Green Freeports Programme: business and regulatory impact assessment (BRIA)

Section 3: Costs, impacts and benefits

10. Costs, impacts, and benefits for businesses and considered against following options: Option 1: Do Nothing: and Option 2: Implement Green Freeport model.

Option 1: Do Nothing

Impact

11. Opting not to implement Green Freeport model would result in several impacts. The targeted economic stimulus of the Green Freeport would not take place in distinct port geographies, resulting in businesses not having access to the package of incentives designed to attract their investment. The local coalition of public and private sector partners would be less united around a common major intervention. It is logical to assume the Do Nothing option would result fewer jobs and apprenticeships created in a given area – and could even be detrimental, given that Freeports in England, seeking to engage similar sectors, would have access to forms of support and incentives that Scottish sites would not have, potentially drawing business away from them.

12. However, as is often the case with place-based interventions, it can be difficult to identify a more precise counterfactual in relation to what happens without the intervention. It can be argued that some places may have grown even without intervention, and while growth in other cases may appear anaemic it might have been worse still in the absence of intervention. However, a Green Freeport aims to address deep-seated and self-reinforcing economic underperformance in distinct port geographies, where market failures have left unmet potential over an extended period. Given the characteristics of relative comparative disadvantage exhibited in Green Freeports, the counterfactual scenario in which no Green Freeport intervention is made is likely to see trends endure as they have done. While it is reasonable to assume that some investment could occur in the designated Green Freeport areas without intervention, the fundamental barriers to improved economic performance – comparatively low competitiveness – are likely to remain, meaning the policy outcomes around regeneration, high quality job creation and others are likely to be unmet. What would happen in the absence of intervention will depend greatly on the specifics of the intervention, sectors, and location in question. But a common anticipated impact would be failure to realise unmet potential, with social, environmental, and economic costs to businesses and communities. Some examples of unmet potential would include:

• underdeveloped port land (e.g. brownfield sites, derelict land, declining industrial sites) remains underdeveloped and is not regenerated
• continued competitiveness challenges for these areas, with reduced investment at the local level and from overseas, and reduced ability to attract significant anchor investments (e.g. manufacturing facilities) to Scotland
• missed opportunities for industry to grow / transition into new specialisms
• reduced labour market opportunities – job losses, fewer jobs created, fewer skills programmes, greater job insecurity

13. Despite these uncertainties, building a more precise understanding of what would happen without a Green Freeport intervention is an important policy question – recognised as part of this BRIA development. As a result, as part of expert engagement, policy consultation, and learning from past special economic zone interventions, the monitoring and evaluation approach for Green Freeports has been designed to compare Green Freeports with a real-time synthetic counterfactual – i.e. an economic analysis which gathers the same data in two areas and enables assessment on what has happened in the Green Freeport area with what has happened in an area of high comparability, where the Green Freeport intervention did not take place.^[5]

Costs / Benefit:

14. A primary benefit of the ‘Do Nothing’ option in comparison to the ‘implement Green Freeports’ option would likely be fiscal in the very short term [though this would be outweighed in the medium to long term].

• it is likely, in a ‘Do Nothing’ scenario, instead of forgoing tax income for a number of years to incentivise development, government may still receive some tax income raised from limited activity occurring on sites which would otherwise have had Green Freeport status. In the short term, any - however limited - tax revenue received from development in the ‘no Green Freeport’ scenario would exceed the ‘nil’ revenue received from designated Green Freeport tax sites. [Note: In terms of the value of revenue accrued on sites in the Do Nothing option, this would be context specific, relevant to the individual site. However, taking into account the nature of the sites which receive designation (i.e. underdeveloped sites, typically having historically faced challenges around lack of competitiveness, requiring regeneration) it is to be expected that only limited tax receipts would be realised in these sites without the Green Freeport]
• in the ‘Do Nothing’ scenario, it is anticipated any modest tax income received in the short term from sites would be outweighed in the medium to long term by the enhanced tax base made possible through the introduction of the Green Freeport. Even taking into account relief periods for various taxes (but not income tax) attracting significant additional investment to previously uncompetitive sites the Green Freeport sites would provide significantly higher tax revenue raising capacity than compared to the Do Nothing scenario. By implementing Green Freeports, government decision-making on the additionality enabled by Green Freeport designation for individual sites becomes vital to ensure in fiscal terms the ‘Implement Green Freeports’ option outweighs the ‘Do Nothing’ option in the medium to long term
• the size of tax revenue forgone as part of Green Freeport intervention is dependent on the build-out of the tax sites and the extent to which devolved reliefs are taken up. In general, the more development occurring on tax sites, the greater the volume of tax reliefs provided, the more tax revenue government would forgo. Likewise, more modest uptake of the Green Freeport benefits would amount to correspondingly less tax revenue forgone. However, options analysis should be cautious of assuming the value of revenue forgone in the ‘implement Green Freeports’ option would be at all comparable to the tax revenue receipts achieved in the Do Nothing option. Revenue can only be forgone if activity occurs on site – and for the reasons explained above, only limited development is expected in the Do Nothing scenario

