Select Committee on Scottish Affairs First Special Report


The Scottish Affairs Committee has agreed to the following Special Report:



On 28 November 2001 the Scottish Affairs Committee published its First Report[1] of Session 2001-02 on The Drinks Industry in Scotland. We have now received a memorandum from both the Government and the Scottish Executive which contain a response to the Report. The memoranda are published without comment as appendices to this Report.


Letter to the Chairman of the Committee from the

Secretary of State for Scotland

I am grateful to the Committee members under your Chairmanship for their work on assessing the Drinks Industry in Scotland and in providing recommendations for action based on evidence gathered. The attached annex provides a response to those recommendations affecting matters reserved to the UK Government.

In providing the response my Department has agreed a split of lead responsibility with the Scottish Executive. I understand that the Executive's response has already been provided. For ease of reference that attached annex provides a restatement of the relevant recommendations followed by the Government's considered response.

I am copying this letter to Paul Boateng, Baroness Symons, Lord Whitty and Lewis Macdonald.

7 March 2002

Memorandum submitted by the Scotland Office



(c)  We recommend that the Government should give full consideration to the public interest, including the prospect for employment and regional economic development, during the consideration of proposed mergers. Explicit reference to the weight given to such issues should be made when outcomes are announced.

The Government notes the recommendation of the Committee set out in paragraph 155(c) of the Report. In the case of the Interbrew / Bass Brewers merger, the case was repatriated to the UK by the European Commission under Article 9(8) of the ECMR: the Article states that where a case has been referred to the competent authorities of a member state with a view to the application of that state's national competition laws, the member state may take only the measures strictly necessary to safeguard or restore effective competition in the market concerned.

For the future, the Government has announced its intention, as part of the Enterprise Bill, to replace the current "public interest" test for assessing mergers with a more focused test based on whether a merger will result in a substantial lessening of competition in UK markets. The Government's legislative plans will put competition on a clearer footing at the centre of the merger regime. The focus on competition reflects the Government's view that competitive markets are the best means to ensure an efficient and productive economy, in line with international best practice.

(g)  We would caution against any improper, pragmatic or idiosyncratic discrimination between markets in the various parts of the UK.

The Government concurs with the Committee's recommendation in paragraph 155(g) of the Report. In assessing the competition effects arising from a merger situation both the Office of Fair Trading and the Competition Commission give consideration in each case to the geographic scope of the relevant market or markets. This is based on the economic principles set out in the Office of Fair Trading's published guidance, which are rigorously applied together with the best available information regarding the merger and the markets concerned to identify the boundaries for a particular market. While the Director General of Fair Trading did not reach a view on the geographic market he noted the potential for increased cross­border competition that the Carling Brewers remedy might provide.

(h)  We recommend that the Treasury should continue on a long­term basis, its policy of freezing the tax on spirits until it is comparable with that levied on alcohol consumed in other forms. This would end discrimination against one of Scotland's major indigenous industries, and one of the UK's leading exports.

The Government is very aware of the enormous contribution that the spirits industry in Scotland makes to our local and national economies, particularly through its significance as a major export earner and employer. The importance and particular circumstances of the industry have contributed to the Government's decisions to freeze the duty rate of spirits over four successive Budgets.

The Chancellor will continue to make decisions about duty rates on a Budget­by­Budget basis, taking into account all relevant factors. This approach permits individual responses to changing circumstances in different sectors of the alcoholic drinks industry.

(i)  We believe that the UK Government should continue to argue in favour of the reform of the existing EU minimum rates system, which, it acknowledges, discriminates against spirits. The system, unsatisfactory from the start, is now well past its sell by date. There is no more basis for the discrimination against spirits at the EU level than in UK taxation. We believe that similar criteria should apply.

The Government agrees that the current EC system of minimum excise rates for alcohol needs reform and has pressed the European Commission on a number of occasions to complete its long­overdue review of this area.

(j)  We think it reasonable that the Government should be expected to undertake a comprehensive study on the revenue implications of the wide margin between excise duties in the UK and those apparent in most other EU countries operating in a Single Market.

The revenue implications of a wide range of factors, including the impact of duty differentials with other Member States, are already fully considered on an ongoing basis, and as part of the Budget process.

(k)  We believe that spirits producers should be allowed the defence of due diligence when consignments (and therefore revenue) are lost, if incontrovertible proof of the exporter concerned acting responsibly, appropriately and in good faith can be demonstrated; and that appropriate steps should be taken to see that this happens.

Securing duty on duty­suspended movements that have been diverted is an important element of the EU­wide arrangements. And it is—as Mr John Roques emphasised in his recent report on the collection of excise duties—important that those dealing in duty­suspended goods are brought to account if they fail to make adequate arrangements to ensure goods are received at their intended destination.

The primary duty liability on diverted goods rests with the person who provided the financial guarantee for the movement. Spirits producers can limit their liability to duty on diverted loads by asking the despatching warehousekeeper or transporter of the goods to provide the guarantee if they consider that they cannot ensure that the goods will reach their destination. And the duty on stolen loads would in any case be recouped if the load were insured.

