UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 378-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

Business, Innovation and Skills Committee

The Implications of Scottish Independence on Business; Higher Education and Research; and Postal Services

Monday 17 June 2013

Iain McMillan, Gordon MacIntyre-Kemp and Jo Armstrong

Robin Parker, Alastair Sim and Ms Mary Senior

Trisha McAuley, Robert Hammond, John Brown, Paul Hook, Jonathan Millidge and Mike Granville

Evidence heard in Public Questions 1 - 97

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Monday 17 June 2013

Members present:

Mr Adrian Bailey (Chair)

Paul Blomfield

Katy Clark

Mike Crockart

Caroline Dinenage

Ann McKechin

Mr Robin Walker

________________

Examination of Witnesses

Witnesses: Iain McMillan, Director, CBI Scotland, Gordon MacIntyre-Kemp, Founder and Facilitator, Business for Scotland, and Jo Armstrong, Independent Economic Researcher, Centre for Public Policy for Regions (CPPR), University of Glasgow, gave evidence.

Q1 Chair: Good morning and thank you for agreeing to give evidence to the Committee. As you can see, we are one witness short at the moment, but I understand she is coming and I do not intend to delay proceedings. Just to repeat, thank you for agreeing to speak to us. Could I just mention that obviously there may be one panellist better qualified to speak in answer to one question rather than the other. Do not feel that everyone has to answer every question if you really have nothing much to add. We shall not be concerned if you feel there is nothing more to add. Equally, if you do feel there is something to add or subtract to what any other member of the panel has said, please feel free to do so. Before we open the questions, could I just ask you to introduce yourselves? Obviously, we know from your labels who you are, but for voice transcription purposes it would be helpful if you could do so. I will start with you, Gordon.

Gordon MacIntyre-Kemp: Gordon MacIntyre-Kemp. I am the Managing Director of the new business network Business for Scotland. It is a business network for pro-independence business people. We launched on the 14th of last month and we already have over 500 members. To join Business for Scotland, you have to sign a declaration that says that you wholeheartedly agree that independence will be a good thing for Scottish business and the economy overall. We are a non-party political organisation and our board has members who represent all political parties and views but mostly (inaudible 10.02.55). The only thing that brings us all together is the fact that we want to make sure people get the facts about the opportunities for business that independence brings.

Jo Armstrong: Good morning, I am Jo Armstrong. I use the word independent economist. I am the economist unaligned to any political party or to any of the possible options facing the electorate at the moment. I write under the banner of the Centre for Public Policy for the Regions and I have a bias towards financial services regulation and economic regulation.

Iain McMillan: Good morning to you. I am Iain McMillan. I am the Director of CBI Scotland. Now, I think most of you will have heard of the CBI. We are one organisation. We are headquartered in London with offices throughout the UK, the principal larger ones being in Scotland, Wales and Northern Ireland because of the devolved jurisdictions. I am part of the CBI line management structure and I am the professional head of the organisation for Scotland. Our role is business advocacy to make sure that the Governments, legislators and others understand the business position and the reasons for the business positions, principally in the development of public policy.

Q2 Chair: Thanks very much. Indeed, my opening question is actually a quote from your boss, John Cridland, giving evidence to the House of Lords. John Cridland, who, of course, is Director General of the CBI, said, "Uncertainty is the biggest killer for investment". In your opinion, what are the key areas of uncertainty that need to be clarified in advance of the referendum? I will start with Iain, although I am sure the other speakers will have a view on this as well.

Iain McMillan: Sure, yes. I would like to do that. I am going to mention seven principal ones, not necessarily in any particular order of importance because they are all important and this is not exhaustive because some questions lead to other questions. Indeed, we have put over 200 questions to the Scottish Government asking them to clarify matters around the independence proposition.

The first one I would mention is membership of the European Union. That is quite a controversial question at the moment where opinions differed. Our view in the CBI is that if Scotland were to be independent then we would like to see the newly independent country be in the European Union, but there are issues around whether that would be so, on what terms and when. For example, the UK Government produced a paper some months ago that called into question the seamless way into Europe that the Scottish Government at that time appeared to believe was possible, that Scotland would be a new state, would need to apply to the European Union for membership, would need to in all probability accept all the full conditions of membership without exceptions, and that position seems to be supported by the President of the European Commission and several of the Foreign Ministers of member states. The President of the European Commission is also on the public record as saying that were Scotland, or an independent Scotland, to apply for membership of the European Union, which it would need to do, it could only do that after statehood. In other words, it could not negotiate its entry to the European Union concurrently with secession negotiations with the UK Government and so it would have to be consecutive rather than in parallel. So, a great deal of uncertainty around EU membership.

There is then the currency that an independent Scotland would adopt. Our view is that were Scotland to be independent we would want to keep the pound sterling. That is the view of the Scottish Government, but the Chancellor of the Exchequer and the Treasury has placed a question mark over that to say that it would require the remainder of the UK to agree to, for example, a sterling area and even if there was agreement then such an arrangement might not endure if the economy of the separate Scotland were to divert significantly from the rest of the UK. Were that to happen, then Scotland would have several choices there. It could unilaterally decide to use the pound sterling but not any sterling area. It could apply to join the euro or it could adopt its own currency. None of the three offer particularly attractive choices and two of them would introduce exchange rate costs and exchange rate risks into doing business with the rest of the UK and other parts of Europe were it not to be the euro.

