Brexit: what's at stake for businesses

Possibilities

Being Able to Avoid Missing out as the Single Market Grows

Nothing stays the same for long. The Brexit talks are not just about the single market as we know it in 2017; it is about what that market will look like in 2020 and beyond.

Right now Scottish businesses stand to benefit from the single market as it grows in the years ahead. The long-term potential gain from completing the single market in services, where Scotland and the UK have a comparative advantage, is of the order of 2.4% of EU GDP. To put this into context, a 2.4% boost to Scottish GDP in 2016 would be equivalent to £3.6 billion. There would also be great scope to capitalise on emerging and innovative sectors, for example digital and integrated energy markets, and to benefit from new EU trade deals already in discussion, such as with Japan and Indonesia.

Brexit may mean:

• UK companies missing out on single market growth and completion; or
• UK companies being able to benefit as the single market grows for example in services and energy; or
• UK companies gaining no benefits from future European funding.

The real life examples in this section illustrate just what we might be missing out on if we freeze ourselves out. And by definition we don't know what more will be at stake here: this could be the tip of a very big iceberg.

Possibilities: What Businesses Say

The examples below capture what companies are saying to us about what's at stake for them, in their own words, demonstrating the real issues they face.

Atlantis Resources Limited ("Atlantis") is a global developer of renewable energy projects with headquarters in Edinburgh. Atlantis's flagship project, MeyGen, is situated in the Inner Sound of Scotland's Pentland Firth and is the world's largest tidal stream array.

The European Union is an important source of financing for renewable projects, particularly tidal stream. Atlantis has been awarded both Horizon 2020 and NER300 funding from the European Commission as well as received offers of support from the European Investment Bank for future phases of their flagship MeyGen project. They believe that should the UK remain in the EU single market they will be extremely well positioned to continue this success and benefit from future rounds of EU funding. Ease of movement and access to markets are as critical as access to EU funding. Atlantis has strategic partners in Belgium and France as well as suppliers across Europe, and employs a number of EU nationals who are technical experts in marine technology and whose skills and experience would be difficult to replace.

Maramedia is Scotland's leading independent natural history TV production company. European connections and partnerships play an important role in the success of Maramedia. Based in Glasgow, Maramedia is behind the production of the critically-acclaimed BBC Scotland series Hebrides – Islands on the Edge and its sequel, Highlands – Scotland's Wild Heart, both narrated by Ewan McGregor. The two series have been sold in over 100 countries across the globe. They estimate that one third of their business is with European broadcasters: the overall EU audio-visual market is growing and set to grow more.

Maramedia is currently producing Wild Way of the Vikings, a documentary-drama considering the Vikings' place in European natural history. This series is a co-production involving French and Austrian partners alongside BBC Scotland and PBS in the USA. Funding has included contributions from Swedish, Danish and Croatian broadcasters. They have also secured grant funding through the EU's Creative Europe programme. Co-founder and Creative Director of Maramedia, Nigel Pope, says that had they not been able to secure funding through the EU, which covers 20 per cent of the production's costs, they would struggle to maintain their highly-specialised production base in Scotland.

EU funding and partnerships with European broadcasters have played an important role in ensuring Maramedia maintain their reputation as a producer of world-class wildlife films – Scotland's place in the European single market is vital to this. It helps them to develop and maintain working relationships, supports the financing of productions and eases the complex logistical challenges of filming wildlife across Europe and the world.

World-leading tidal energy company Edinburgh-based Nova Innovation successfully deployed a third turbine at the Shetland Tidal Array, the world's first offshore tidal array, in February 2017 and achieved this with over 80% Scottish content, demonstrating genuine commitment to and confidence in the local supply chain.

Now employing more than 30 staff, Nova has more than doubled its workforce and recently moved into new larger premises to allow them to deliver their current order book. In July 2017, Nova won a major new €20 million European tidal energy project, Enabling Future Arrays in Tidal ( EnFAIT) and will head a consortium of nine leading industrial, academic and research organisations from across the UK and Europe building on the existing project in the Bluemull Sound, Shetland. The project is a flagship initiative for the EU and marine energy, and aims to increase the commercial viability of tidal power.

Nova values scientific collaboration and enjoys excellent research relationships with other member states and regions. The EU energy union is due to be completed in the years ahead. Without access to EU markets, supply chain and free movement of people, Nova will struggle to build on the tremendous success achieved to date and deliver success across a pan-European market and beyond.

The Scottish Salmon Company ( SSC) The Scottish Salmon Company ( SSC) is the leading producer of premium Scottish salmon with operations only in Scotland. Headquartered in Edinburgh, SSC has 60 sites along the west coast of Scotland and Hebrides and employs over 500 people. A global business, SSC produces 25,000 tonnes annually and exports to 26 countries. Overseas markets account for over 50% of sales and around 35% goes to the EU. SSC is focused on strategic international growth, particularly in the Far East and North America. SSC believes remaining in the Single Market will allow important trade relationships to grow. With a clear focus on growing the company internationally, SSC is harnessing the power of its Scottish provenance to position itself on the global stage and driving exports.

A global IT consultancy company with a Scottish base. As a global company, they liaise with clients and business in many countries. Free movement of labour is crucial to them as employees with specialised skills are highly mobile, working wherever their skills are required. Their graduate program currently attracts many highly skilled international applicants. They fear they won't continue to have access to applications from the EU due to Brexit. Brexit is unlikely to have an impact on dealings with the public sector but with more private sector businesses moving their businesses to the EU, such as Dublin and Frankfurt, there is a likelihood that Brexit will impact dealings with the private sector.

