todd: Have many exercised that? Mr Bright: I do not believe that many have chosen to do so. Q203 Mr Todd: Could you give a figure separately in a note as to what level of enfranchisement has taken place? Mr Bright: Yes, of course. Chairman: These are important issues and we shall return to them when the Minister appears in front of us shortly. We are now going to move on to the rural estate. Q204 Mr Breed: You indicate that you are a good landlord to your tenants. I suspect that is for the urban estate. If we take the rural estate, the National Farmers' Union in its evidence to us said you could do an awful lot more to assist individual tenant farmers who are wishing to retire from agriculture but suffer no doubt from a scarcity of rural housing to move into. What are you doing to assist these tenants, if you are being a good landlord? Mr Bright: We certainly would like to think of ourselves as a good landlord. We have a policy which is to enable retirement with dignity so that farmers, when they wish to retire, are able to do so. The first thing that we do - and it is what happens in the majority of cases - is that we have a long term relationship with our agricultural tenants and we take a close interest in their business. What we try to do is ensure that they are building up within their businesses sufficient profits, a revenue reserve if you like, so that when the time comes to retire they have the wherewithal to enable them to find alternative accommodation. Q205 Mr Breed: You keep stuffing up their rents. How does that allow them to build up this nice reserve? Mr Bright: With respect, we do not keep stuffing up the rents. We operate within the rent review regime that applies to ---- Q206 Mr
Breed: You keep taking more and more rent. In an agricultural sense, how are they to
build up this reserve to buy a rural house, in my part of the country in Mr Bright: I think it is fair to say that until a couple of years ago rents were by and large almost static for about five years and that reflected the state of the agricultural ---- Q207 Mr Breed: They were not making any money. Mr Bright: Indeed. Q208 Mr Breed: Precisely. When they start making some money, you stick the rents up so where is this reserve coming from? Mr Bright: I hasten to say it would make no sense at all for us to increase rents by an amount which simply wiped out the increase in business which farmers are getting. Q209 Mr Breed: You think you are doing enough? Mr Bright: What I was going to go on to say is that if that is not possible what we will do is put in equity to help a farmer buy a house when he comes to retire, or it may be possible to --- Q210 Mr Breed: Buy him a house and then rent it to him? Mr Bright: What we tend to do is put in an equity stake and the farmer might well put in an equity stake as well. The other thing that we can do sometimes is on a farm where there is maybe a cottage that becomes available and that can be made available to the retiring farmer. Q211 Mr Breed: And it is sold off sometimes by yourselves. Mr Bright: Not all of them have, with respect. Q212 Mr Breed: Not all of them, no; I accept that. Not all of them and not all of them have been done by the Duchy either, but both of you have been undertaking the selling off of such cottages. Moving on to evidence we had from Natural England, which notes that you are exempt from the duty placed on other public bodies to have regard to the purposes of National Parks and the Areas of Natural Beauty designation. They also refer to a lack of legal clarity over whether you have to meet the Government's condition targets for all SSSIs. Could you explain these situations to us and perhaps clarify whether there are similar provisions that do not apply to the Crown Estate Commissioners. What is this almost unique situation under which you have been able to operate? Mr Bright: I am not exactly clear what Natural England is driving at there. The Natural England submission, as I recall it, was overall extremely complimentary about the way in which we look after the land that is within our care. More to the point, we had a target which was that we should achieve the fact that 95% of all our Sites of Special Scientific Interest should be in good or better condition by, I think, 2009, and we have actually beaten that target. Q213 Mr Breed: 95% of all SSSIs by the end of 2010. Mr Bright: I beg your pardon. But we have already achieved that, so I would like to think that we are actually exercising good stewardship of the land that is in our care. Chairman: We will turn briefly now to
the Marine Estate in Q214 Nick Ainger: Last week we had evidence from the Renewable Energy Association, the Gas Storage Operators Association and the Carbon Capture and Storage Association. Certainly the Gas Storage Operators Association was quite critical of the current approach of the Crown Estate. They said that the current approach which the Crown Estate is taking towards offshore development is purely focused on revenue generation and will be of potential huge detriment to other Government policy. Obviously it is in the national interest that we develop offshore gas storage; also in the national interest that we have carbon capture and storage facilities developed offshore. We obviously need more renewables and so on and these are all part of the national interest. Why do you think an organisation like the Gas Storage Operators Association was so critical of the current approach? Mr Bright: I have to say, Mr Ainger, that I was pretty surprised and disappointed by that. The first thing to say is that on all aspects of offshore energy and related activities we are doing all we can to facilitate the development of these things in the national interest - offshore wind, wave and tidal and so on. The position on gas storage is that we have made available our proposed terms for the renting of gas storage facilities undersea since, I think, 2007. We have been in negotiation with four main operators in this area. We have reached agreement with three of the four operators and there is one that we have not reached agreement with. The one that we have not reached agreement with takes a fundamentally different view from us about the basis on which we should charge. They say that we should charge on a cost plus basis; we say that we should not. We have offered to go to independent arbitration but this fourth company has so far refused to go to independent arbitration. Q215 Nick Ainger: The Renewable Energy Association was saying that in terms of the offshore wind farms the relationship was working extremely well and we are now into round three of the offshore development, which seemed to be a success. But they are saying that in terms of small demonstration units with pilots perhaps greater consultation is needed, greater understanding that these developments in their early stages need to have a quite different approach from the large offshore wind farms, which is a mature industry now - the technology is known, and so on. Again, they are saying that there should be greater consultation but there seems to be an element of criticism there again. How do you respond to that? Mr Bright: When it comes to wave and
tidal one of the things that the Crown Estate has done is actually
groundbreaking - we are the first country in the world that has actually
launched a wave and tidal bidding round.
