UK: Getting on with devolution.

UK: Getting on with devolution. - Devolution is creeping up on Scottish business. How will it cope with the new parliament? And how likely is full-blown independence for Scotland in the years ahead?

by Neil Fitzgerald.
Last Updated: 31 Aug 2010

Devolution is creeping up on Scottish business. How will it cope with the new parliament? And how likely is full-blown independence for Scotland in the years ahead?

At first they were in denial. Even as the polling booths in the referendum on Scottish devolution closed on 11 September last year, senior businessmen in Scotland were still saying the outcome would be 'too close to call' or that somehow devolution simply would not happen. But happen it did. The next day, startled executives awoke to discover the electorate had voted by three to one in favour of a Scottish parliament and by nearly two to one for the new chamber to have tax-varying powers.

Now there is less than a year before the 129 members of the Scottish parliament are elected and worries abound for the business community, especially in the areas of taxation and inward investment. Most are only now getting to grips with the new reality. But what is this 'reality'? The legislative powers of the new parliament and the role of its Scottish administration have all been clearly laid out in a surprisingly readable Scotland Bill now going through Westminster.

Reassurance for the business community of a 'level playing field' with the rest of the UK is found in a number of key areas in which legislative authority is still reserved to the Westminster parliament. These include company law, corporate taxes, consumer affairs, financial services regulation and energy policy. Also built into the Bill, and emphasised by the secretary of state for Scotland, Donald Dewar, is a mechanism to ensure that any attempt by a feisty young Scottish parliament to extend its prescribed influence ultra vires will be headed off.

Doubts remain, however. The promise of government attention and resources being more keenly focused on local conditions and needs than they were from Westminster is seen as empty rhetoric, yet to be tested in practice.

In addition it is 'unfortunate', according to some in the business community, that the only tangibles to come out of the devolution process so far have been to do with spending, and of the debit variety at that.

First, there is the extra annual cost of the new system of government.

An independent think tank, the Scottish Council Foundation, now estimates this cost to be around £40 million, which some believe is a lot of money to spend when the impact of devolution could be minimal. Ian McMillan, director-general of the Scottish CBI, whose executive body was sceptical of the merits of devolution, says: 'The whole reason for our council's stance before the referendum was that devolution didn't seem to make a particular difference from the way the Scottish Office was already addressing them.'

Second, some Scottish businesses have become concerned at the post-referendum developments. Following the plebiscite, the Treasury announced it was considering changing the way the block grant to Scotland, already criticised for failing to reflect the decline in its population, is to be calculated: this could mean bad news for those parts of the business community dependent on public-sector custom and investment. It may also hasten the use of the power to vary standard rate income tax +3% or -3%, although probably still not before the new parliament's second term.

Even so, the 'tartan tax', as it was previously labelled by the Conservatives, who suggested that any variation in tax would be in an upward direction, has declined as a threat to employment and investment in the eyes of most Scottish businesses. Some are disquieted that it is still an issue at all. Royal Bank of Scotland's group chief executive, George Mathewson, exudes disappointment, if not frustration, with the form that the business sector's involvement in the run-up to the referendum took: 'The whole debate has been obsessed with the taxation issue,' he says. 'That's now been battered to death and it wasn't that significant a commercial issue anyway.'

Even before the referendum the Fraser of Allander Institute, an independent economic research unit at the University of Strathclyde, said the benefits to the economy from higher public spending as a result of the extra tax would outweigh the cost.

Only if the workforce sought to recoup more than a third of the tax through higher wage claims would it affect employment and output, it estimated: 'And not only are many people non-unionised and so unlikely to claim, but Scots are fairly social-minded and likely to accept the tax increase as a social wage for better services if it is introduced the right way,' says the institute's director, professor Brian Ashcroft.

Any remaining concern is now down to what are considered over-complex, tax-avoidance rules proposed by the Inland Revenue to determine who would be liable, based on the number of days resident in Scotland per year.

The mood is best illustrated by McMillan's comment: 'Who is going to bother arranging their business journeys just to avoid paying less than £70 a month in extra tax?' A newer concern to have emerged with the details of the Scotland Bill has been the parliament's powers in relation to local government finance and a possible dismantling of the Uniform Business Rate, even if the Labour Government is discussing doing the same in England and Wales.

These worries are still only hypothetical. What about that most strategically sensitive segment of the business community, inward investing foreign multinationals? Mathewson, who in the early '80s was chief executive of the Scottish Development Agency, predecessor of today's economic development agency, Scottish Enterprise, says: 'I hope that under whatever arrangement is made for economic development and in particular inward investment, Scotland will be allowed to retain its own presentation. It has been very successful so far.'

