Government intervention in property in Scotland, UK

Citation

(2007), "Government intervention in property in Scotland, UK", Journal of Facilities Management, Vol. 5 No. 1. https://doi.org/10.1108/jfm.2007.30805aaa.001

Government intervention in property in Scotland, UK

In this editorial I examine how the public sector has intervened in the market for industrial and workshop space in Scotland over recent decades and how the relationship between the public and private sector has developed in that time.

In the immediate post war period there was significant public sector intervention in the industrial sector to address the problems of reorganising industrial infrastructure worn out, structurally distorted or war damaged during the conflict. Thereafter governments of different persuasions intervened through various mechanisms such as the Scottish Development Agency (SDA) and the Scottish New Towns and local authority direct provision. In the 1990s the SDA's industrial portfolio was largely sold off and the organisation was replaced by the Scottish Enterprise Network. In the 1990s the Scottish New Towns were wound up. These changes brought substantial private capital into the Scottish Industrial market. However, there continued to be some public sector intervention through regional selective assistance, the rapid scheme operated by Scottish Enterprise, direct local authority intervention, and assistance in more fragile areas through Highlands and Islands Enterprise. To day there is substantial private investor commitment to the Scottish Industrial Sector and yet the picture remains mixed with a substantial commitment to the sector from Scottish local authorities and Highlands and Islands Enterprise.

The Hillington Industrial Estate near Glasgow was developed in 1938 and was a move to take industry out of the more congested urban areas taking advantage of improved road communications and an expanding electricity grid. In the post second world war period the SDA was established to provide industrial space directly and until it was wound up in 1991 played a leading role in developing, leasing and managing industrial estates in places such as New House or Hillington. The SDA became one of the biggest developers and landlords of industrial property in Scotland. In 1991 (check) the bulk of its property portfolio was sold to the private sector. Caledonian Land bought a major part of that portfolio. The training agency and the remainder of the SDA merged and created Scottish Enterprise and its network of local enterprise companies.

The SDA had so dominated the market that private investors were reluctant to invest in a market where they had to compete both in developing and letting property with an organisation that might develop and lease property from social and political motives rather than strict economic criteria. There was always the fear that rents might be held down artificially in times of economic stress and rental growth inhibited so that there was not a level playing field.

In parallel was the Highlands and Islands Development Board which operated in the fragile areas of north western Scotland. The HIDB was set up to provide support in fragile areas where the market found it difficult to operate. It had a very wide remit which included the direct provision of industrial units in rural areas where the market would not do so to secure investment and employment. When the HIDB was replaced by Highlands and Islands Enterprise and at the same time that Scottish Enterprise was created, it nevertheless retained responsibility for providing industrial property in fragile areas.

Local authorities

Throughout the post-war period Scottish local authorities have developed and managed a substantial portfolio of industrial and workshop premises to encourage employment in their localities. In an unpublished paper by Scottish Property Network (1998) in a study of the local authority areas covered by the Scottish Enterprise Network (except Dumfries and Galloway and Borders) found that the local authorities in the survey had 16,972 units totalling 14,079,000 square metres of space. In other words those local authorities provided 23 per cent of the units in the study area and 7 per cent of the floor space. Obviously they tended to concentrate on providing and managing the smaller units sought by start up organisations. Because of their small scale and intensive management costs these are not attractive to the private developer.

The Scottish new towns

The new towns of East Kilbride, Cumbernauld, Glenrothes, Irvine and Livingston also provided substantial quantities of industrial space for the Scottish Economy. With new housing for workers, and new infrastructure they provided a very attractive location for business and by the time the wind up order for the New Towns came in the mid 1990s they were major players in their markets. With the wind up of each new town most of their industrial property holdings were sold to the private sector except for a residual portfolio which went to Scottish Enterprise.

Scottish enterprise

The Scottish Enterprise continued to manage the residual portfolio and rationalising it to meet Scottish office disposal targets and using the income for further investment. The emphasis in direct provision shifted to providing space for inward investment and a number of high profile investments were made such as Chungwa, and Motorola. Assisting in the provision of strategic sites or helping provide property for high profile inward investors were seen as a major strategic role for the organisation.