Next up is the cost of credit. An independent Scotland-based Government would not have a track record of borrowing on the bond markets. It would not have a track record of fulfilling its obligations and, therefore, it could well be that the bond markets would attach a premium to the interest rate payable by an independent Scotland to offset that risk. Of course, that could have an impact on a currency if Scotland was to use a different currency than the pound sterling. Indeed, there is quite a lot of cascading knock-on effects there, which I would be happy to explore with you as we go forward.

Then there are the public finances. The only claim that they have to this really are the Government expenditure and revenue accounts, which show that at the last numbers that were struck, without oil and gas revenues included Scotland would have a deficit of some £18 billion, which is over 14% of gross domestic product, compared to the UK’s deficit, which is just under 8% of gross domestic product. Include 90% of oil and gas revenues, which is a figure roughly that the Scottish Government believe that they could negotiate, and that deficit falls to 5% of gross domestic product.

Now, there are some issues around that because oil revenues are volatile. For example, in 2011/2012 they delivered £10.6 billion of revenue to the UK Government. Two years earlier, they delivered only £5.9 billion in revenue. That is also the long-term trend. In the short term, I think that the Scottish Government are probably right that the oil and gas output could well rise from 1.5 million barrels equivalent a day back up to 2 million, but that is a long way down from the peak of 4.5 million barrels of oil and gas in 1999. Therefore, given we are, as the economists said in 2006, "into the long goodbye", it certainly appears to us that the macroeconomic case for independence is highly dependent on oil and gas revenues, which are volatile and in the long term reducing.

Then there are the full costs of statehood. What would these be to the Scottish Government? What would they be to business? Because we would see the great departments of state having to be duplicated north of the border; the regulators that report and are responsible to the departments of state and through them to Parliament. There would be much duplication there.

Then on to my penultimate uncertainty, which is the impact on key industries; for example, financial services. Although it varies from sector to sector a bit, by and large our financial services sector has 90% of its clients outside Scotland, mostly in England. Therefore, what would happen in terms of regulation, what would happen in terms of currency and so on and so forth following independence?

Then, lastly, over time there would inevitably be a divergence of all the laws and the rules and the regulations between the two jurisdictions. Although, because of our civil and criminal justice system and devolution and some of the things that carried on after the Act of Union there is already some divergence there. Business by and large lives with that and it is not a problem, but there would be a great deal more divergence, in our view, following independence as Parliament quite rightly reacted to different pressures north of the border to those south of the border.

That is seven, as I said. It is not exhaustive and I would be very happy to expand on some of that during your questions.

Q3 Chair: Thanks very much. I think that was a fairly comprehensive introduction to the issues. Now, I am sure that both the other panellists could probably participate and we could take all morning on the issues that you have raised. I would just caution panellists. I think we have an hour for this session and we have at least a dozen questions altogether, so if you could keep your points in response as brief as possible I would be grateful. I would emphasise that if you feel that you have not had the opportunity to say everything that you would want to at this session, feel free to submit further written evidence or if you wish to contradict a point that was made but you did not get a chance to during the session, equally feel free to write in with supplementary written evidence. We will be very happy to receive it and it has equal weight to any verbal contributions that are made at this session. First of all, would anybody like to pick up in response to those opening remarks?

Jo Armstrong: Yes, I do not have seven, I have three, and they are definitely shorter than Iain’s seven points there. One is businesses have to deal with and do deal with uncertainty, so I think it is an important issue that says uncertainty is part of business.

The second one is around we are talking about in the main short term versus long-term issues. I think the short-term transition, short-term uncertainties, are significant purely dependent on, in effect, the negotiations in large part, but there is clearly a belief that the longer term outcome would be better as a consequence of that very painful potential short-term transition phase. What is not clear to me is how long that is likely to be. What are the costs and what is the net present value of the overall outlook that you might be expecting to achieve as a consequence of going down that route?

The third one is the status quo is not lacking uncertainty either. Clearly, the issue around EU membership is one that is quite significant. As Iain pointed out, we are part of the European Union but we may or may not be as a consequence of what is currently happening in Westminster. I think the status quo uncertainty is maybe not as large but it is definitely significant and cannot be ignored.

Q4 Chair: Gordon, I suspect you may want to add to all this.

Gordon MacIntyre-Kemp: Yes, I will try not to take as long as Iain did but I want to counter quite a few of those.

First of all, we have just had a survey done by Ernst & Young, which says that Scotland has just had a record year of inward investment. It is a significant increase year on year-76 inward investment projects. I think that the idea of uncertainty existing because of the independence referendum has been turned on its head completely by that. What actually has happened-and this is what the report itself said-was that we will actually be having quite the opposite effect. Business people that I speak to tell me that the uncertainty they are worried about is whether or not-and this goes to Jo’s point-after the next UK-wide general election the in/out referendum on Europe will actually take Scottish businesses out of Europe regardless of how Scotland votes because of the number of people in London and the South East that will vote and possibly sway the referendum. If businesses are afraid of anything, it is the fact that there could be an exit from Europe as a result of policies that we in Scotland would very probably not agree with in the referendum. There have been polls that have said that Scottish people, as a whole, are pro remaining in Europe, whereas there have been polls that have said that from London and the South East in particular there is a potential to exit.

