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Glasgow-based Weir Group is one of Scotland’s biggest and most successful companies. It employs approximately 600 directly in Scotland including Head Office staff and spends around £75 million in the local Scottish economy annually including wages, professional services etc. Across the UK it has around 1,500 staff, and globally 15,000.

Last week its chief executive Keith Cochrane [pictured] spoke in Edinburgh about the likely impacts of independence on Scottish business. In view of the importance of his remarks and their relevance to those beyond the business community, Scot-Buzz carries almost the entire text of this speech as a service to readers. We believe you will find it of considerable interest.


“It’s a great honour to be asked to speak at the home of the General Assembly of the Church of Scotland, but rest assured I am not here to deliver my own Sermon on the Mound.

Like many of you I’m a chartered accountant, not a preacher or a politician. My training equipped me to study financial statements, not the bible or opinion polls.

But no matter what our background, each of us has a big decision to make on September 18  . With only a few weeks to go until the most important vote in our nation’s history, access to facts and objective analysis is urgently needed.

So what role should business play in that conversation?

It is a question we considered carefully at the Weir Group.

Weir was founded in 1871 and is now Scotland’s largest industrial business. We operate in more than 70 countries around the world and currently employ 15,000 people globally with a market capitalisation approaching £6 billion.

We have operations that stretch from Canada to Australia and from Chile to China, but there is only one place we call home. That is Scotland and more specifically, Glasgow. Given our heritage, it is little wonder we care passionately about what happens to our country.

But we’re also a business that makes assessments based on facts not emotion. That’s why we were so keen to see the contents of the Scottish government’s White paper, ‘Scotland’s Future’. It was billed as a “prospectus” and “the most comprehensive blueprint for an independent country ever published”.

Now, for a businessman, the word “prospectus” has a specific meaning. It’s a detailed analysis of all the potential costs and benefits of a transaction. In fact, before taking a company public, there’s a legal obligation to publish a thorough examination of all the risks and rewards potential shareholders might face. Perhaps understandably, as a political document, the Scottish government’s White Paper turned out to be more of a manifesto that a prospectus. It focused exclusively on the potential upsides of independence without acknowledging the potential downsides.

In a similar vein, I’ve also heard independence described as a management buy-out. That may sound attractive but management buy-outs often come with a lot of debt and rigorous diligence, which can constrain a business.

Of course, the referendum is not a commercial deal - it is far more important than that – and therefore it deserves the highest level of objective scrutiny.

At Weir, we read the White Paper with interest and we would happily endorse many of its sentiments about supporting manufacturing, innovation and encouraging growth.

But we were also left with many outstanding questions - some of them very basic indeed, like what currency arrangements would an independent Scotland actually have rather than simply wish to have?

How would independence affect the single market across the UK which has been so important to the shared prosperity of all the nations of these islands?

Given some of the significant fiscal challenges a newly independent Scotland is predicted to face, what would the tax environment be like for industry?

And what impact would independence have on pension schemes across the UK? A topic highlighted by this Institute’s earlier research.

These questions and their answers are crucial to Scottish businesses and the millions of people whose livelihoods depend on our continued economic prosperity. Sadly, with the Scottish and UK governments at loggerheads, clear answers have been scarce and we now face the prospect of taking an enormous, potentially irrevocable decision, based on assertion rather than hard facts.

So what are the answers? At Weir, frustrated by the lack of clarity from official sources, we sought our own assessment. The Board commissioned Oxford Economics, one of the world’s leading economic consultancies, to examine all the available evidence, and give us objective guidance on the likely consequences of independence for currency, trade, taxation and pensions.



Let me start with the most fundamental question of all: what currency would an independent Scotland use?

The answer will determine Scotland’s economic future if there is a yes vote. It will influence borrowing rates for businesses and mortgage payers, how much we’ll pay in taxes and the affordability of public services.

There are four principal currency options.

  • Firstly, a currency union with the rest of the UK
  • Secondly, so-called Sterlingisation or unilaterally adopting Sterling without a formal union
  • Thirdly, introducing a new Scottish currency pegged to Sterling, and
  • Finally, establishing a new, free floating Scottish currency.

Our research says they would ALL lead to additional costs.

A formal currency union is the favoured position of the Scottish government but has been rejected by the three main UK parties. But let’s assume a deal can be done. It would allow us to continue to use the pound Sterling as we do now but may also give the government of an independent Scotland a seat on the Bank of England’s Monetary Policy Committee or MPC.