15. The Do Nothing option would also result in savings on capital expenditure allocated to seed capital funding up to £25 million per Green Freeport [though note: seed capital funding is funded from UK Government, therefore Scottish Government would see no direct saving].

16. Together, at the time of this BRIA, the estimated combination of revenue forgone (devolved taxes) and seed capital across two Green Freeports within the ‘implement Green Freeport’ scenario is up to £334 million. The figure is not a budget for the two Green Freeports – there is no financial cap on the value of potential reliefs which could be awarded (it is possible, due to the demand-led nature of the policy, for the collective costs to exceed this) though in practice the physical restrictions of designated tax site land do limit the potential value of government subsidy that could be provided to support Green Freeport activity. The extent to which the investment will constitute value for money for government will depend on the delivery structures surrounding Green Freeports, and they create the conditions to ensure the every pound spent in the award of seed capital or in tax reliefs provided is delivering a value for money return on investment – via increased investment and job creation incentivised by government in the short term, and via the benefits of emerging new industrial clusters that the Green Freeport seek to deliver in the long term. Ensuring a positive cost benefit ratio for individual Green Freeport proposals is part of business case appraisal to ensure for every pound invested by the government, significantly higher levels of private investment is unlocked as a result.

17. A final benefit of the Do Nothing option would be the elimination of the displacement risk associated with Green Freeports. Through a range of local and programme level controls, there are mechanisms in place to significantly mitigate the displacement risk – however some displacement may still be expected.

Option 2: Implement Green Freeports model

18. With the demand-led basis of Green Freeport delivery, just as it is not possible to predict the exact costs of the policy, the same is to true of estimating the exact impacts of each Green Freeport. At a high level, the estimated impact of a Green Freeport would be enabling areas to maximise their economic potential – with significant economic, environmental, and social benefits. As discussed in section 1, positive impacts would be envisaged to be realised over time, through a process of change whereby investable sites are created, investment is landed in target sectors, and reinforcing benefits support growth of new industrial clusters as a result. Over time, the combination of available incentives and operational delivery controls encourage sustained changes in business decision-making, resulting in increased economic activity. This increased activity unlocks further benefits, with positive impacts reinforcing one other, and delivery controls ensuring benefits are well-aligned to the core objectives. Among these processes include:

• regeneration, agglomeration, and high-quality job creation, as a result of firms and people being in close proximity (reducing transportation costs for goods, people and ideas) leading to the creation new high quality jobs
• increasing investment, trade, and innovation whereby the Green Freeports combined are expected to catalyse investment
• less state dependence in the future whereby following the award of subsidies the regions are likely to require less taxpayer support and generate additional tax receipts
• social impact arising from empowering communities and strengthening local economies, leading to better outcomes for those based in Green Freeport regions
• decarbonisation as a result of new investment in clean energy, new green industrial clusters, and acceleration of the Scotland’s clean energy output, enabling cheaper, greener and more secure energy for the long term

19. These impacts must be balanced with potential negative impacts or unintended consequences of the intervention - in particular learning lessons from previous interventions, and identifying where risks can be mitigated through controls. Among these potential impacts include:

• geographical and distributional impacts and displacement of activity from other (disadvantaged) areas. Though there are controls to mitigate and avoid displacement (detailed in Section 1), nevertheless it is possible that some displacement could still occur
• market distortion, although this is expected to be low, based on the analysis of the Green Freeports subsidy scheme submitted to the Competitions and Markets Authority
• potential benefits to larger firms over smaller firms whereby evidence from other countries suggests that larger firms may be better able to take advantage of enterprise zones more than smaller ones
• negative impacts of agglomeration on pollution, traffic congestion and house prices
• not everywhere can benefit, and not all places in need of a boost to regeneration can benefit from a Green Freeport (although it is expected that the Green Freeports will generate benefits for surrounding regions)