I think that is something of which we can be proud; but equally, of
course, there are going to be lessons to be learnt along the way. We have actually had a huge amount of
interest in the wave and tidal round that we are conducting in Q216 Nick Ainger: As you are the monopoly owner of the seabed, how do you calculate the rents that you are charging these developers? One of the other criticisms - well, it was not a criticism - was from the Carbon Capture and Storage Association, who have yet to enter into direct discussion, that they want the process to be open, transparent and fair. Obviously at the back of their mind there are concerns there. As a monopoly how do you actually set a fair price for the rental of these developments? Mr Bright: That is a very good question. Basically, the first thing to say is that our Act expressly says that we may not take advantage of our monopoly position; so we are quite clear, it is spelt out that we cannot exploit our monopoly position. How do we do this? Basically, we have to find a starting point and the starting point is, if you like, an analogous activity that might be undertaken on dry land. Many of these activities - not all of them, obviously wave and tidal are not one - cables, pipelines, wind farms and so on, there is a dry land starting point. We then go to independent valuation experts who will arrive at a value using the guidelines of the RICS Red Book which actually explains how you discount any element of monopoly value. On certain new industries we will take advice from other independent consultants, so in relation to carbon capture and storage, for example, we took advice also from Ernst and Young and also from an energy consultancy called Oxera to satisfy ourselves that we were actually looking for a fair rent from these sites. So that is what we are trying to do. Q217 Nick Ainger: Are you aware of any developers who have had to withdraw from a renewable development because of the rents that you have been demanding from them? Mr Bright: I have not been aware of any that have withdrawn because of the rents. They may withdraw for a whole range of reasons, and it is in the nature of these things that people do withdraw but I am not aware that it is because of the rents. Q218 John
Thurso: You and I have had a great deal of toing and
froing over marine energies. Can I put
on record that I do actually appreciate the fact that the Crown Estate stepped
up to the plate and became a part of the project team that kicked the whole
thing off in the Mr Bright: I think the principal lesson
that we would take from this is, as I mentioned a moment ago to Mr Ainger, that
we should perhaps have conducted more extensive consultation with the industry
before we launched the round. As I say,
the reason that we did not was not ill intent but because we know that there
was a lot of expectation that we wanted to get this moving. The other lesson that we learnt - and indeed
you and I have exchanged views on this - is that we were initially over
optimistic about how quickly we could get the leases signed. We initially hoped that we would be able to
get the leases signed on the Q219 John Thurso: On a completely different issue but related, you of course own the seabed where a lot of ports place their infrastructure. Mr Bright: Yes. Q220 John
Thurso: We had evidence from one of the Mr Bright: There are two things really. The first one is - and you will know, Lord Thurso, there is quite often a lot of demand in the ports, particularly in Scotland, to buy a seabed from us rather than to rent it - as I think you know, we have a policy which is generally disposed against selling bits of seabed. It is not an absolutely inflexible policy but our predisposition is against, and the reason for that is bitter experience because in the past historically we had sold parcels of land in ports and harbours and we found that that stores up a problem for the future because somebody may come along 20, 30, 40 years later and want to construct a new development of some sort in the harbour and it can be extraordinarily messy if there is a patchwork quilt of ownership in the harbour. That is why we have generally followed policy of not now selling. That said, we grant long leases and generally speaking we will grant long leases of seabed in harbour situations up to 125 years, which we have never found has been an inhibition to development or the financing of development. Q221 John Thurso: When Dr Michael Foxley, the Leader of Highland Council, was here he made a very strong submission in favour of a socioeconomic fund to be created, and likened it to the Shetland Oil Fund for Orkney and, I guess, Caithness and the Mainland, and I know that you are currently discussing a Memorandum of Understanding with Highlands and Islands Council. But in press reports afterwards it talks of tens of millions being in this fund. Can I ask you, one: do you agree with the principle of a socioeconomic fund; and, two: are those sorts of numbers achievable? Mr Bright: I have no reason to disagree with a socioeconomic fund. I think it would be very difficult under the terms of our Act for us to put money straight into such a fund. I think it would almost certainly fall foul of the provisions in our Act. That said, I think that the main benefits that are likely to come out of offshore renewable energy, particularly in the Highlands and Islands, are likely to be economic activity in the communities, and we can certainly play a part there by working with the local authorities in terms of developing their strategies for taking advantage of the opportunities that arise. There are assets that we can, if you like, put into the mix that may be able to help the development of such strategies and plans, and certainly that is the focus of the Memorandum of Understanding that we actually initiated. Q222 John Thurso: Can I just be clear on this? If you put up an onshore wind farm at the moment part of your planning processes is community benefit, and typically for a 50 megawatt installation it will be a capital sum of £500,000 and an annual income of between £40,000 and £50,000 which will go to a community fund. Are you saying that the Crown Estate is prohibited from similar arrangements with communities that are hosting their activities? Mr Bright: I think it is fair to say that the Crown Estate Act would not allow us simply to make payments into a fund, but there are other ways in which we believe--- Q223 John