Sectorial Case Studies

This section illustrates how the different issues come together in two very different sectors.

Case study sector 1:

Asset Management

Scotland is the UK's 2nd largest financial cluster after London. 86,600 people are employed across Banking, Asset Management, Asset Servicing, Insurance and Life & Pensions. Scotland's Asset Management sector is one of the largest in Europe.

For asset management perhaps the largest problem is the uncertainty created by the current limbo. Firms simply do not know what the arrangements will be after March 2019.

Asset management firms, in common with all financial services firms in Scotland, are able to sell into Europe because, under the single market the UK Regulator, the Financial Conduct Authority, is accepted as competent to regulate UK businesses for their operations across the whole EU. This arrangement, known as ' passporting', will cease to apply in March 2019 unless a specific agreement is reached.

The majority of Scottish firms have already established subsidiaries in other EU countries in the hope that they will be able to continue to do business through them after 2019. However, it is unlikely that regulators in other EU 27 states will be content for these offices simply to act as post-boxes whilst most of their work is done in what is effectively a third country. Therefore, Brexit will imply significantly increased costs for Scottish firms and the transfer of some operating activities from Scotland to other EU states.

There will also be implications for sales to customers outside the EU. Currently relations between the EU and the US, which represents the most important non- EU market for Scottish asset management firms, are governed by the principle of regulatory equivalence. This means that, since both sides agree that their regimes are similar, cross-border transactions can be done on a relatively relaxed basis. After Brexit, it will be necessary to set up new regulatory agreements with both the EU and the US. Whilst future UK regulations are likely to be similar to those in place now, these agreements will have to be negotiated, which will take time. It is almost inconceivable that these will be completed before March 2019 as it is improbable that discussions with the US could make any progress until agreement has first been reached with the EU. Moreover the negotiations with the EU will be complicated by the fact that several member states will have a clear objective of obtaining new business at the expense of UK firms.

Maintaining regulatory equivalence on a continuing basis will constrain any future adaptation of financial regulation within the UK, and will require UK regulators to closely follow developments in regulation with the EU, without being able to influence them. Third country clients have become comfortable with the regulatory protections provided by the current EU arrangements. It will be necessary in future for Scottish firms to, either satisfy their clients that the protections they provide and the associated regulatory oversight are at least as strong as those that currently exist , or to allow these clients to invest through an EU authorised entity, based in some centre outside Scotland, such as Dublin or Luxembourg.

Case study sector 2:

Food and Drink

The food and drink sector is very important to Scotland, worth around £14 billion annually. It has an enviable track record and an ambition to grow to £30 billion by 2030. There are many issues at stake. One of the biggest is labour. From fruit growers, to fish processors, to caterers and chefs, virtually all parts of the sector exemplify the key importance of attracting and retaining EU staff - both skilled and unskilled – often at very short notice. Even indirect effects may be severe: without the 98% of abattoir vets who are from elsewhere in the EU almost no meat could be processed in Scotland.

Trade in food is of great importance and complex. There is considerable concern about the potential loss of access to key EU export markets and real uncertainty about the fate of protected food names such as Scottish salmon. With EU tariffs traditionally highest for some food stuffs such as red meat and smoked salmon – up to 40% - the implications for costs on both exports and imports are potentially very significant, for both businesses and consumers. Even relatively low tariffs are likely to affect the viability of processing operations with low profit margins.

There may be some new export opportunities if the UK is ultimately able to deliver meaningful new free trade agreements over and above those negotiated by the EU. This may provide new opportunities for consumers, but may also come with other less welcome consequences, such as low cost/high volume imports of, for example, beef and lamb and the inability to resist products which do not meet current EU standards, such as chlorine washed chicken from the United States. Companies could also be subject to different rules for different markets, perhaps needing different production lines.

Food supply chains are complex, with ingredients and products crossing many borders, often just in time. One of the key issues is the risk of adding to that complexity, with serious potential for practical upheaval such as considerable delays for checks at ports, causing real difficulties for perishable goods such as seafood. The nature of the trade deals agreed will determine how exports from the UK are managed in future. At present, depending on the needs of the importing country, each export consignment of a product of animal origin requires an export health certificate. This can often involve long round trips, as currently the authorisations are not issued electronically. On average the certificates cost £60 each. If these arrangements are mirrored for trade with the EU, this would place a tremendous resource burden on both local authorities and food businesses who would need to pay for a service that is already stretched. Similarly for our vital Scotch whisky exports, it is crucial that there should be an effective replacement from day one of the current export and import declaration system.

We will of course want to grasp any emerging opportunities to reform the means of support, such as the Common Agricultural Policy, and to determine our own fisheries management. But this would be far from a clean slate. In addition to World Trade Organisation constraints, we would want to retain high environmental, food safety and other standards and work within the rules of international agreements such as those which apply to the sustainable management of fish stocks. In addition, the UK Government have to date been unable to guarantee in the medium to long term the continuation of EU funding currently provided under the CAP, the Food Processing Marketing and Cooperation Scheme and the European Maritime and Fisheries Fund.

Above all the food sector is complex with a huge range of variables and potential pitfalls. The uncertainty and potential damage caused by Brexit has already affected confidence in the sector. Decisions and clarity are urgently needed.