As a consequence the Government does not consider it appropriate to seek changes to the relevant EC Directive to allow a defence of due diligence for lost or diverted loads.

(l)  We recommend that the Government commits itself to close monitoring of conditions and to ensuring that Inward Processing Relief levels are set appropriately.

The Government obtained commitments from the Commission to keep export markets in sectors affected by targeted savings under close review and to keep the "facilitated" IPR system under review.

The Government intends to hold the Commission to these commitments. Trade associations representing affected sectors have been asked to bring any clear evidence that the measures are disturbing the market to the attention of DEFRA officials. With such evidence they can press the case of the sector concerned. Similarly they can press for improvement to IPR arrangements if they are found to be unsatisfactory in practice.

(m)  We fully support the Government's efforts to overcome the trade barriers facing spirits producers in some foreign markets.

The Government welcomes the Committee's full support of the Government's efforts to overcome barriers facing UK spirits producers in foreign markets.

(p)  We recommend that the Government recognises that there is a direct association between the various stages of whisky production, and, when operation of the Climate Change Levy scheme is reviewed, acts to ensure that the rebate scheme treats all spirits production equally and thereby corrects the inherent anomaly.

The current definition of the sectors eligible for rebates is based on the Integrated Pollution Prevention and Control (IPPC) Regulations. Using IPPC as the framework for determining eligibility for rebates meets the four tests which were set when the levy was first proposed—it has a clear rationale, provides legal certainty, is administratively simple, and is consistent with EU state aid rules.

The three­year gap between distillation and actual bottling of whisky breaks the direct association needed to allow bottling to benefit from eligibility within the IPPC Regulations.

The Government remains willing to receive and consider alternative proposals provided they can be shown to meet the four tests.

(q)  We believe the insensitive application of the Climate Change Levy rebate scheme, for which only food and drink producers using animal, vegetable or dairy ingredients in the manufacturing process are eligible, has the effect of needlessly discriminating against bottled mineral water producers. Given Scotland's position as the UK's major producer, it works to the detriment of Scottish companies. We recommend that the Government attends to this discrepancy when the CCL scheme is reviewed.

For the reasons explained under recommendation (p), eligible sectors are based on IPPC regulations.

The Government remains willing to receive and consider alternative proposals for determining eligibility for rebates, provided they can be shown to meet the four tests. The Government would also encourage sectors that are not eligible for the 'rebate scheme' to consider joining the UK voluntary emissions trading scheme, for which the Government has made available an incentive of £30 million per annum after tax.


Letter to the Chairman of the Committee from the Deputy Minister for

Enterprise, Transport and Lifelong Learning, Scottish Executive

Thank you for the copy of the Scottish Affairs Committee's First Report into the Drinks Industry in Scotland which was sent to Wendy Alexander's office. Both Wendy and I welcome the report and the extensive work undertaken by the Committee.

I have the primary interest for the Executive in the alcoholic drinks industry in Scotland and I am therefore responding to some of the points in the report, which for the most part, are devolved to the Scottish Executive. Other aspects are either reserved to the UK Government or fall to the operators within the drinks industry itself to consider. The Executive recognises the aspirations that the Committee has for improvements in performance within various parts of the industry and shares the Committee's wish that as many good quality jobs be provided by the industry in Scotland. We also recognise that the importance of certain operators in the global market place will lead them to recruit and locate staff where they can best serve the competitiveness of their Scottish based operations.

Our response to those issues which we view as largely devolved is enclosed. The Scotland Office will be forwarding a separate reply in response to those issues that are reserved to the UK Government. For your ease of reference, the response includes the Committee's conclusions and recommendations with the Executive's response shown directly below.

I am copying this letter to Helen Liddell.

January 2002

Memorandum submitted by the Scottish Executive



(a)  Competitive pressure has led to a growing concentration of production facilities in a few large plants, with detrimental effects on employment in peripheral areas. There has been a substantial fall in the number of distilleries in production in recent years. Figures show that the number of malt distilleries in production fell from 114 in 1980 to 85 in 1999, a reduction of 25.4 per cent. We are concerned about the extent to which the peripheral areas are likely to suffer as the industry continues to cut costs.


In common with all industry, Scotch Whisky producers have been required to become as efficient and competitive as possible. This has led to a decline in the numbers employed over the years. However, the Executive recognises that the industry continues to support quality jobs, often in the absence of alternative employment opportunities in rural and economically deprived areas of Scotland.


(e)  The approach adopted by Diageo following closure of its Strathleven plant in Dumbarton may have lessons for other communities that have been affected by closure.


Diageo took a lead role in working in partnership with the local public sector agencies to assist those affected by the closure of its plant at Dumbarton. The Executive wholeheartedly supports such partnership working. Indeed such partnership working is key to the implementation of the PACE (Partnership Action for Continuing Employment) initiative that the Executive introduced in March 2000 that puts in place a national framework for dealing with companies in difficulty at all stages, including redundancy.


(o)  We would ask the Scottish Executive to consider transposing into law the full terms of Directive 96/70/EC, which is concerned with the exploitation and marketing of mineral waters, including harmonising the definition of the term "spring water".