Thurso: Even if they were coming out of a portion of the rent that you are getting from people? Obviously, after it has been developed, not in the early stages. Mr Bright: Yes. But I would say that we do find other ways of working with communities and putting something back. You are probably aware that we have a marine stewardship fund where we channel funds into small local community schemes, pontoons and harbours--- Q224 John Thurso: The worrying word there is "small". The Shetland Oil Fund has made the Shetlands a highly sustainable community and this is a vast resource; it could be in 20 years' time, 12, 13, 14 gigawatts, a quarter of Britain's installed capacity, and the poor blighters who live on the cliffs at either side just watch all the money going out. That is a bit of hard luck. Mr Bright: I understand that and no doubt the local authorities will have discussions with the developers as well; so I am sure that they will want to talk to us. Q225 John Thurso: You are talking about it coming from the developers direct rather than you having an involvement? Mr Bright: I think it would be difficult for us under our Act to put funds in directly. Q226 Chairman: We have the Minister waiting outside for our next session. You promised us a number of points in writing; we will need those within the next seven days of business and we may of course have other follow-up questions as well. Mr Bright: Of course. Chairman: In the meantime, thank you very much for your evidence today. Witnesses: Sarah McCarthy-Fry MP, Exchequer Secretary, Ms Paula Diggle, Treasury Officer of Accounts, HM Treasury, and Mr John Henderson, Scotland Office, gave evidence. Q227 Chairman: Minister, can I apologise to you on behalf of the Sub-Committee for keeping you waiting but there were some issues we needed to explore in some detail with the Chief Executive. Can you begin by identifying yourself and your colleagues formally, please? Sarah McCarthy-Fry: I am Sarah McCarthy-Fry and I am the Exchequer Secretary to the Treasury. Ms Diggle: I am Paula Diggle; I am the Treasury Officer of Accounts. Mr Henderson: I am John Henderson, Deputy Director of the Q228 Chairman: Thank you very much for helping us this afternoon. Could we start perhaps with the Crown Estate Commissioners' objectives? How do these objectives include wider public policy objectives, or is your role simply to set and agree a financial target with them? Sarah McCarthy-Fry: The remit of the Crown Estate is set in the Act, as I am sure you know, which is to maintain and enhance its value in the return obtained for it with due regard to the requirements of good management. Obviously the Crown Estate have set themselves parameters, or they have set themselves a view in that they recognise that to be good management, not just in pure commercial terms but in the same way as an Accounting Officer does. I believe that they want to be recognised as a decent landlord, a good employer, a reliant market counterpart and a good steward of the assets that they manage. So in the sense of within their remit that is the way they see good management and their role. Maybe Paula could elaborate on the annual meeting, twice a year. Q229 Chairman: I just want to be clear from the Government's perspective how you satisfy yourself that there is the right balance between revenue generation and the wider public interest. What is the Treasury's position on the wider public interest? Sarah McCarthy-Fry: The Treasury's position is in effect with the good management side of it; that they seek to be a good employer, they seek to be a good landlord, which is in their programme and in their statement and in their annual report, and that is how we monitor that. Q230 Chairman: So you are not specifically interested in how they might meet wider public policy objectives of the Government? Sarah McCarthy-Fry: I do not believe it is in their remit. Q231 Chairman: No, your remit is what I am trying to get at; we have heard about their remit. What I am trying to get at is, do you have any interest in ensuring that the Commissioners, and the balance that you strike with them in setting the targets and so on, also have regard to your wider public policy objectives? Sarah McCarthy-Fry: As far as we can, within the statutory remit that the Crown Estate has. I cannot direct them to put the public policy interests before the revenue generation. Q232 Chairman: You have powers of direction though? Sarah McCarthy-Fry: I do have powers of direction; we do have powers of direction, but they have to be reasonable. Q233 Chairman: How often do you meet the Commissioners? Sarah McCarthy-Fry: Personally I have not met the Commissioners yet; I have not yet been in post for a year. That is not to say that they do not have interaction with ministers in Government. Q234 Chairman: No, but you are the minister responsible. I know you are recently in post but normally you would meet the Commissioners how often? Sarah McCarthy-Fry: I am not sure how often other ministers have met. I do intend to meet them. I would have thought an annual basis would have been right. Obviously officials meet with them on a regular basis. Q235 Chairman: How often do you have meetings with them? Ms Diggle: I see them very frequently - as the need arises really, as issues crop up, anything novel or contentious or just significant to the business of the Crown Estate. So I would see them several times a month. Q236 Chairman:
How
often then would you refer things up to your Minister? Chairman: "There is not usually a problem"; I see. Q237 Mr Love: You will probably be aware, Minister, that in a previous session we discussed in some detail the current proposal of the Crown Estate to sell off a substantial portion of its residential estate, round about, as we understand it, 1,500 properties. Following on from the questions that the Chairman has asked, is there any role for the Treasury or for ministers in giving a green light to such a proposal and what role will you play if they do decide at the end of the consultation period to sell off these properties? Sarah McCarthy-Fry: I would expect the Treasury to be consulted, of course, on this. Obviously I am familiar with this issue; it has been raised with me by a number of MPs who have concerns about their constituents. I would want to discuss this with the Commissioners after they have done the consultation to ensure that they have taken this on board. Whether I would then be able to issue a direction if I thought that they were not going in the right direction and I thought that they were doing something that was contrary, as I said it comes back to whether it would be considered reasonable and whether they were acting outside their remit. They have a statutory duty to maintain and enhance the value of their estate and the income it generates and they keep their asset portfolio continually under review. I am as concerned as anybody about the status of tenants if the proposal were to go ahead, and I would want to ensure that the safeguards I believe that the Crown Estates are prepared to be put in place would be put in place if they were to go down that route. As I understand it, it is still a consultation at this stage. Q238 Mr