Going back to inward investment, recent research has proven that newly independent nations have had significant increases in inward investment immediately after independence. One of the reasons for this-and I have spent some time working at Scottish Enterprise on inward investment projects-is really about the brand that the country has. It is about putting yourself front of mind. Countries like Estonia, Czech Republic, Latvia, et cetera, have all had increases in inward investment. The fact that Scotland is in the press right now all over the world, front of mind, is making people look at us and actually consider us as an inward investment location. Several businesses have said whatever happens they are quite calm about the prospect of an independent Scotland having sensible business-friendly strategies.

The EU referendum is one area of constitutional uncertainty that I think is potentially going to be damaging in the future. The other one is that there are reports, for instance, by the Liberal Democrats and also by a Westminster committee that have said that if there were to be a no vote, there would have to be a UK-wide referendum on further powers for Scotland and the regions. Now, that again means that if we vote no we have a further two, three, four years of constitutional uncertainty. So if anyone argues there is constitutional uncertainty, then there clearly, from my point of view, seems to be more with a no vote than there is with a yes vote.

Very quickly on currency, as a former economist I am very fond of getting into the numbers. They compared the deficits as a percentage of GDP in 2011 using an average of Eurostat, International Monetary Fund and CIA projections and found that out of 170 sovereign states the UK debt level as a percentage of GDP we were 150th out of 170. But the really bad news is that when you compare the deficit we found that we were 188th out of 192 nations. What that actually means is that if you took the trade that was done between Scotland and England-and by the way it is a two-way trade. I would imagine, and I would have to check up on this, but I think that Scotland is a significant export market for businesses from the rest of the UK, in fact, and were that to be a fact there will not be any borders, we will be in Europe, and, therefore, it only makes sense to maintain the same currency so that it does not affect the balance of trade deficit, which is a major problem because London, and the South East in particular, is overheated and imports a great deal and we as a whole do not manufacture enough as the UK as a nation but Scotland obviously does significantly better there.

Iain was right to say that 5% of GDP is the deficit, which is a couple of per cent lower than the UK as a whole. So Scotland’s economy is stronger. The whole argument really confuses me when people say, "But if you take oil out of the equation". Well, let us take London tourism out of the equation then. Oil is part of Scotland’s economy. It will be on-going. The UK oil and gas sales, at least 40 to 60 years of profitable extraction left there. That is enough time to put Scotland’s economy back on its feet and undo the damage that has been done to it by London-centred Westminster policies over the last few generations, which have de-industrialised Scotland significantly.

Finally, one last thing on volatility. When we had devolution, the oil price was $10 per barrel. Last year the average was $110 per barrel. It has been extremely volatile but in a massively upwards direction. Jackpots tend to be volatile but nobody gives back the lottery jackpots because the next week it is a lot less than what they have just won. I think that the way to deal with volatility is to have a sovereign oil fund, just as Norway have done, just as almost every nation in the entire world that has oil as a significant part of their GDP has done, except the UK. I believe that the fact that the UK Government as a whole has not dealt with volatility does not mean that they should actually be able to use it as an argument for voting no right now.

Chair: There are a number of issues I think I am tempted to take up. I am conscious of the time. I should emphasise that as a Committee we may well write to you with further questions arising from evidence that you have given us and we would be grateful for a reply. I am going to give you a quick supplementary, Ann, because you did ask, and then I want to bring Paul in. To a certain extent, Paul, the questions have been covered but you may want to-

Paul Blomfield: I will ask them.

Chair: Yes, but I will just bring in Ann quickly.

Q5 Ann McKechin: Could I just follow up the point that you made, Gordon, about creating an oil fund that has been regularly mentioned. Some analysts and economists-and I listened to a number of them last week-were stating that because Scotland is likely now to inherit a pro rata share of Government debt it is not at a very high level. They would suggest that the first thing that an independent country should do is actually pay off the debt rather than create an oil fund. Would you concur with that?

Gordon MacIntyre-Kemp: You have various options. One thing I would like to point out is that the long-term debt is secured at a 2% to 3% interest rate, maybe slightly more, slightly less, but within that sort of area. The Norwegian oil fund last year returned 13%, returned a massive profit. You are balancing up a couple of per cent versus significant profits in the oil fund. It has been proven that everywhere that has had an oil fund has actually-

Q6 Ann McKechin: Apparently, it took quite some while to gather that amount because that oil fund, as I understand it, has been in existence for many decades, whereas we would be starting from scratch. With such a high debt level, many people have suggested that economically, with credit possibly being at a higher cost, the incentive recommended by the markets is to pay down the debt.

Gordon MacIntyre-Kemp: No, you are making an assumption that the debt would be at a higher cost as the UK has lost its triple A rating. I personally see no reason why Scotland would not actually be able to attain a triple A rating, whether the assets would have the 26% of the EU’s renewables, oil and gas, and so on. As far as I am concerned there are also significant savings from independence. Take, for instance, that an even larger conventional armed forces without nuclear weapons could cost £1.5 billion a year. We talk about the deficit. Last year, if you look at the Revenue Scotland report, the GERS report, you will see that £4.1 billion came straight out of-

Ann McKechin: I am talking about debt rather than deficit, just to clarify.