Scottish Enterprise also ran the RAPID scheme. The RAPID scheme was designed to sharply focus assistance to the private sector to specific examples of market failure. This meant providing the minimum required intervention of expertise or finance to rectify an identified market failure so that an important unmet demand for industrial property could be rectified providing it offered net economic benefits to Scotland. The aim was to avoid distorting the market by only focusing on situations of clearly identifiable market failure and then offering the minimum assistance necessary to give the developer a fair return. RAPID grant was offered under the enterprise and New Towns (Scotland) Act 1990 Section 8(1)(a)(i). The aim was to leverage in private capital has much as possible. An example of the use of RAPID might be the development of an industrial scheme in an area that desperately needed it, but where the development of a particular site was uneconomic due to site development difficulties. By focussed intervention the scheme might be developed by minimum gap funding so that the developer achieved a fair rate of return and the public sector intervention was confined to the minimum necessary to get the scheme going.

Scottish Enterprise also retain the power to undertake joint ventures to provide industrial property in collaboration with the private sector on a commercial basis. There were provisions for ensuring that the rewards were commensurate with the risk taken by the organisation. Also for schemes involving investment over £5M Scottish office approval was required. RAPID operated from 1995 to 2000. Changes in European Union rules meant that it was then replaced by the Property Support Scheme.

Scottish Enterprise has used a special purpose vehicle called Akeler (Scotland) Limited to provide industrial/business property over (1993-2003). It has been particularly active in developing Hamilton International Technology Park within the Lanarkshire Enterprise Zone building on Scottish Enterprise's investment in infrastructure there. It has drawn in a substantial private sector investment and ERDF funding. It has also worked in borders.

The advance procurement programme

Up to 1999, Scottish Enterprise intervention was based on local priorities identified by their local enterprise companies. By 1999 the Scottish Enterprise national took the view that overarching national priorities should reassert themselves and the Advance Procurement Programme was created with the local enterprise companies identifying sites for 400,000 square feet of development across the country. On going to the market there was little interest and some concern that Central Government was once more threatening to intervene in the market. Despite negotiation with a preferred developer a satisfactory agreement was never concluded and only one modest in the borders has been developed under this scheme.

Strategic spatial priorities

To attract an international investment and retain high quality national investment the Scottish Enterprise saw it as vital that the country could offer high quality business locations. It wanted to focus its activities on supporting particular business locations, to promote key priority industries or clusters of industries to act as growth points. These reflected the Scottish Executive's policy framework set out in smart success for Scotland.

It undertook independent economic research in 2002 and concluded that Scottish Enterprise needed to focus on a smaller number of locations and eventually decided on eight strategic economic development zones. Unless there were compelling special circumstances speculative development would not be supported by Scottish Enterprise outside those zones. Again the emphasis is on identifying and rectifying market failure. A major priority was identified as the Clyde Corridor and particularly the Clyde Waterfront. This will lead to a restructuring of the strategic land portfolio which still generates a significant income for the network to reinvest. It also sees for itself a wider role influencing and co-ordinating the investment of local authorities, the utilities and Communities Scotland.

The current situation

Throughout much of central Scotland business and industrial property development works without any need for public sector assistance. This is a healthy state of affairs. There are three main areas where there is still some public assistance.

Within the Scottish Enterprise area there are still market failures which require intervention. This may include providing highly specialised facilities in key clusters which the market is not interested in such as in science zones in Dundee or Lothians. There may be particular localities where the costs and risks are too great for the private sector and the Scottish Enterprise will continue to have a role.

Highlands and Islands Enterprise deals with the particular needs of fragile rural areas with a low population and it too sees a role for providing industrial space where it is simply not economic for the market to operate.

Local authorities retail substantial holdings of industrial workshop space. They too see a continued role for themselves focussing particularly on those parts of the market that the private sector find unattractive particularly small units, start up facilities, incubator units and heavily managed clusters to promote new businesses.