Love: It is Government stated policy to address the
particularly acute shortage that we have in Sarah McCarthy-Fry: First of all, I do not think it necessarily means even if it were sold that there would be a shortage of affordable accommodation; that would depend on to whom it was sold. So there is a long way to go yet before that would come into play, and then we would have to balance that public policy objective against the remit that the Crown Estate has. If it got to the position that you talk about, it looked as if there was going to be a significant loss of affordable housing, if they were prepared only to sell to a private landlord - which I understand is not the case - then I could really understand the concerns that some of the tenants have, and it is a concern I would take up with the Commissioners. Whether it would be considered reasonable to direct them not to do it, I would have to consult on that. Q239 Mr Love: Ms Diggle, you indicated earlier that you have regular meetings with the Crown Estate. To what extent would you go into detail on a proposal of this nature? To what extent would you report back to other Treasury officials or to ministers in relation to that? Ms Diggle: I would certainly want to go into the idea of selling in quite some detail. I would want to satisfy myself on behalf of the Treasury that if the sale should go forward - let me stress that - it is in the wider public interest in the way we have been talking about earlier. We would want to be confident that the sale is not in any way going to deprive tenants of their proper rights. Mr Bright has explained to you that he is intent on preserving tenants' rights in quite a generous way, actually over and beyond what the law requires. If I thought that none of that was going to happen I would certainly want to tell the Minister and want to consider intervening. It does not seem that that is going to happen. Q240 Mr Love: It was indicated to us earlier on that it has been a policy for some months now for the Crown Estate to hold vacancies of properties on the estate. The presumption would be that they are doing that to make it more attractive. The presumption would be that if it is more attractive, it would be more attractive to a housing organisation that felt that vacancies would be a commercial opportunity to maximise the sale value of those properties, which will over time reduce the affordable accommodation available across London. The question I asked you is: would you investigate something of that nature and would that be reported back as a concern and something which should be a part of the judgment at the end of the day as to whether it is appropriate that the sale goes ahead and the sale goes ahead to whoever the appropriate housing organisation should be? Ms Diggle: If there was a serious problem, yes of course I would. But what Mr Bright told you, if we heard correctly, was that there are 32 vacancies out of about 1,200 tenancies. That does not sound like a very high vacancy rate to me. I would want to investigate that as part of looking at the whole process of sale as and when that proposal, if there is one, comes forward. Q241 Mr Love: All I would put to you is that the concern, I do not think, is with the Crown Estate who have been, as I understand it, a good landlord; the concern is about who would purchase, who would start with 30 or 40, who will find the eventual figures; the concern would be that that would rise fairly precipitately over as short a period of time as possible as they chose to sell off property, rather than continue with a key worker. But I do not want to go further into that. Ms Diggle: I am not sure that we can speculate on that. Q242 Mr Love: A final question from me: would it be appropriate for this Committee to ask you to look at this situation? Sarah McCarthy-Fry: I can assure you that I had intended to do that anyway when it was brought to my attention. Q243 Mr Love: Absolutely. And just assure yourself that we are not asking the Crown Estate to do more than they already have within their objectives, but I do think in terms of public policy issues it may be an issue that you would want to look at carefully. Sarah McCarthy-Fry: I have sought a meeting with the Commissioners on this very issue. Q244 Mr Todd: Is this not a typically English archaic compromise? Sarah McCarthy-Fry: In what way? Q245 Mr Todd: Because the Crown Estate is governed by an Act which we know to be quite restrictive in its purpose and yet the Crown Estate Commissioners over the last 40 years or so have pottered along doing mildly benevolent things and carrying out purposes which probably do not generate a substantial return for them. As soon as someone says, "Actually the Act does say that we are supposed to be maximising our return" then of course there comes about a difficulty. So it is what I normally describe as a typically English compromise of a disassociation between actually what is written down as a purpose and what people understand to be the behaviour of individuals. Sarah McCarthy-Fry: Can I say that it certainly has not been the Treasury that has told them that they have to maximise their revenue over and above any other --- Q246 Mr Todd: No, the law says that. Sarah McCarthy-Fry: The point you made was someone told them that the law said it; it certainly was not us. Q247 Mr Todd: The law has always been there, it is just the rather polite way in which we carry on our affairs. I am sure that is not unknown to you, that people understand that what they are supposed to be doing is not quite the same as what is written down in the statute. Sarah McCarthy-Fry: I understand the point you are making. Yes, you may be right; it may be that is the