Gordon MacIntyre-Kemp: The deficit adds to the debt, doesn’t it? Every year the debt increases if you run a deficit. So £4.1 billion of that deficit was actually on interest payments from the UK’s debt. I would definitely invest in an oil fund and use other savings to pay back the share of the debt that we take on.

Q7 Paul Blomfield: If I could just follow up on the question of membership of the EU, which has firmly been central to a number of comments that you have made. I would agree that membership of the EU is important for an independent Scotland. Do you think, therefore, that it is important to have absolute clarity on the issue of whether an independent Scotland has to reapply for membership of the EU? The question is whether it is important to have clarity.

Iain McMillan: I think we would like as much clarity as we can get but opinion seems to be divided on this. I think that one does need to look at the opinion that has been given by the President of the European Commission. That is a pretty high level of seniority in the European institutions. He has made it clear that Scotland would be a new state, the remaining part of the UK would be the continuing state, and that Scotland would need to apply. That is controversial. Others have said no, that is not the case, although I do understand that the Deputy First Minister of Scotland fairly recently did concede that negotiations would be required. I expect these negotiations would require unanimity and the 27 countries of the EU to put these negotiated points into effect. There is a lot of uncertainty there. It is not something we like. It is not something that we would like to go forward with, but it does look for now as if it is going to be two sets of opinions.

Q8 Paul Blomfield: Are there any other views?

Gordon MacIntyre-Kemp: Yes, I would just like to point out that the European Union will not give an official response on this to the Scottish Government because the Scottish Government is not, in effect, the member; the UK Government is. The UK Government could actually ask, could write to the European Union and ask for an official response, but they have refused to do so. They have, in fact, been criticised by the House of Lords for doing so as well. This is a case of someone, an actual organisation, that does not want Scotland to become-

Paul Blomfield: For not doing so.

Gordon MacIntyre-Kemp: For not doing so, yes. This is a case of an organisation that does not want Scotland to become independent refusing to seek the clarity that they themselves are claiming does not exist because they will not renegotiate.

Paul Blomfield: I think-

Gordon MacIntyre-Kemp: I am sorry but if you let me finish here, basically the only way to get clarity is for the UK Government as the member state to seek clarity. I would actually wonder why they have not. Is it because they are afraid they might get the sort of clarity they do not want to receive?

Q9 Paul Blomfield: Can I just ask you, Gordon, because I think that the President of the European Commission has made the position fairly clear, but I understand that the Scottish Government has taken legal advice. Do you think it would be helpful if that legal advice was made public?

Gordon MacIntyre-Kemp: I am actually not here to speak for the Scottish Government.

Paul Blomfield: No, I am asking for what you think.

Gordon MacIntyre-Kemp: In terms of the President of the European Commission, I do not believe he is in a position to actually make a decision.

Paul Blomfield: I was asking what you think about the Scottish Government making its legal advice public.

Gordon MacIntyre-Kemp: I know, but you put two points in the question so if you will let me just answer one and then the other. The President of the European Commission is a politician who has moved on to a new role. He has made a statement, as it has been said by Iain himself; others have contradicted that statement. I have looked at the evidence myself personally to see who I believe, and I find the Scottish Government’s position that we will be able to renegotiate terms from an existing membership from within the European Union-which is what we have always said and we have never changed that-to be compelling.

In terms of what the Scottish Government intends to do, I think that in October this year they are writing a White Paper, which will set out the definition of the type of independence that people are going to be asked to vote for. Two things will come out of that. One is a great deal of clarity, and I think it is right we have taken the time to do that properly. The second thing is that separation will not be on the ballot paper. A mature, interconnected and interdependent independence within the EU is what we are going to be asking people to vote for and I am sure that the legal advice will cover that then.

Q10 Paul Blomfield: Can I just come back briefly, Chair? Let us assume for a moment that Scotland does have to reapply for membership of the European Union. A prerequisite would be joining the euro. In those circumstances, what view would you have on the impact that would have on the Scottish economy?

Iain McMillan: Well, the first thing is that that would introduce an exchange rate differential between Scotland and the rest of the UK because the rest of the UK would remain outside the euro. Therefore, cross-border trade, cross-border business between Scotland and England would become subject to costs of exchange and it would become subject to exchange rate risk. Now, okay, there is hedging, but hedging comes at a cost. That would be the most immediate and the most impact, I would suggest, that would happen in the island of Great Britain.

Jo Armstrong: Yes, it would certainly add transactions cost to businesses in Scotland whose major trading partners are in England. It would add transactions costs; there is no doubt about that. It would depend on the terms of trade at entry, and that again would actually be negotiable. But it would certainly add to transactions costs so potentially in the short term reduce growth.

Gordon MacIntyre-Kemp: It is a false question, the assumption-you say let us assume we would have to join; we would not have to join. In order to actually adopt the euro you have to join the ERM mechanism for two years. Now, to do that you have to commit your own currency to that. We do not have our own currency right now so we would have to first launch our own currency and then have a referendum deciding to join and then we would have to commit it for two years and meet all the criteria, and even then it is optional. You can decide whether you want to do it or not. I would not recommend joining the euro. I have, since 2005, recommended an independent Scotland keeping the pound, and that is exactly what we will do. That will be beneficial for both parties. So I think it is a loaded question.