20. In practice, the exact impacts on the ground would be context dependent – and the balance of benefits and costs must be weighed up in detail as part of business case appraisal. Nevertheless, detailed modelling has been completed by both Forth Green Freeport and Inverness and Cromarty Firth Green Freeport (as part of their business cases) to set out the scale of impact they seek to achieve using the policy’s incentives:

• Forth Green Freeport aims to use the Green Freeport status to attract around £7.9 billion of private and public investment over a 10-year period, and create around 16,000 direct jobs (gross), with a further 18,500 jobs (gross) supported indirectly in supply chains and through wages. Using strategic sites at Leith, Burntisland, Rosyth, and Grangemouth, it will focus on 7 priority clusters which include offshore wind, alternative fuels, advanced manufacturing including shipbuilding, logistics and warehousing, and creative industries.
• Inverness and Cromarty Firth Green Freeport aims to create 18,300 jobs for the UK - 11,300 of which would be located in the Highlands. It aims to attract investment in the region of almost £6.5 billion, with over £3.5 billion forecast over the next 5 years. With strategic sites at Inverness, Invergordon, Nigg, and Ardersier, it will focus on offshore wind and other low-carbon energy industries.

21. The business case process acts as a primary programme level control to ensure these overarching anticipated benefits proposed by the Green Freeports are based upon well-evidenced proposals, which will deliver value for public money. Following a Green Book process, each Green Freeport coalition must submit detailed economic analysis linked to their proposals. These proposals must be signed off by both Scottish Government and UK Government before incentives are made available.^[6] In its Economic Case, it must set out analysis including:^[7]

• critical success factors
• value for money (VfM) and affordability/cost modelling
• the expected value of the tax, customs, and seed capital benefits to the businesses operating on the proposed sites, and their impact on viability of investment
• the expected impact of proposals on the creation of additional jobs and wage uplift, investment, and trade throughput in the Green Freeport area
• sensitivity analysis that models what the VfM of the various options would be if some of the key underlying assumptions were different
• benefits that cannot easily be quantified/monetised, and each option’s ability to deliver them
• the extent to which benefits are additional or displaced from another area
• deadweight loss associated with proposals
• wider economic impacts, including labour demand effects, export and import substitution, social impact, equality impact.
• a whole life carbon emissions impact, including embodied carbon from construction, estimated in tonnes CO2e

Quantified costs to business:

22. At an individual business level, the policy intention is to reduce costs to change decision-making and encourage investment. The way a company could take advantage of the incentives would depend upon variables including its size and its business model. However, the below sets out two example scenarios of how a business could use the tax incentives^[8]:

Scenario 1

• a company acquired a non-residential property in a Green Freeport tax site for £2 million. It has a rateable value of £55,000
• it also employs 200 people with salaries of £20,000 each

Scenario 2

• a company spends £5 million on renovating a building for non-residential use
• it also spends £1 million on special rate plant and machinery

** Net tax benefit is calculated on the basis of a 25% CT rate applied to remaining profits after capital allowances have been applied.

23. Note: in the above examples, costs to the Scottish Government (in the form of foregone revenue) would only be incurred against the devolved reliefs awarded – i.e. NDR and LBTT relief. NICs, SBA, and ECA revenue would be forgone by the UK Government.

Scottish firms’ international competitiveness

24. Green Freeport incentives are designed to boost the competitiveness of Scottish firms, enabling them to attract new large scale investment.

Small business impacts:

25. Green Freeport incentives are not restricted by size of business. Small businesses are entitled to access the incentives as are medium and large businesses. Past evidence from similar economic zone interventions in other countries has suggested that larger firms may have been able to take advantage of enterprise zones ahead of smaller ones.^[9] This risk is managed through the selection process, whereby rigorous consideration has been given to ensure that plans support small and medium size activity, as well as that of larger firms.

Workforce and Fair Work:

26. A key ambition of the Green Freeport model is to support a growing labour market in emerging industrial clusters. This includes maximising local labour market participation, upskilling, as well as supporting apprenticeships, career returners, and the long-term unemployed in the community. As a requirement of the business case phase, Green Freeports are required to prepare detailed skills plans – setting out how they will drive the growth of the cluster, whilst also supporting local opportunities. In practice, the two Green Freeports have different plans fitted to their local context. Inverness and Cromarty Firth proposes to create a skills fund (estimated £15 million), while Forth Green Freeport seeks also to create a skills fund (estimated up to £3 million). These funds put together using through financial contributions to the Green Freeport operating company, directly from businesses receiving the incentives.