The Scottish member would be faced with nine others from the remaining UK. Those are not good odds if difficult decisions need to be made. Now, you may argue, it’s more influence than we have at the moment, although the current MPC is required to consider appropriate monetary policy for the whole of the UK. However, a look at the practical details of this arrangement suggests potential problems.

In the event of independence, we would no longer have a fiscal union with the rest of the UK. Currently, if monetary policy is inappropriate for Scotland, its impact is offset by the UK wide tax system. So when more people are unemployed, more money is paid out in benefits. But independence would remove the shared tax system and with it, the fiscal cushion provided by the current arrangements.

However, Scotland would gain control over the majority of North Sea oil and gas revenues. At the moment, these don’t affect the estimates of output or public finances of any one part of the UK.

That means from 1998 to 2013 for example, Scottish and UK GDP, excluding North Sea output, tracked each other closely.

If Scotland had received a geographic share of North Sea revenues, a valuable but also volatile resource, the picture would have been dramatically different, with both economies diverging substantially. That means the UK’s monetary stance over that period would typically have been much less appropriate for Scotland, had we been independent.

And remember, we would have had one voice on the MPC solely concerned with Scotland, compared to nine others concentrating solely on the monetary policy interests of the rest of the UK.

An independent Scotland could accommodate inappropriate monetary policy but it would probably mean more booms, where inflation rises sharply, and more busts where unemployment rises sharply. That would inevitably increase credit risk to sovereign debt lenders and therefore mean it would cost more for an independent Scotland to borrow – even in a formal currency union.

It is also worth asking what the rest of the UK might ask for in return for a currency union?

High levels of public debt can destabilise economies that don’t have full control of their own currency. So getting Scotland’s national debt under control would be central to any agreement.

A look at the criteria for joining the Eurozone offers at least one pointer to what might be required. To join the Euro currency union, a country requires a 60% debt-to-GDP ratio and a 3% deficit-to-GDP ratio. Given the recent crisis in the Eurozone, it’s likely those criteria will be strengthened further but for the moment it serves as a reasonable estimate of the kind of arrangements the rest of the UK might reasonably expect.

The National Institute of Economic and Social Research estimate to reach the Euro criteria over ten years would require an independent Scotland to run a primary budget surplus – before interest payments - averaging 3.1% of GDP. Indeed under any currency arrangement, investors might want to see Scotland making progress on debt reduction on a similar trajectory. But this has big implications for the scale of tax rises or spending cuts that the newly independent government would need to introduce.

Earlier this month, the Institute for Fiscal studies revised their projections to suggest that an independent Scotland would face a primary deficit of 2.8% of GDP in its first year, when the economy is expected to have all but bounced back from the financial crisis.

So to put Scotland back on track to meet the Eurozone criteria for currency union within ten years could mean imposing tax rises and spending cuts of around £9 billion in 2016 alone. That is almost as much as we currently spend on the NHS each year.

That would usher in a new age of austerity, except this time it would be exclusively made-in-Scotland austerity, and would surely raise the question of just how politically feasible a currency union would be in practice?

Sterlingisation would mean the banks based here in Edinburgh, would be without a lender of last resort. The same would effectively be true if a new Scottish currency were credibly to be pegged to Sterling. That would increase the risk of financial instability and therefore the interest rate international lenders would want an independent Scotland to pay for its debt.

The most radical option would be to set up a new free floating Scottish currency. This would give an independent Scotland full control over its monetary policy but would also impose significant new costs.

Firstly, money markets would charge a higher premium for Scottish debt until Scotland could demonstrate it has a strong credit record. In fact, our research found that under any currency scenario, a lack of credit record would mean Scotland paying more than the rest of the UK to borrow.

That is no surprise: lenders are going to look more favourably on a country with a 300 year record of honouring its obligations than on one with no record at all.

But Scotland would also pay more to borrow because of the relatively small and illiquid nature of the bond market it would create, and because of the volatility of Scotland’s new exchange rate – made all the more uncertain because of the volatility of North Sea oil and gas. Lenders would want to be compensated for these uncertainties.

The additional premium is conservatively estimated to be one percentage point, which translates into tens of millions of pounds being sent to serve additional interest payments each year rather than being invested in public services or making the economy more competitive.

Higher borrowing costs for government also tend to translate into higher borrowing costs for banks and therefore businesses and mortgage payers.

Our report suggested large, international businesses would be less affected as they have more diverse sources of funding.

That isn’t the case for small and medium sized enterprises which are so crucial to the economy.