Also, the idea that the EU would force us into various things is quite interesting because the UK, because of its size, is often said to have these four big opt-outs. Well, Denmark, which is a smaller nation than Scotland, has five opt-outs. We can actually look at the likelihood of that happening. When you make an assumption you have to decide is it a likely assumption, and it is a completely and utterly impossible assumption that we would be forced into either, in my opinion.

Paul Blomfield: I think it is a very reasonable assumption and very reasonable question, but I will leave it there.

Q11 Mike Crockart: It is a question really to you, Gordon, on your website you have argued that independence would act as a catalyst for Scottish people to become more entrepreneurial, confident, successful, ambitious and international in their outlook, which is quite a big claim. What evidence do you have to support that assertion?

Gordon MacIntyre-Kemp: Well, basically it is not a claim from myself; it is a claim that all 500 members have actually signed and agreed to. Scotland deciding to vote yes, which I believe it will do, is making a significant statement of confidence. It is one of the issues about our country that for several generations we have witnessed a deindustrialisation; we have witnessed an eroding of economic opportunity; we have seen massive economic migration from Scotland to London and the South East. In my own family, I am the first generation to actually come back to Scotland; there are a lot of them in Hexham and Northumberland.

If you actually look at the publicity that Scotland is having right now, the inward investment that that has, according to Ernst & Young, started to generate, and actually consider the publicity we will get from the opening of the polls to the actual announcement of the result, an English advertising agency said that if you were to buy that as advertising time on international TV it would be between £800 million and £1 billion worth of TV advertising. I think if we have £1 billion to spend as a nation on building our brand, what do we want to see? Do we want to say we are a confident, entrepreneurial, international, outward-looking nation that wants to talk to the rest of the world on their own terms? Or do we want to spend all that money sending out a message that we are no more worthier of nationhood than Shropshire? That is no insult to Shropshire. That is what Tony Benn said, Scotland had no more right to nationhood than Shropshire.

Basically, I think that one of the most single biggest cultural jumps that Scotland could ever take is a statement of intent and of confidence and I think it will have a major impact on the confidence of the nation and, of course, business and entrepreneurship as well.

Q12 Mike Crockart: All those things are now already happening. Yes, we are using the benefits of the publicity, but the inward investment is already happening. Talking particularly about entrepreneurship, there are lots of things happening in Scotland right now about business start-ups. We have a higher business start-up. That is happening under the present system, so what are the things that you are arguing are holding us back? I have an Entrepreneurial Spark set up in my constituency. Business England Network seems to be very healthy in Scotland. There do not seem to be the barriers that you think are there that independence will help particularly.

Gordon MacIntyre-Kemp: Traditionally, Start-up rates in Scotland are about five years and it was something we struggled with and something that Scottish Enterprise and the Scottish Government since devolution have put an awful lot of effort into. I think we are seeing the results of their efforts there. We have struggled for generations with start-ups and we are getting an awful lot of self-employed people nowadays, which is contributing to the start-up rate. What we really need to see is a lot of fast-growth companies, those that can actually accelerate away and start employing a great deal of people. Something that I hear on a regular basis is the lack of headquarters of businesses in Scotland, the takeovers but also the lack of inward investments in terms of European headquarters, and so on, because fast-growth start-ups tend to spin out of headquarters. The skills of marketing and finance and operational management, these sorts of things, there is not enough of those people starting businesses in Scotland or contributing to start-up teams. I think that the corporation tax plan, which we used as part of a suite of products to increase inward investment and European headquarters, and so on, into Scotland, will help create a situation where the opportunity to create a better type of start-up will happen. But there has been some increase. I am pleased to hear you say we have been using the publicity to good effect, but I think that there is still a great deal of room for improvement.

Q13 Mike Crockart: I agree, but I think what you have outlined is that there are a lot of major steps forward caused by devolution, so that would be the first step. We are running out of time. If I can turn to a question around the banking system but more as to how it relates to small businesses, and it is more really to the whole panel. In Scotland the banking system is much more dominated by really two players, HBOS and RBS. How do you think that dominance would affect bank lending to business in an independent Scotland?

Jo Armstrong: I think, on the issue of bank lending, at the moment we have a problem of bank lending and small businesses are saying they cannot get access to finance almost at any price let alone at an affordable price. Again, we are starting from a position that is difficult. If we are talking about two large banks effectively being the only two routes to finance for small businesses in Scotland, then we get worried about potential anti-competitive pressures that might bring so we have to look to regulation to make sure that did not dominate. But if we are talking about, again, at the local levels and talk about regional banks as a route to restructuring the banking sector to make it more business friendly, more business focused, we start to ask the question: if you have regional banks in regions within the UK, what is the difference that that might create in terms of monopoly power to what might be within Scotland at the Scottish level if it had only two banks, two regional banks, as opposed to one regional bank, for example, in the northeast or one regional bank in the southwest? Again, it is about understanding how the regulatory framework will work to make sure that monopolistic power might not be abused.

Q14 Mike Crockart: There will in turn be a greater need for Scotland to regulate?