Council Directive 96/70/EC has been implemented in the UK. The Directive allows Member States to continue to maintain national provisions on the treatment of spring water until such a time, as Community provisions have been determined. In the continued absence of these Community rules, the provisions in "The Drinking Water in Containers Regulations 1994" have been maintained. Once the Community rules have been laid down, the Executive will transpose them into Scottish Law.


(r)  We believe that the Water Framework Directive contains some useful elements, particularly when viewed in a European, if not a worldwide environmental context. SEPA must continue to monitor the state of river levels and flows in the light of the significance of the water extraction industry in Scotland.

(s)  We would support the Scottish Executive, following its consultation process, in the introduction of a scheme for the registration of water usage. We firmly believe that the resultant increase in information would enhance its ability to protect the Scottish environment against potential future damage arising from climate change.


We welcome the Committee's support for the introduction of a register of water abstractors. The Executive is fully aware that a proper picture of water use is required to inform policy that enables us to be in a better position to tackle future pressures on our water environment, such as from climate change.

We have pledged to introduce a system proportionate to the degree of environmental risk. Our aim is to achieve the best possible balance between the protection of the water environment and the interests of those who depend upon it for their prosperity and quality of life. We will ensure SEPA's current monitoring activities are expanded in order to meet the requirements of the Directive.


(t)  We find it curious that Scottish Enterprise Network's policy framework does not attempt to make greater use of whisky, both to promote the sale of other high quality Scottish food and drink products in international markets, and as a means of increasing tourism to Scotland.

(u)  We urge SEN to consider how it might take greater advantage of the unique position of whisky to increase international sales of other quality Scottish goods, and to increase tourism to Scotland.


Whilst there is always room for improvement, Scottish Enterprise and Scottish Development International have indeed used the strong overseas image of the whisky industry to both further promote the whisky industry itself and to promote the wider food and drinks industry. This is best evidenced through the work of Scotland the Brand in the USA, and through the use of the Scottish Pavilion at key International Food and Drink Exhibitions, where both whisky and other food and drink companies exhibit under the strong umbrella presence of the Pavilion.

These organisations recognise however that they could better leverage the image and more crucially the international marketing and logistics/distribution expertise of the whisky industry and to that end, they will be initiating conversations with the whisky industry through the Scotch Whisky Association. SE and SDI have always worked with the smaller independent whisky companies to develop both their capabilities and to enter or better exploit overseas markets—recent examples from this year would include the highly successful work carried out with El Corte Ingles, the premier Spanish retailer, on food drink and particularly whisky, and our significant national presence at Vinexpo, the premier European drinks exhibition.

The marketing of Scotland as a tourism destination is the responsibility of VisitScotland. It would be for VisitScotland to consider with the whisky industry how best to capitalise on whisky in the promotion of Scotland for tourists. SE believe there is potential in whisky to enhance further the visitor experience in Scotland to the mutual benefit of the whisky and tourism industries. Discussions are underway with representatives of the whisky industry in Scotland and VisitScotland about a new whisky/tourism initiative. This would cover both tourism marketing and product development aspects.


(v)  With alcohol consumption patterns changing and growing, particularly amongst the young, we believe that more funding should be made available from both the industry and Government to enable increased availability of measures aimed at preventing and curing misuse.

(w)  Some of the problems we have identified relate to devolved matters and fall within the responsibility of the Scottish Executive. But we would urge the Scottish Executive fully to recognise the current trends in alcohol misuse and to take appropriate action.


The Executive is committed to tackling alcohol misuse in Scotland and has just published a Plan for Action on alcohol problems, which set out the range of local and national action proposals. The Plan is broadly based with the emphasis on partnership working between key interests including the licensed trade and the drinks industry. It embraces prevention and education, effective and targeted treatment and support services and measures to protect families and communities from anti­social behaviour and the criminal consequences of alcohol problems.

We have repeatedly said that the Executive alone does not hold all the answers to tackling alcohol problems and the Plan sets out action for a range of organisations and individuals. It also acknowledges the social responsibility efforts of the industry, including initiatives by The Portman Group and others.


(x)  We recommend that a fuller indication of the composition of soft drinks should be made available to consumers. Parents and consumers should know on an easy to understand basis, such as the number of spoonfuls per container, the exact sugar content of soft drinks. This information should be placed on the container. Consideration should also be given to a specific dental health warning. In addition, we support the EU proposals that labels for soft drinks should say so specifically when caffeine has been used.


We welcome the Committee's comments on provision of fuller composition labelling on soft drinks. In taking forward its 'Food Labelling Action Plan' the Food Standards Agency is committed to ensuring consumers are given clear, easily understood labelling to enable them to make informed choices when buying foods and drinks. Part of the Action Plan involves looking into the promotion of foods to children. The Agency is currently working closely with consumer, enforcement authority and industry interests to develop a strategy to improve parents' awareness and understanding of healthy eating advice and the way in which certain foods can contribute to health problems.

First Report from the Scottish Affairs Committee, Session 2001-02, The Drinks Industry in Scotland, HC 324. Back

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