And then there are the costs of having a different currency to the one used by our biggest market. The one-off costs as businesses re-denominated contracts and changes consumer pricing isestimated by Oxford Economics to be £800m. This would be followed by an annual transaction cost to Scottish businesses and households of £500m: a very significant additional cost for no additional benefit.

The rest of the UK economy might face costs of a similar scale but given its size, these would represent a far smaller proportion of their overall economy.

These numbers are not simply the result of some academic exercise; they’re based on what actually happened when Latvia recently changed currency and joined the Euro.

We also have the opinions of the major credit ratings agencies. David Riley of Fitch told the Treasury Select Committee: “I am not aware of a situation where Fitch has assigned a triple-A rating on a new sovereign nation. History and track record can be important in terms of building credibility”.

n a research note last year, Standard & Poor’s said: “we would expect Scotland to benefit from all the attributes of an investment-grade sovereign credit”.

That doesn’t mean triple-A of course but anything from Triple-B upwards.

The note went on: “the newly formed state would begin life with comparatively high levels of public debt, sensitivity to oil prices, and, depending on the nature of arrangements with the EU or UK, potentially limited monetary flexibility”.

And last month, Moody’s concluded: “While there are significant uncertainties associated with Scottish arrangements post-independence, an 'A' rating is perhaps the most likely at the outset, but with risks tilted to the downside.” Moody’s did suggest a better rating in time but after measures to address what they described as “longer-term fiscal issues”.

Add to that list, a number of international investment banks which have all been consistent in raising similar issues. These are some of the reasons we can be sure there will be additional costs associated with ending our current arrangements and that is an indication of just how financially integrated the current UK is.

In fact, the United Kingdom is far more united than many people realise. We don’t just share an island, we share a deeply entwined economy. Two thirds of Scotland’s non-oil exports, worth almost £50 billion a year, go to our neighbours in England, Wales and Northern Ireland. Scotland’s non-oil exports to the rest of the world stand at just £26 billion.

But the links go much further than just a balance of trade. Take the way taxpayers’ money from around the UK is disproportionately spent on research at Scottish universities. In this city, the Edinburgh BioQuarter is leading a UK cluster of leading bio-science universities. In Glasgow, the University of Strathclyde leads a project which is developing a new range of bespoke medicines for patients by working closely with colleagues at Heriot Watt, Edinburgh, Cambridge, Loughborough and Bath.

In Oil & Gas, ministers from Westminster and Holyrood work together on the Energy Industry Council to protect and enhance the UK’s leadership position in this industry. That co-operation helps sustain 450,000 jobs across the UK.

Those are just few examples, there are many more and they are the result of centuries of working together.

But of course independence is about doing things differently: otherwise what’s the point?

And that raises the inevitable issue of what happens when these two economies start to diverge?

esearch suggests that trade between countries in an established monetary union may be as much as three times greater than would be expected if they did not share a currency union.

The same research suggests ending a successful union typically halves trade over a 30 year period.

One way to mitigate those losses would be for an independent Scotland to substantially increase trade with other parts of the world. As the leader of a global company, I know how valuable a comprehensive trade support network can be. The UK currently has one of the best in the world, with diplomatic representation in almost 200 countries and trade experts in 100.

The Scottish government proposes that an independent Scotland would have an initial network of 70-90 offices. I have no doubt the people in those offices would be dedicated and hard-working but we couldn’t possibly expect them to match the current capability and influence we enjoy as part of the UK network.

One of the ways the White paper proposes to encourage more companies to locate to Scotland is by reducing the rate of Corporation Tax below the UK rate by 3 points. I welcome any proposal to improve the business environment, but it is worth looking beyond the headlines and examining the details.

Corporation tax is only one of the considerations a business makes when deciding where to invest. Take my own company. Weir is not headquartered in Glasgow by default. We have chosen to stay in our home city because it has proved to be an excellent location to grow a global business. We have access to highly skilled people, a business friendly and stable environment, and open markets.

 Last year, despite the vast majority of our revenues coming from overseas, we spent more than £75m in the Scottish economy, supporting more than 600 jobs directly and many more indirectly.

But overall, Weir’s Scottish operations run at a loss.

That’s no surprise, given the costs associated with running global headquarters functions.

At the moment, we have the option to offset losses in one part of the UK with the profits we make in other parts. It’s a system called ‘Group relief’ and I am sure it will be familiar to many of my fellow Chartered Accountants in this room.

But ‘Group relief’ couldn’t survive independence because the current UK tax arrangements would no longer exist.