Jo Armstrong: I think there is a need across the UK to make sure that small business-I think small businesses, as someone who worked in the banking sector, do not find it easy to hop around and look for competitive pricing. They look for a banking relationship. That banking relationship, once gained, will have a potential for them to look for the cheapest price. It is about a suite of products that small businesses need access to. I think that is about how the regulation framework works in the best interests of businesses, and I do not think it is working at the moment at all. Potentially, we are going to have an independent Scotland with two large non-local banks.

Iain McMillan: I think I would endorse a great deal of what Jo has said there. We are in a very difficult place. The UK banks have had to shrink their balance sheets. The regulators have required them to have more tier 1 capital. Under Basel II that will increase yet again. That is less money that they have to lend when it is in that sort of capital framework.

Over time, regional banks, yes, I think that would help; anything that improves competition. I think that would help but again there are risks ahead here. One risk is currency. If Scotland becomes independent, adopts the pound sterling-I really do have to add here Scotland cannot demand its way into a sterling area. It needs the consent of the UK Government and Mr Osborne has made it clear that that consent is not certain and that even if there is consent then it may not endure. What would happen if Scotland fell into the pound sterling area, you would have all these businesses with liabilities in pounds perhaps having to repay them in the Scottish groat or whatever the currency that might be adopted here. The same is true for the fund management business. That would stray into that. The costs and risks around the currency question are considerable and it could affect small businesses just as much as it could affect large businesses.

Gordon MacIntyre-Kemp: Can I just answer? I need to come in on that. First of all, we had a global banking crisis that was largely created by the lack of regulation by governments and one of those two leaders of those governments around the world that was-

Mike Crockart: Alex Salmond.

Gordon MacIntyre-Kemp: No, not at all. He had nothing to do with the deregulation of the Scottish banks.

Mike Crockart: He was a champion for it.

Gordon MacIntyre-Kemp: In what respect? He actually was not the person who knighted the leader of the bank and then the leader of the No Campaign actually complained when his knighthood was stripped. I am not here to defend or to talk about any particular politician. I am talking about the system of government that we operate under.

As I was saying, I go back to my point, which is that we have had a global banking failure caused by a failure of governments. One of the two leaders of that deregulation was the UK Westminster Government, and the way to respond to a global banking crisis is to have global banking regulation in place. A large amount of the regulation, about 70%, will come from the EU in the not too distant future. One of the key reasons for leaving the EU that a Conservative politician that I noticed on TV a while ago said was he wanted to make sure we do not get put under the thumb of those draconian EU banking regulations. Now, as far as I am concerned, that is actually quite a worrying thing. I think that that is something that we need to put on record as well.

In terms of the actual pounds sterling, sterling is owned by the people of Great Britain as an asset. We in Scotland have a percentage population share of that. We are not adopting it. We already have it. We will be keeping it and I believe that after a yes vote there will be no political posturing on that because, as I have said before about the size of the deficits, it would actually be extremely silly for the rest of the UK not to want to keep Scotland’s exports within sterling in order to strengthen the sterling zone. Political posturing aside, coming at it from an economist point of view, I would have to say I would expect that deal to be done fairly quickly and sensibly because after the referendum is done most politicians will start to behave in a sensible way.

Chair: Interesting point. We will not pursue that particular line.

Q15 Katy Clark: Iain mentioned earlier the need for new regulators. What institutions or regulators do you think would need to be established in an independent Scotland? Has anyone made an assessment of the cost of that?

Jo Armstrong: I think the Scottish Government has produced a fairly broad-brush paper on the regulatory framework they would be looking to establish, and we accept that certainly some of the skills needed to run it efficiently and effectively we do not have in Scotland at the moment. We would be looking to have some sort of arrangement by which some of the regulatory structures continue to perform for the benefit of Scotland until such time as we have the skill sets necessary.

They also point out two quite interesting things. One is that of all the regulated structures none of them are set it stone and are constantly having to change to accommodate how the market reacts to the regulatory structures that they are facing. The cost structure, therefore, for some existing UK regulators may actually be a bit bloated, and I would argue that there are efficiencies to be had if you restructure and I would argue that there would be some for Scotland.

They are also suggesting that they have a model in Scotland that has worked fairly well for water and they would like to build on that as a mechanism for better regulation within Scotland. The water regulator in Scotland that regulates Scottish Water, which is the whole water and sewerage provider in Scotland, has through its management generated something like 40% savings and efficiencies, created an infrastructure that is vastly improved given its starting point, and is now one of the cheapest providers of water and sewerage for domestic customers in the UK. I think it is important to note, however, in order for them to have done that they have had to rely on Ofwat’s data sets, knowledge and experience and they have used that very effectively. They are now helping Ofwat develop, one might argue, the shape of the sector in England and Wales by introducing competition to their own domestic part of the market in England and Wales.

That is a relatively small part of its regulatory requirements, so there would be a requirement to piggyback off the back of existing activities in the UK. Again, we enter a world of negotiation and potential service level agreements or transition periods, which again I come back to how long is that, what is the cost and at what point do you then wean yourself off it? One assumes given our commitment to the EU that we will continue to have competition law equivalent to what we currently have, but it is interesting potentially that if the focus is on the Scottish dimension rather than the UK dimension it might focus on different activities than what we would currently happen because it is too small for the Competition Commissioner really to be interested in. You could argue that some aspects of greater efficiency or greater innovation might occur as a consequence of a greater focus on Scotland.