Reassuringly, potential higher taxes 'have never been raised as an issue' for the inward investors, according to a spokesperson for the agency responsible for drawing them in, Locate in Scotland. After all, multinationals, he says, base their decisions on a much wider range of factors, such as skills availability and transport infrastructure, things on which a devolved government could act with far more flexibility. One real concern for the rest of the Scottish business community is that Locate in Scotland's successful manoeuvring to attract inward investment could be restricted by Margaret Beckett, president of the Board of Trade. She has threatened to impose an agreement among the various UK regional inward investment bodies to stop them over competing against each other to attract overseas investors.

Space for this 'concordat' has already been written into the Scotland Bill.

Planning is another vital area for business, says Fraser Morrison, executive chairman of Morrison Construction, Scotland's largest indigenous construction company. He believes the devolved parliament could legislate to reduce the damaging uncertainties and delays of the existing process. 'The parliament has the authority to create a new national physical plan for Scotland and to ensure local authorities are implementing it. Scotland is small enough for a single plan to work, identifying areas for inward investment and effective land use. On the sites identified in this way there should then be strong expectation of development and the time scales for appeals would be reduced. Planning appeals must be fast-tracked or else enthusiasm and commitment for development can easily be killed off. It is not solely a Scottish problem, but there are examples south of the border showing how this can be done.'

Mathewson also thinks planning is key issue. 'I think that planning should be addressed. For example, people forget that it's only in the last few years that Edinburgh allowed new offices to be built in the centre and that meant a dearth of high-quality office space. If Scotland has to play to its strengths then Edinburgh as a centre for business is one of those strengths. I would also like to see better air communications with Europe, all of Europe.'

Dewar and the chancellor, Gordon Brown, have both been at pains to stress that Scottish business will enjoy a level playing field with the rest of the UK, combined with fiscal responsibility and prudence. According to Graham Leicester, director of the Scottish Council Foundation, this message has done much to reconcile Scottish businesses to the arrival of devolution.

Certainly, Mathewson has few worries about the possibility of a Scotland that turns in on itself, a common fear: 'I really don't have any fears about Scotland becoming more inward-looking, not when it's clear that Europe dominates everyone's minds and we are all in global markets these days. And, to be fair, Dewar has already made very positive moves to ensure this parliament attracts good-quality people who are interested in running things from a new perspective.'

Although they may be reconciled to devolution now, there are few signs of Scottish business leaders queueing up to stick in their two pence worth in the post-referendum debate. The overall response has still been tentative. Leicester, who has been organising seminars to help bring politicians together with business leaders, says one reason is that, 'with the collapse of the anti-devolution campaign and the disappearance of the Tory party in Scotland at the general election, business feels it has no coherent body to represent its interests in the political domain'.

Even so, business involvement is clearly needed, even within areas thought to be within the political remit. Under what might be termed 'New Labour, new parliament, new thinking on joint business-government issues', Dewar and constitutional affairs minister Henry McLeish have openly invited views from business on how the parliament should operate. Leicester adds: 'But over and above that is the fact that devolution hasn't happened yet and until it does business doesn't know what it would like (parliament) to do. Public-private partnership is not as well developed in Scotland as in the minds of the Number 10 Policy Unit.' He remains confident that it will be, but it will take time.

What of the prospects for full independence? The polls encourage the Scottish National Party to see itself as the official opposition in the new parliament, but its leader, Alex Salmond, has been running his own charm offensive to demonstrate that full independence is concordant with the interests of business. What's clear is that the business community's response to the SNP overtures has been muted. Scotland exports more per head of population than the rest of the UK, thanks principally to its electronics, food and drink (especially whisky) industries. But all its major sectors, from manufacturing to financial services and even construction, are still closely interlinked with the UK economy.

Hence, for business the destabilisation that independence may or may not generate is just not worth thinking about. 'However it may appear in London, the business sector in Scotland is already coming to terms with devolution and isn't even looking at independence,' says Leicester.

McMillan at CBI Scotland agrees: 'Independence is so far down the line it's not even a prospect. What we have to do now is keep our feet on the ground.' The trouble is that, much as the business community may not want to think about independence, if the polls are right then, as with devolution, they will have been in denial.

MOTOROLA

WANTED FOR SILICON GLEN - NEW INITIATIVE ON SKILLS AT ALL LEVELS.

It is the potential for the devolved system of government in Scotland to focus on and adapt to increasing worldwide pressures on local skills that most interests Motorola's Scottish-based European vice-president and general manager, George Bennett.

Bennett is chairman of the Scottish Electronics Forum. The SEF is an industry grouping comprising over 30 of the major international electronics manufacturers now operating in Scotland, often working in partnership with government and the economic development body, Scottish Enterprise. As such its members constitute the core not only of those activities collectively known as Silicon Glen, but also of Scotland's inward investment community as a whole. Successful as this has been, both they and Scottish Enterprise continue to toil to extend Scotland's range of added-value operations.