27. Another consideration around workforce and fair work is ensuring that the employment opportunities created are of high quality. This relates to the risk that Green Freeport incentives would encourage investment and jobs created, but not translate into well-paid high quality opportunities. This was a key issue identified in the public consultations which fed into the design of the Green Freeport model. As a result of the views provided, Green Freeports are required to embed fair work practices in line with the Scottish Government’s Fair Work First approach through locally administered controls. This means businesses operating within a Green Freeport area will be required to adhere to all existing employment law and worker protections, within enhanced criteria around embedding the Scottish Government’s Fair Work First principles – and both have developed Fair Work Charters, in partnership with Scottish Government officials.

Climate Change:

28. A core requirement for Green Freeports is to ‘promote decarbonisation and a just transition to net zero.’ As part of the business case requirements, local coalitions are required to submit decarbonisation plans demonstrating carbon savings over the lifecycle of the project. Green Freeports will not become operational without robust decarbonisation plans, approved by government. Green Freeports and the businesses within them will play an important role in Scotland and the UK’s path to net zero by adopting high environmental standards and through attracting investment in green industries, creating green jobs and reducing greenhouse gas emissions. Green Freeports will contribute to realising the outcomes set out in Scotland’s National Performance Framework in accordance with Scotland’s Climate Change Plan.

Competition assessment:

29. The Green Freeport intervention includes financial incentives to businesses that are likely to constitute subsidies. These subsidies may have potential to impact on competition, and the potential impacts have been considered by Scottish Government and UK Government throughout business engagement and the policy design process. It is impossible to establish ahead of time the maximum level of subsidy an individual beneficiary could receive (as this will depend on the relief-qualifying activity they undertake), but Scottish Government and UK Government deem it possible that this amount could exceed £10 million.

30. As a result, in accordance with the Subsidy Control Act 2022, in March 2024 the Scottish Government and the Ministry for Housing, Communities, and Local Government, jointly referred a Green Freeports Subsidy Scheme to the Competition and Markets Authority (CMA), as a Subsidy of Particular Interest. The CMA published their independent advisory report on the Green Freeports Subsidy Scheme in April 2024. Green Freeports subsidy scheme details were uploaded on the GOV.UK subsidy transparency database. The scheme assessed the award of Green Freeport subsidies against the below criteria:

• policy objectives and appropriateness of policy instruments:
• i. principle A: subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns)
• ii. principle E: subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means
• baseline no-subsidy scenario and additionality assessment
• i. principle C: subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change, in relation to a subsidy, should be conducive to achieving its specific policy objective, and something that would not happen without the subsidy
• ii. principle D: subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy
• proportionality/minimising distortion
• i. principle B - subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
• ii. principle F - subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition and investment within the United Kingdom
• balancing exercise:
• i. principle G - subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on competition and investment within the United Kingdom, and international trade and investment
• environment and energy principles
• i. environmental principle A: all subsidies in relation to energy and environment shall be aimed at and incentivise the beneficiary in delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market; or increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy
• ii. environmental principle B: subsidies in relation to energy and environment shall not relieve the beneficiary from liabilities arising from its responsibilities as a polluter under the law of England and Wales, Scotland, or Northern Ireland

Consumer Duty:

31. The Consumer Scotland Act 2020 (‘the 2020 Act’) introduced a duty on public authorities in Scotland to have regard to the impact of those decisions on consumers (individuals or small businesses) of goods and services in Scotland that are supplied by a public authority or body. The Green Freeports programme does not involve the supply of goods or services by the Scottish Government or another public authority to individuals and small businesses, therefore the Green Freeports programme is outwith the scope of the Consumer Duty. Nevertheless, the impact on consumers more widely has been considered. As a result, no negative impacts and one indirect positive impact have been identified: In principle, a key ambition of the Green Freeports is to promote decarbonisation, and though the policy is not specific, it is anticipated a key strategic outcome of the Green Freeports will be to enable new investment in clean energy within Scotland, leading to new green industrial clusters, and accelerating Scotland’s clean energy output. Though energy prices are not in direct scope of the Green Freeports policy, it is expected that through the industrial developments they seek to catalyse, Green Freeports should support the enabling of cheaper, greener and more secure energy in Scotland for the long term. These developments are therefore anticipated to be of direct benefit to consumers in Scotland – including the most vulnerable. In practice, the identified targeted sectors in the two selected Green Freeport’s proposals confirm the strategic intent on clean energy production – with production of offshore wind and alternative fuels (including hydrogen) being central strategic focuses for investment.