Iain McMillan: Well, I think that is correct but it would also mean duplication of regulators unless in some instances the regulators were shared. I think that has been mentioned. Again, if regulators are shared, then there could be economies of scale there, but perhaps the UK regulator would not regard a small matter in Scotland as being top priority, whereas an independent regulator in Scotland might well do. I think there are going to be some tensions there, but we would certainly see a situation where businesses that currently have to deal with one regulator would need to deal with two.

Now, on the financial services, for example, we have not taken an opinion on this ourselves, but our friends and colleagues in Scottish Financial Enterprise are on public record as saying that there would need to be a separate financial services regulator in Scotland and that the EU law requires that. That is one example of where there could be additional costs for business. Again, it is not just the regulators; it is the whole panoply of laws and rules and taxes as well. Over time, businesses may be dealing with a different corporation tax regime, for example, north and south. Corporation tax may come down in Scotland. The business rate has not. There is power for that now; it has not come down. The corporation tax could, but then it would have to come down to at least an extent that would offset the cost of having to segregate taxable profits north and south of the border and also the compliance costs with HMRC south of the border under Scottish revenue authority. Again, this is quite an expensive thing to look at.

Gordon MacIntyre-Kemp: Can I just say that, as I said before, I do not think separation is on the ballot paper and this is where a lot of business people are very interested-trying to understand what form of independence people are actually being asked to vote for. When the Government White Paper comes out in October we will get a much clearer view of that, but my form of independence ahead of that, that I actually believe in, is one where we understand that there are thousands of unions between not just ourselves in England, Wales and Northern Ireland but ourselves and other countries, Ireland in particular. Some of those unions work, some of them do not. The political union and the economic policy that we get from Westminster, the one size fits all, does not work and that is one of the things we want to lose. My form of independence is one where we keep the bits where collaboration and cooperation work and we lose the bits where it does not.

In terms of regulators, I think that if you are going to have a common market it makes sense to have, in some cases, a common regulator across that common market. We are seeing a lot of that across Europe right now. We have mentioned banking as well. There will be the European super grid, there will be a completely free energy market across Europe as well. Regulation has to be within a market, not within an old-fashioned sort of boundary. I think that is the mistake that a lot of people are making when they look at this. We already have a separate judiciary, a separate accounting exam, separate actuarial exams, and so on, those sorts of things. There are an awful lot of things that currently we have and companies do not seem to be complaining about that.

The final point is on tax, which is that devolution has already allowed us-should we vote for a Government that wants to use it-to change income tax. With the Scotland Act we will be able to change tax to a greater degree, so the income tax across borders exists with devolution and it is not an independence question specifically. On corporation tax, businesses deal internationally. They will tie in the different corporation tax rates. It is not too much of a problem, but can I just say that I think the problem with corporation tax right now is the variance that we do have between Scotland and England because right now we are giving 100% corporation tax rebate to some companies.

Q16 Katy Clark: We will be coming on to the issue of tax, but specifically on regulators, do you think it is feasible that Scotland would share some of the regulators with the rest of the UK?

Gordon MacIntyre-Kemp: The point I made was across open markets, yes. If you want a complete trade zone it is reasonable to say yes to that.

Katy Clark: The answer is yes?

Gordon MacIntyre-Kemp: Yes.

Q17 Chair: Just quickly, you talked about effectively collaborative regulation, where it works and does not work, as you have said. Do you not think there could be a problem that, if you like, some collaborative regulation works for Scotland but might be perceived in England not to work in England’s favour and, therefore, you may not have a choice of that?

Gordon MacIntyre-Kemp: Sorry, that is the situation we currently have, isn’t it, that we have one regulator for the whole of the UK? If issues do not work for Wales, Northern Ireland or for the north of England, where I was brought up, then nobody really gets a say. If we have a shared regulator, then I would guess that we would have more say than we have currently. I think that is actually an improvement and not a problem.

Q18 Chair: You do not think it is a problem if England decided that it did not wish to share the regulation with Scotland?

Gordon MacIntyre-Kemp: There is a huge piece of negotiation to be done. Whether we go for changing devolution on a slow basis towards independence, which is the route that we are on right now, or whether we take the leap as a country and go for what I believe to be the optimal answer, there will be renegotiations either way. I believe that when cool heads following the actual election campaign get together we will find that there are ways and means to come up with an optimum solution in terms of regulation for both Scotland and the rest of the UK.

Chair: A lot of this seems to depend on belief.

Q19 Ann McKechin: It is estimated in Scotland that of firms with more than 250 employees only 18% of those companies are actually registered in Scotland. Would an independent Scotland be more or less attractive as a country to which headquartered companies would be attracted? What factors would you believe would have the greatest influence on it?

Jo Armstrong: I suppose the issue about headquarters is: is it large headquarters or small headquarters because all SMEs have their headquarters in Scotland. I think it is important to distinguish that that is an important driver if we are talking about the real powerhouse of job creation and economic growth.

If Scotland was independent, then we probably would find that Scottish development and national-type activities would be even more to the fore. They would be seeking more options to try to attract, probably requiring tax breaks to make that happen if you are talking about mobile capital. I certainly disagree with Gordon’s views about the Ernst & Young report. We are talking about size of projects that are being brought in as a consequence of tax incentives and the like. Scotland is a small jurisdiction. Within the EU it is an attractive location.