'Closest to our hearts in SEF would be the view that devolution is an opportunity to increase the levels of skills and competencies within the country,' Bennett says.

'We have been seeing quite significant changes within the Scottish electronics industry, moving further away from box-making, assembly-type operations and up the value chain to encompass product research and design, the production of the new system-on-chip semiconductors and so on.

'For that reason we'd really like to see a new initiative on skills, at school level and onwards, targeting people's education for work to complement the knowledge base with an agenda of higher skills such as people management, presentation and design.'

Another area in which the new Scottish government could beneficially exert its influence is in creating more direct transport links, and there is also scope, he believes, for closer tailoring of government incentives for higher-value investment in Scotland. 'There tends to be a block of incentives such as regional selective assistance grants that don't discriminate,' Bennett says. 'If we can influence and educate local ministers on the technologies we use we might see incentives aimed at attracting more R&D activities including product design so that, again, we get a complete flow of activities developing more widely in Scotland.'

Action at Scottish government level in these areas would more than offset any potential disincentive to investment there might be in, for example, powers to vary taxation. 'Any added cost is a downside. You can't pass it on to the customer so you have to ensure you can recoup it from higher productivity and added-value activity,' Bennett says. 'One other downside we might see is if Scotland becomes too inward-looking. We're all working for global companies in global markets.We're all keen that those in the Government look outward, which I think they are already doing.We hope we have a strong enough voice to persuade them to stay that way.'

MAIN AREAS OF POWER FOR THE SCOTTISH PARLIAMENT

The legislative powers of the new parliament have all been clearly laid out in the Scotland Bill that is currently going through Westminster.

These are the basic areas of legal authority covered by the Bill.

TAXATION: power to vary the basic rate of income tax by up to +3% or - 3%

HEALTH: including training and terms and conditions of NHS staff

EDUCATION AND TRAINING: schools and higher education; science and research funding (excluding UK Research Councils); training policies and vocational qualifications

LOCAL GOVERNMENT, SOCIAL WORK/HOUSING: including finance and area regeneration; and the designation of enterprise zones

ECONOMIC DEVELOPMENT AND TRANSPORT: including financial assistance to industry; trade and export promotion; tourism; passenger, road, air and sea transport; planning and environmental issues concerning airports

LAW AND HOME AFFAIRS: police; fire; prisons; and criminal law (excluding issues involving national security, drugs and firearms)

ENVIRONMENT: including the Scottish Environmental Protection Agency; water; sewage; and Scottish National Heritage and Historic Scotland

AGRICULTURE: including the implementation of measures under the Common Agricultural Policy and the Common Fisheries Policy; and finance for Scottish activities of the Forestry Commission

MORRISON CONSTRUCTION

PRIORITY FOR PARLIAMENT - CREATING A LONG-TERM TRANSPORT MASTERPLAN

'Co-operation between the public and private sector is very close to the hearts of those in the Scottish construction industry. The relationship between the two has changed enormously over the past few years, although not as fast as it could, and I'm confident the new parliament will create new partnerships,' says Fraser Morrison, executive chairman of Morrison Construction, Scotland's largest indigenous construction company. Morrison points to one relationship in particular: 'The Private Finance Initiative has led the way, but it is not the complete solution. The Scottish parliament should therefore be looking for ways to bring new money in through new types of partnership.' 'Development in Scotland,' notes Morrison, 'depends on creating a long-term transport masterplan for a radically improved transport system, intermeshing public transport solutions with a sensible use of the car. Finding a way to finance this masterplan will be a test for this parliament - imposing real tolls on city parking, city entrance and on improved roads and bridges will not be popular but the parliament must get behind this.' In place of the tussling between Edinburgh and Glasgow over raising the importance of their respective airports, Morrison notes that: 'Scotland will increasingly cry out for a truly international airport. One sees the benefits to the regional economies surrounding the development of the airports for Birmingham and Manchester. The new parliament should address this as a priority.'

One issue he feels the parliament should not revisit is the system of business rates. 'These have traditionally been higher in Scotland than elsewhere but have been tackled to some extent by the Uniform Business Rate. Rather than reverse that we should further improve the financial environment in which we operate.' Similarly, although Scottish property law has long been considered superior to English law for its relative simplicity, in the area of leases, for example, the European codified system is much simpler and change is essential and would be welcomed by inward investors.

Finally, Morrison says, 'as far as the Scottish property sector is concerned, the Scottish financial institutions have been hugely important but there are also already substantial amounts of capital invested from outside Scotland. All institutions now have global investment opportunities and expectations. One of the most damaging things

the parliament could do would be to create conditions that would discourage them from putting their money here. Instead I hope it will create a framework to make Scotland one of the most attractive investment environments in Europe.'.

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