Business Case – Establishment of a New Sustainable Aquaculture Innovation Function (SAIC)

5. The Financial Case

5.1 Capital requirement

The Scottish Government has assessed the financial requirements necessary to establish and operate the new independent SAIC entity and confirms that ongoing annual revenue funding of £1.4m per year is required to deliver the work set out in this business case. While there is some flexibility within this allocation with the goal being to maximise funding available for the bid fund where possible, the expectation of funding is as follows:

• £700k for core organisational funding, including staffing, governance, administration, and project making and knowledge-exchange activity,
• £700k for seed project funding for an annual programme of research and innovation projects directly aligned with SG priorities for aquaculture, fish health and climate resilience.

A Year 1 operating budget developed by SAIC staff with input from SG officials is at Annex C with year 1 operating costs estimated at £645,510. The year 1 funding available for project funding, before external match is secured, is therefore expected to be £754,490.

SG anticipates that operational costs may rise modestly in years 2-5 due to annual inflation and the operation of the Company maturing as Directors develop and execute their own detailed plans for delivery against the required outputs of the funding agreement. It is assumed that any annual underspend on the core operational budget of the Company will be carried over to project funding in order to maximise the Company’s impact.

Initial estimates are based on current staff costs, expected market rates for contracted services such as HR, payroll, IT and audit and an assessment of the operational requirements of a small independent company.

Project funding from SG via CES will be used to lever funding from private and other public sector sources from Scotland and the UK. The salmon sector has committed to continue to contribute to project funding. SAIC has historically leveraged in additional funds in cash and in kind; at November 2021 SAIC had secured £9.8m into Scottish research and innovation projects from other UK and EU funding sources against Scottish Government investment.

It is expected that Crown Estate Scotland (CES) will provide £1.4m p.a. in funding over the 5-year period of their Corporate Plan. There may be options to utilise project match funding from Marine Fund Scotland (MFS) subject to the Fund’s normal processes. Please refer to the CES business case for more details on how the Preferred Option as determined in the economic case will be funded and whether it is affordable for CES over the five-year period of enabling payments.

5.2 Net effect on prices

SG has assessed the potential impact of preferred option on public expenditure and confirms that the arrangement does not create any upward price risk for the Scottish Government or Crown Estate Scotland. Funding to SAIC provided by CES via the Scottish Government will be a fixed sum capped grant with no inflationary uplift applied.

Payments from SG to SAIC will be made only on the basis of agreed milestones and performance requirements set out in the grant agreement. Any cost increases must be absorbed by SAIC or offset through efficiencies or rebalancing of activity.

5.3 Impact on Balance sheet

SG confirms that there will be no material impact on the Scottish Government balance sheet given the scale of Scottish Government’s existing revenues and spending commitments and that the new company will be established as a separate legal entity. The organisation will operate as a separate legal body with its own financial responsibilities, and all liabilities and assets will sit with the company rather than SG.

Potential impact on the CES balance sheet of an annual cost item of £1.4m is considered within the CES Business Case as not being significant in the context of the scale of the organisation and its growing revenue profile. SG has reviewed CES’s financial position and is satisfied that this contribution is affordable within CES’s projected revenue profile.

5.4 Impact on Income and Expenditure Account

A Year 1 operating budget developed by SAIC staff with input from SG officials is at Annex C. SG will provide an annual grant to the new company following receipt of the enabling payment from CES. VAT is not expected to arise on either the payment from CES to SG nor to the grant from SG to the new company.

The specific decision to charge VAT on the second transfer would be the responsibility of the new company but drafting of the funding agreement will ensure this does not create an additional cost to SG. The principal issue in determining the applicability of VAT will be whether SG and CES benefit from the services directly and exclusively, or simply as a secondary result of the wider public benefit of the research being carried out. Grant documentation will be structured to make clear the reality is the latter which should defend the grant position against any calls to apply VAT.

An annual revenue funding requirement of £1.4m per annum is anticipated, allowing for £700,000 of core funding and £700,000 of project funding (flexible, with a view to maximise project funding). There are no Capital funding requirements.

5.5 Overall affordability and funding

SG has reviewed the wider public sector budget landscape, including the position of Marine Directorate budgets and the constraints affecting multi-year allocations. The SG budget position makes it clear it would not be feasible to fund an aquaculture innovation vehicle from Marine Directorate budgets and wider consideration is needed.