At Weir, we estimate in 2013, the changes to Corporation Tax suggested by the Scottish government would have saved us approximately £400,000 but the flexibility offered by UK ‘Group relief’ is worth almost 9 times that figure – demonstrating why the tax system should be looked at in the round. We would end up paying more than £3 million extra in corporation tax.

Overall, the Oxford analysis suggests cuts to Corporation Tax may eventually pay for themselves if the Scottish government’s assumptions prove accurate but it could take between six and fifteen years for that to happen.

And it is worthwhile questioning whether a cut to business rates would be politically sustainable if estimates are correct and Scotland needs to undertake substantial tax rises or spending cuts in response to higher borrowing costs, an ageing population, and falling oil revenues.

But assuming the tax proposals came to fruition, would we expect the rest of the UK to standby as Scotland undercut its Corporation Tax rate to tempt firms to locate in Glasgow and Edinburgh rather than Newcastle or Manchester?

The UK already has one of the lowest Corporation Tax rates in the G7 and the gap is widening as the UK rate drifts down towards 20%. And even if there was no retaliation, an independent Scotland with a rate of 17% would still be well behind Ireland with its current 12.5% rate.

And it is also worth noting that only around 5% of UK firms pay Corporation Tax. For the rest, the small profits rate and capital allowances are far more important but on these issues, the White Paper on independence is silent, other than a proposal to simplify the system.

ne area where added complication seems guaranteed in the event of independence is pensions. As many of you will be aware due to the work of this Institute, current EU rules mean that schemes which operate across the borders of member states cannot carry deficits. This means that deficits will either need to paid off much more quickly that currently planned or UK wide schemes will need to be split up, causing additional costs.

Weir’s UK wide scheme, like many company schemes, is currently in deficit, by some £60m. We would therefore be faced with the choice of either breaking up our current UK-wide arrangement or paying off the deficit more quickly than we currently anticipate and reducing the resources available to invest elsewhere.

So our research found across these important areas of currency, trade, tax and pensions: increased costs from independence were guaranteed but potential benefits were uncertain.

Also uncertain is what will happen in the negotiations following a Yes vote in September.

For more than 20 years, I have been involved in negotiating deals. At no point, have I emerged having secured everything I hoped for at the start. Compromise is part of life. That is true if you are buying a company or negotiating the terms of independence. In fact, I have often found negotiations take longer than expected, even when you have a willing buyer and a willing seller.

And when it comes to currency, Scotland doesn’t seem to have a willing seller.

So negotiating a compromise will take some time and while that happens there will be significant uncertainty. It may even stop businesses making new investments.

I know Weir would be very cautious in committing to new projects until we are certain of the answers to some basic questions like what currency arrangements an independent Scotland will have. That is not a statement I make lightly but I am certain I will not be alone.

What impact that hiatus in investment will have on Scotland is yet another uncertainty but it would be foolish to believe it won’t happen. And even after negotiations are settled, foreign investors may be wary of committing to Scotland for a couple of years as they wait to see how the newly independent economy performs.

One of my favourite quotes is from David Hume, who said “a wise man proportions his beliefs to the evidence”. That is advice we should all heed as we consider what to do on September 18. I would never suggest to anyone how they should vote --- that is a private matter. Too often in the current debate, we are presented with hyperbole by propagandists on both sides. One suggesting that a Yes vote will propel us from an age of austerity to a land of milk and honey, and the other too often focusing on what Scotland can’t do rather than what she can.

For my part, I think Scotland demonstrates each day that she is currently a successful country.

Just look at some of the statistics: the lowest unemployment in the UK and the highest per capita GDP outside of London and the South East. Take a Scottish company like Weir. Our total shareholder return has increased by almost 1,000% in the last decade: all orchestrated from our Scottish headquarters.

Personally, I believe that by sharing resources across the UK, we do get the best of both worlds – a strong Scottish influence on domestic policy and the advantages of being part of one of the world’s biggest economies. If most Scots think independence is worth the additional costs it would bring then should support it. But they should also be aware that such a result risks making Scotland less competitive, not more. And that must be a concern for all of us who want to see our country continue to succeed.

Scotland’s current UK-wide partnership has helped make us, and our neighbours, one of the most prosperous economies on earth: able to develop and promote the talents of our people and build truly global businesses. We should celebrate our good judgement in creating such a successful way of sharing Scotland’s ingenuity with the rest of the world. Let’s continue to use this Union as a positive platform, to create an even brighter tomorrow.

Thank you. “