reason that the Treasury up until now has not felt the need to intervene. Q248 Mr Todd: Okay, but then that suggests that there is something we need to do. Either the Crown Estate needs to be given a clearer direction within the Act - and I think you have made the perfectly fair point that that has to be reasonable in law - or there has to be some transaction which takes this assumed social purpose from outside of the Crown Estate and place it somewhere where it should be exercised properly, and that would be the correct Government action. I can understand the criticism that has been directed at the Crown Estate in this exercise but they can reasonably say that the law has said that that is what they are supposed to do. Government has the task to try and resolve this confusion in purpose which I think is, as I said, built into the way we choose to produce law in our country, which is that while everyone behaves as we expect gentlemen to behave it turns out okay, does it not? But at some point someone starts to be a little tougher about it. Sarah McCarthy-Fry: But we do have the power of direction that we have never up to now, as I say, needed to use. Q249 Mr Todd: That may be one of the approaches to use, but the other is to look again at the Act itself and indeed the purpose of the Crown Estate. Sarah McCarthy-Fry: It is a very old Act. Mr Todd: It is. Q250 Jim Cousins: Have any Government departments expressed concerns to you about the Crown Estate and the way they are managed or their own dealings with them. Sarah McCarthy-Fry: Not to me. Ms Diggle: Nor to me. Q251 Jim Cousins: Have any other public bodies, local authorities, whatever, done that? Sarah McCarthy-Fry: Not to me. Ms Diggle: Nor to me. Q252 Jim Cousins: Do you think that the Crown Estate Commissioners should consult you on, as it were, on issues of policy and strategic direction? Sarah McCarthy-Fry: I will pass that to Paula, because they do. Ms Diggle: They do consult me and if I have any concerns they go straight to ministers. We talk about general investment policy, prospects for the year ahead, general, medium-term prospects and so on, as you would expect us to do. Q253 Jim Cousins: We have just heard that they have taken the decision to get out of housing and to get into retail parks. Did you approve of that? Ms Diggle: Can I please pause on that? These were two separate decisions and they were not decisions quite as clear-cut as you describe them, I am afraid. They took a decision to investigate the possibility of selling off part of their residential estate in the way that Mr Bright described to you earlier. They also took the decision stepwise, in very small steps, to make minor investments in retail investment parks as part of the general diversification of their portfolio. As Mr Bright described to you, we discussed and we agreed restrictions on the extent to which they would do that because it seemed a very cautious and sensible thing to do, in line with the general cautious nature of the estates' constitution. Q254 Jim Cousins: Ms Diggle, you have given us a version of what the Crown Estate perhaps would have been wiser to have said, but I am afraid it is at some variance with what they actually did say, because they actually did say that they were getting out of housing and they were getting into retail parks. Can I be clear about this: is this part of the strategic direction with which you are comfortable, Minister? Sarah McCarthy-Fry: As I understand it, it is a suggestion that was put to their board. As I understand it, the consequence was not one leading to the other; it was the fact that they did not feel that they were able to operate as good landlords, and it was not part of their core business. That is what I understand, but you had the conversation, did you not, Paula? Q255 Jim Cousins: Do you have any evidence on the housing front that they had not been acting as good landlords? Ms Diggle: Can I explain to you the case that the Crown Estate made to me? What they said was that these days modern residential landlords are typically very much larger than they are and they feel that they are not able to act as the best quality residential landlord and therefore it made sense to explore the possibility of divesting that part of the portfolio. They have not yet made the decision on that one. Q256 Jim Cousins: Minister, this housing that they have has been with them for a great number of years, and it was a product of legislation that was designed to provide homes fit for heroes after the Great War. Do you not think that this experience of housing brought about in that way is a strategic resource for the Government that you might wish to develop rather than to abandon? Sarah McCarthy-Fry: Can I say that the Government do not own this property; the property is owned by the Crown Estate on behalf of the Queen. The Government is only entitled to the revenue from this. Q257 Jim Cousins: The Queen constitutionally is not able to express views about it, so you are the proxy for the Queen. Sarah McCarthy-Fry: That is a very interesting position to be in, to be the proxy for the Queen. I have to act within the legal framework that I have, and the legal framework I have is to ensure that the Crown Estate is operating within the remit it has been given, and within that framework the Treasury meets with them to agree their plan, to ensure that we get the revenue return and to ensure the principles of good management, which we explored before. I think you are going a step further with what you are suggesting the Treasury's role may be in this. Q258 Jim Cousins: You are not suggesting from your point of view, in terms of your powers of direction, the overriding consideration is to maximise the return? Sarah McCarthy-Fry: No, I am not. I am suggesting that the power of direction for the Treasury is if the Crown Estate are not acting within their remit. I am not convinced, as of yet, that that includes the wider public policy - Government maybe, public policy - issues to which you are referring. I am not convinced and I would need to look at it closer. I am concerned about the tenants in these properties and I am concerned about tenants' rights in these properties, and I am concerned that the Crown Estate, as part of its role in good management, seeks to be a good landlord and they would seek to make sure that the tenants enjoyed those same benefits if they considering selling on those properties. But they are managing