The Marine Fund Scotland (MFS) already funds aquaculture projects and provided some funds for SAIC’s current transition budget. Marine Fund Scotland is, to some degree, dependent on arrangements between the UK Government and SG and subject to change; securing multiyear funding is highly challenging. Allocating funding from MFS to support an aquaculture innovation entity would represent a significant reduction on funds available to eligible aquaculture and fisheries projects into the long term, is not possible on a multiyear basis, and due to the lack of certainty is not considered viable for the longer term.

Following analysis of all options, it has been concluded that the most viable and sustainable funding source is a multi-year contribution from CES revenue. CES is uniquely able to provide stable multiyear commitments aligned with its Corporate Plan and marine based revenue projections.

A portion of CES net revenues from its marine estate (out to 12 nautical miles) are distributed to SG which then transfers the funds to the local authorities for local development, and the authorities are then responsible for ensuring that the funding is used effectively and delivers value for money. The amount each local authority receives is a factor of the sea area within 0 to 12 nautical miles of the local authority and the revenues raised from marine assets within 0-12 nautical miles from the council area. This distribution method has been agreed on by the Settlement and Distribution Group, comprising Local government, Convention of Scottish Local Authorities and SG.

CES is expected to benefit from a strong and expanding income profile driven by both asset value growth and the development of new revenue streams. The overall estate value is anticipated to increase through continued investment activity, with around 7% of the current asset base projected to be reinvested, both to enhance existing assets and to support the acquisition or development of new ones. This, combined with natural valuation uplifts, is expected to generate increases in total asset value within the range of £50 million to £150 million over the coming years. Further uplifts have been captured from the Allocation Round 7 for offshore wind leasing on the east coast of Scotland, where new lease options have increased rental income and strengthen long term revenue generation. However, this will likely be ringfenced for SG. While most capital value increases will not directly flow through the income and expenditure account, they underpin the creation of future income streams, including rent receipts, net operating income and associated discounted cash flows. Overall, CES’ income generating activities are expected to increase and there are no major expenditure items expected in the next five years which could impact the affordability of this project. However, it is acknowledged that this funding commitment puts additional pressure on CES budgets and CES already has a proactive approach to manage this.

Project funding from SG, CES or development agencies can be used to lever funding from private and other public sector sources from Scotland and the UK, and there may be options to utilise project match funding from Marine Fund Scotland (MFS) subject to the Fund’s normal processes. SAIC has historically leveraged in additional funds in cash and in kind, at November 2021 SAIC had secured £9.8m into Scottish research and innovation projects from other UK and EU funding sources against and we would expect the new entity to be able to achieve similar support. Given wider public sector budget pressures the most practical solution to funding core costs is seen to be from CES revenues.

CES is able to offer multi-year commitments, something SG can only do exceptionally. A multiyear commitment is proposed on the part of CES to fund the ‘future SAIC’ organisation’s costs from April 2026 when transitional funding expires, which would safeguard aquaculture innovation into the longer term. The intention is to support the economic sustainability and development of Scottish aquaculture via innovation, and so local communities and economies will see long term benefit from increased CES investment in innovation. The knock-on impact of investing in improving fish health and welfare, reducing mortalities and addressing challenges arising from climate change at source, would lead to increased productivity. This would lead to increased economic return (notwithstanding volatile salmon markets), support local communities who depend on aquaculture and, given aquaculture rents are based on production, additional revenue flowing back to CES and the consolidated fund.

The sustainable growth of all forms of aquaculture is a SG, and CES objective – supporting economic growth while directly growing CES revenue and maintaining and enhancing the value of the estate on behalf of the people of Scotland. The future economic viability of the sector is underpinned by its ability to innovate effectively in the face of existing production challenges and emerging problems linked to a changing climate and sea conditions. A credible alternative to CES providing core funding for the aquaculture innovation body has not been identified.

SG therefore concludes that the preferred option is affordable, financially sustainable and justified, and represents the most credible means of ensuring long-term innovation

Subsidy Control

It is recognised that while a reasonable proportion of the new entity’s bid fund recipients will not be experiencing state subsidy, some might, and the registration of a new scheme with the Department of Business and Trade is appropriate. Marine Directorate officials are undertaking this task with support from specialist SG colleagues. The scheme will be in place in advance of the award by the new entity of any grants and once in place the scheme will remove risk of challenge.

Confirmation of stakeholder support

Sector engagement has demonstrated support for the preferred option across finfish, shellfish, seaweed and supply chain interests. The salmon sector has committed to continue to contribute to project funding but there are currently no realistic opportunities for funding organisational core costs outside of the Scottish public sector. Public sector investment generates value for money through levering external funding from other sources and analysis conducted in November 2023 showed SAIC to secure £5.60 in external funding for each £1 of SAIC investment in projects.