the properties. Q259 Jim Cousins: We cannot second-guess what your decision would be about this matter and whether you think housing forms part of the strategic interests that you would wish to maintain, but if the housing were to be disposed of can you give us an assurance, Minister, that the normal rights that would be available to tenants and leaseholders in a stock transfer situation will be observed? Sarah McCarthy-Fry: Can we get one thing clear? It is not my decision that they sell it off, that is a decision for the Commissioners of the Crown Estate. I would want them to assure me that that is what they were going to do in the negotiations that we have with them. The power of direction is something that has to be used legally and has to be used where we feel that the Crown Estate have not acted within their remit; and, as I say, it has to be used reasonably. So it is not my decision whether the Crown Estate, after consultation, go on to sell. I would then have to be satisfied, if they were to do that, before I was able to take the only power I do have, which is a power of direction, that they were not acting in a way which I felt was reasonable. Q260 Jim Cousins: Can you give us a guarantee, if the housing is disposed of, that the normal rights of tenants and leaseholders, as a matter of Government policy - as a matter of, if I can put it like this, our Government's policy - will be observed? Sarah McCarthy-Fry: And the Crown Estate have given that assurance. Q261 Jim Cousins: No. They very specifically said that they were not going to offer a ballot. A ballot is part of the stock transfer process. Can you give an assurance that a ballot will be offered? It is our Government's policy. Sarah McCarthy-Fry: It is our Government's policy for registered social housing landlords, I believe; I will be corrected if I am wrong. This is a non-departmental public body and legally they are not obliged to offer a ballot. They have to consult and we have to be satisfied with that consultation. Q262 Jim Cousins: But you would not wish to fall back, I am sure, on a legal contrivance of that kind? Sarah McCarthy-Fry: But I cannot direct the Crown Estate to undertake--- Q263 Jim Cousins: I am seeking an assurance from you that you will ensure that if disposal does go ahead - and it may not - the normal rights of tenants and leaseholders in such a situation will be observed; that they will have a ballot. Sarah McCarthy-Fry: The Crown Estate follows best practice. I have to come back to--- Q264 Jim Cousins: The Crown Estate have said to us that there will be no ballot; it is not part of their policy to have a ballot. You would not try to tell us, would you, that best practice does not include a ballot? Sarah McCarthy-Fry: All I can say to the Committee is that my power of direction is limited to reasonableness - would it be considered that failure to hold a ballot if any other consultation had taken place would be unreasonable? I want to do everything that is within my power to do. Q265 Jim Cousins: Were you aware that the Crown Estate Commissioners' policy is not to have a ballot? Sarah McCarthy-Fry: I was aware that they had a preferred method of consultation which did not include a ballot. Q266 Jim Cousins: Will you ensure that they have a change of policy in this respect? Sarah McCarthy-Fry: I am sorry? Q267 Jim Cousins: Will you guarantee to us that they change their policy in this respect and that--- Sarah McCarthy-Fry: I cannot guarantee; I have no power to do that. Q268 Jim Cousins: So you cannot assure us that the normal rights that tenants and leaseholders would have as a matter of general Government policy the Crown Estate would not be allowed to duck out of? Sarah McCarthy-Fry: If they were legally obliged to offer a ballot then I could direct them to hold the ballot. If they are not legally obliged to hold the ballot I cannot direct them to hold the ballot. That is not the relationship that we have with the Crown Estate; it is not the legal relationship we have with the Crown Estate. I can entreat them to. Q269 Jim Cousins: So the only time you see yourself as being able to give a direction is in the circumstance where they are legally obliged to do it anyway. What sort of power of direction is that? Sarah McCarthy-Fry: It is a power of direction that can only be used if they are acting outside their remit. Q270 Jim Cousins: Is your view of their remit that they should offer their tenants the normal rights that any other tenants or leaseholders would have in such a situation: that is, a ballot? Sarah McCarthy-Fry: I told the Committee that I have asked for a meeting with the Commissioners and I am more than prepared to ask the Commissioners and to ask quite forcibly that they have a ballot. I do not believe I have the legal power under the power of direction to stop the sale if they did not have a ballot. I do not want to give false hope to tenants and I do not want to give false hope to the Committee, if I do not have the legal power to do it. I am more than happy to go and check if I have, but I do not believe I have. Q271 Chairman: I wonder if we could pursue this because under the Act, which I have here, under subsection 4 of section 1 it says that you have power to give directions with regard to subsection 3, which talks about the general duty of the Commissioners to maintain and enhance the value of their estate and the return, but with due regard to the requirements of good management. So it is not quite right then to say that your power of direction is limited to keeping them within their remit. Sarah McCarthy-Fry: And the remit is within lines of good management. Q272 Chairman: You could give them a direction on the grounds that what they were doing might not be good management. Sarah McCarthy-Fry: I would have to look at my legal powers to do that. As I have said, I am more than happy to use any power I have to ask them to have a ballot of their tenants. Q273 Chairman: You are going to look at that specific point again. Sarah McCarthy-Fry: That is why I am going to have a meeting with the Commissioners. Q274 Mr Love: Just on this point, my understanding is that Government best practice is that the consultation should last for three months. It has lasted from the end of January to the middle of March, which is significantly shorter. Perhaps the Minister could take that point up with the Crown Commissioners. Sarah McCarthy-Fry: I have a number of points to take up with the Crown Commissioners. Q275 Chairman:
Just coming
back to the general issue of your financial relationship with the Crown Estate,
perhaps Ms Diggle could help us here. We
have been told earlier today that they have got round the restriction on
borrowing by setting up this joint venture, this Ms Diggle: Not by ministers. Q276 Chairman: It was approved by you? Ms Diggle: I looked into it very carefully with them. I discussed it with my seniors in the office. We first of all check that the vires existed. The vires say that it is proper for the Crown Estate to make investments in land and property, and this is actually an investment in a property asset. It happens to involve incidental borrowing. I was troubled by the apparent but not real conflict with the requirements of the Act. We therefore discussed and voluntarily agreed a limitation - quite a severe limitation - on the extent to which implied borrowing could take place. Q277 Chairman: Would you allow a similar venture in future? Ms Diggle: I would look at it very carefully on its merits at the time. Q278 Chairman: Just before we move on to some of the other issues, could you tell us how this financial return is set? Ms Diggle: Certainly. We look together, the Crown Estate and the Treasury, at its prospects for the year ahead. We look to see whether it is realistic for it to actually deliver a return of the previous year plus the GDP deflator, as Mr Bright described to you. If it is, then that is a good place to start and we ask could they do even better. Sometimes they can and we push them to do that. Sometimes they cannot and we try to set a realistic but stretching cash return in terms of revenue to be delivered. Q279 Chairman: What was your ministers' involvement in that in previous years? Sarah McCarthy-Fry: There has not been an involvement of ministers because there has been no problem to resolve. Q280 Chairman: And you have not come under pressure from a minister to say, "Get some more money out of the Crown Estate", for example? Ms Diggle: No, because they have been returning very good returns. If you look at their submission to you, you will see that their actual rate of growth of revenue has been pretty impressive. Mr Bright was a bit too modest to actually describe it in those terms. Q281 Nick Ainger: Minister, do you agree with the views expressed by some of the witnesses who have had dealings with the Crown Estate that they are an unregulated monopoly? Sarah McCarthy-Fry: They have a monopoly but within the Act they have to exercise that monopoly responsibly and there are restraints on it. I think there is a case for looking at it. They do try to benchmark themselves as best they can but I do think that there is a case where we could look a bit further on this. There is the option for any operator that thinks they have been a victim of a monopoly situation to approach the Office of Fair Trading on this. Of course, Scottish and Southern Energy in their written memorandum said that they believed the tender process has been fair, even-handed and run in a way which leads them to believe that a fully competitive approach has been taken at all times. Q282 Nick Ainger: We have indeed had that evidence. Sarah McCarthy-Fry: I have not seen any evidence from people that believe --- Q283 Nick Ainger: That evidence was given to us last week from a representative of the Gas Storage Operators Association. You say that if people have concerns then they can go to the Office of Fair Trading. My experience of the Office of Fair Trading is that if you want to wait long enough you may, if you are lucky, get a decision, whether it is the right decision or not. Surely when we are dealing with the offshore environment, which is absolutely key to the national interest in terms of renewables, in terms of gas storage, in terms of carbon capture and storage, tidal and wave renewable development, these are hugely important matters and the concern that has been expressed to us is that if there are delays, either because there is conflict over a fair price for rental of the seabed or there may be licensing issues, that these are international developers that can go elsewhere. The idea of just referring a developer to the OFT, surely that is not good enough? Surely you would be prepared to step in in those circumstances where you could see that the national interest was being affected by the position adopted by the Crown Commissioners? Would you, in those circumstances, be prepared to step in and give direction then? Sarah McCarthy-Fry: I think this is a matter that we do have to look at. DECC is of course the lead department on this and they have been negotiating with the Crown Estate and they have been having meetings over this. They have not come to me and said that they think there is a problem. However, with the importance of renewables as we go forward, the importance of energy security, I think that we ought to be raising this and looking at this again and seeing what the future should be. I do not think it needs to have been done yet but in the future as we move forward I think this is of concern. Q284 Nick
Ainger: The Sarah McCarthy-Fry: If it could be shown that it was getting in the way then, yes, it would need to be looked at. Q285 Nick Ainger: Obviously the responsibilities of the Crown Estate flow from the 1961 Act, which was before we had any real offshore development, and the potential in terms both of income but also the importance to the national interest of our offshore areas is now very, very significant. Should we be reviewing the 1961 Act in terms of the offshore environment? Sarah McCarthy-Fry: In my view, given the scale of what we are looking at and the scale of the challenge in front of us in terms of energy security, energy supply and the development of renewables, I think that is an option. Q286 John Thurso: Mr Henderson, it is my understanding that your Secretary of State has a rather different view of his ability to direct from that of the Treasury. Would you care to comment on that? Mr Henderson: You would not expect me, sitting next to a Government Minister, to say that the Government actually do not have a collective view on this. I am not aware that my Secretary of State does have a radically different view. Q287 John Thurso: Were you at the meeting that he very kindly chaired between myself and the Elements of the Renewable Energy? Mr Henderson: I was. Q288 John Thurso: You remember that we discussed a variety of things. It was my understanding - not at the meeting, but afterwards - that the Secretary of State, were a satisfactory conclusion not to be arrived at, felt that it was completely within his power to issue a direction. Mr Henderson: I am sorry, I do not recall that. Q289 John Thurso: There is nothing about reasonableness anywhere in the Act; there is not a word from start to finish. You have said you can only do it if it is reasonable. There is actually nothing in the Act which says you have to act reasonably. There are many other things you have to do but not act reasonably. Sarah McCarthy-Fry: I think it is a point of general law that you have to act reasonably. Q290 John Thurso: Actually if you look at subsection 4, it gives the Chancellor of the Exchequer and the Secretary of State for Scotland powers to give direction and it then says: "But the Chancellor of the Exchequer and the Secretary of State in giving directions to the Commissioners under this subsection shall have regard to subsection 3 above." That is just "have regard to" and all subsection 3 says is that they must maintain and enhance the value of the estate and the returns obtained from it, but with due regard to the requirements of good management. I put it to you that there is nothing in that to prevent either the Chancellor of the Exchequer or the Secretary of State for Scotland, either in these property matters we have been talking about or in respect of renewable energy, saying to the Crown Estate, "This is the policy which we wish you to pursue and it must be good management because it is Government policy." Sarah McCarthy-Fry: Up until you came to the last sentence I may well have agreed with you. Q291 John Thurso: I was trying to be kind. Sarah McCarthy-Fry: Nothing I have said this afternoon has said that I would not be prepared to use the power of direction if I felt it was necessary; and I do not want anyone to go away and say that I have not said I would do that. What I have said is that it is not a power that is used lightly and it is something where we would have to look at all the circumstances. Q292 John
Thurso: My concern is that the power of direction has
become in the passage of time since 1961 to be viewed as a slap on the wrist, a
kind of nuclear option that you do not exercise because they are all being
quite nice chaps; rather than what I think it was intended to be in the Act,
which is that from time to time ministers actually step up to the plate of
their responsibilities and say, "We need to direct these guys because without
that direction they cannot do their job properly." I will stay out of the housing side of it,
but if you look at renewable energy when we did the Sarah McCarthy-Fry: The power of direction is a last resort tool and if you can achieve--- Q293 John Thurso: That is what it has become to be believed by the Treasury but it is not what is in the Act. Sarah McCarthy-Fry: But if we can achieve what we want to achieve without having to use the power of direction by consultation and negotiation, then I would rather do that. On the housing we are still at the consultation stage, and there are a lot of questions I need to ask the Commissioners and the negotiations on that will go forward. On the renewables we are still at an early stage. I have not had anything back from DECC to tell me that I need to exercise a power of direction in this. They are working together with the Crown Estate. DECC have the objective of energy security, bringing on low carbon and renewables in the national interest. They have not come to me yet, if they are going to, because they are working with the Crown Estate. Because we have not actually used the power of direction I think that means that we have been able to resolve issues without having to do that. Q294 John Thurso: Let me put this to you. On 8 December, when you appeared in front of us and I asked you what contact you have had with the Crown Estate and you told me that you had not, and you said you thought your officials might have done and that you would check into that; and you have now told us that they do meet on a fairly regular basis. But we are now at 3 March and you have said, "I think this is an area it is important to keep track of" and you have actually between December and March managed to set up a meeting of the Crown Estate for April. Is that enough attention by one of two ministers of the Crown who have the actual power over the Crown Estate? Sarah McCarthy-Fry: As I say, as far as the energy renewables side of it, DECC have been having the ongoing relationship with the Crown Estate and they have not come to me and said there is a problem. As far as the housing side of it, it was brought to my attention by various MPs and since then I have been trying to get a meeting with the Commissioners. Q295 John
Thurso: Let me turn quickly to Mr Henderson: In the Government's response to the Calman
Commission they accepted the recommendation that as regards the appointment of
the Scottish Commissioner there should be consultation with Scottish
ministers. The Government did not,
however, accept the recommendation that the Secretary of State should place his
power of direction. The Government did
point out in the White Paper that there were very good and developing
relationships between the Crown Estate and the devolved administration, and we
heard that from the Chief Executive earlier.
We have heard also about the Memorandum of Understanding that will
shortly be finalised with the local authorities in the Q296 John
Thurso: A few years ago the Crown Estate Commissioners
stopped treating Mr Henderson: Calman did not recommend that. Calman actually pointed out, if I recall,
that there were advantages in making investments in Q297 John Thurso: Do you think that the body he suggested for more consultation with Scottish ministers is a good idea? Or does your Secretary of State think that? Mr Henderson: Clearly the more dialogue that the Crown Estate has with the devolved administration has to be a good thing. Chairman: We are going to leave it there for the moment but I think you have undertaken, Minister, just to reflect on the power of direction point and to check whether your description of the position is exact. If you are able to help us further on that we need to hear from you, simply because of our timetable, within the next seven days if that is possible. In the meantime, I would like to thank you and your colleagues for helping us this afternoon. |