Q20 Ann McKechin: Part of the thorough investment, certainly the oil and gas business, as Gordon has referred to, has been going through a growth period at the moment, clearly, that would include the figure that is currently going into the oil market.

Jo Armstrong: Yes, but most of the headquarters would be outside Scotland, I would think, than in Scotland. So in terms of balance of payments issues it is actually a moot point as to whether or not it would be net beneficial to the UK if (inaudible 10.55.25) are already transmitted out of Scotland at the moment. It would be attractive. How much more we could attract will depend on how much mobile capital is willing to come. The attraction is not just about tax but clearly it is important. We have good transport systems. We have a highly educated population. We have wonderful countrywide, which are all important factors in attracting inward investment. But if it is about attracting inward investment, then because, as the Ernst & Young report clearly said, it is a highly competitive marketplace and though Scotland has done very well, it is becoming much, much harder to be that attractive and probably tax incentives will have to increase rather than diminish to be able to attract yet more of that capital because there are many, many more places for them to go.

Iain McMillan: I think that is right. It could also be argued that the success of inward investment to Scotland has been as a result of access into the English market. It is absolutely seamless. There are no barriers at Hadrian’s Wall. The tax system is becoming more competitive for businesses. What would happen after independence if these things started to change and businesses thought, "We did want that access to the rest of the UK, but you know what, if we go into Scotland their health and safety laws are different, their employment laws are different, they have shaved a couple of pence or three pence off corporation tax, they have done a few more things, but it is risky. They might have a separate currency one of these days and who knows. Let us just go to Tyneside". I am not making a forecast or a prediction, but businesses would have that in mind and would certainly factor these parts in.

Jo Armstrong: To counter that, I would argue that they would come into Scotland to get access to the European market because England is out.

Iain McMillan: Well, you could argue that as well. Let us remember we are on the periphery of Europe up here. The further north you go, the more the connectivity disadvantages you.

Gordon MacIntyre-Kemp: I would like to thank Iain for pointing out the lack of infrastructure investment from Westminster and the lack of direct flights because of lack of powers to change things like fuel taxes and duties, and so on. I think that Scotland is aiming to be at the heart of Europe and in terms of headquarters businesses, I agree completely with Jo that if we are looking to grow Scottish businesses that have started here and help them to grow more quickly to give them direct access and direct help from Scottish Government assets in having a direct relationship with the EU, then helping to get them to go faster would be the best thing we can do for Scottish business. But you do need to, as part of a suite of products, attract HQs here. I think that if we have the rest of the UK after independence leave, then we will see a massive migration of headquarters from England to Scotland so they can actually stay within the European Union.

Q21 Ann McKechin: Can I just play devil’s advocate? Two of the largest headquarters with thousands of staff in Scotland are the Royal Bank of Scotland and HBOS. Do you think it might be better for Scotland’s economy if it was independent that actually neither of those companies have their headquarters here given the issues and problems that they have?

Gordon MacIntyre-Kemp: No, I think that is a bit of a bizarre question. We were actually told that as a result of the UK Government’s bailout one of the key things would be that we would maintain jobs in Scotland and we have seen about 8,000 jobs go from the Royal Bank of Scotland, for instance. I do not think that the current system has anything to really boast about there.

Ann McKechin: I am not talking about the actual performance of the companies. I am just talking about their actual situation as a headquarters.

Gordon MacIntyre-Kemp: Lots of small countries all over the world have large multinationals based there. I see that as being a benefit and in terms of HBOS I am actually quite unclear. Maybe on paper they are based here, yes, but it appears to me that most of their operations appear to be in-

Q22 Ann McKechin: That was my point because legally they are based here and it is their legal headquarters, which in terms of liability and debt is a key point. But the problem is much of their business is actually outwith Scotland.

Gordon MacIntyre-Kemp: Certainly, I know that 90% of their losses came from the London operations. What I would say is that especially if those corporation tax cuts, as part of a wide range of economic boosting measures from an independent Scottish Government, I would say that would be attractive to not just them but other large corporations to headquarter themselves here.

Ann McKechin: Thank you.

Chair: I want to bring in Robin Walker now. His question is to Iain. Some elements of it I think you have already covered, so we will be grateful in view of time if you did not repeat them.

Q23 Mr Walker: Picking up on both your comments today and the follow-up paper that you sent to Scottish Government, it raised a number of questions about tax rates, duties and levies. Is the primary concern in that area about raising sufficient revenue and giving the Government a sustainable tax base, or is it more about the competitiveness of the Scottish economy?

Iain McMillan: I think it is three things. Firstly, certainly, is the ability of an independent Scotland to fund itself in the long term, and that includes all the costs of social welfare and other things like that. It is something that most business leaders care about. But it is also about the degree to which Scottish businesses would be competitive after independence. There are signals being sent out that corporation tax, for example, in an independent Scotland would be lower. Firstly, that would require the political party that makes these promises to fulfil them, and weigh the balance of corporation tax versus other taxes. How do they fund the agreed degree of public spend?

But there is also the issue for business, the costs for business. At the moment, a business can operate across the UK and pay one set of corporation tax on its taxable profits. If Scotland becomes independent, these taxable profits will have to be struck for the two jurisdictions, the rest of the UK and Scotland. That is actually quite complex, and it is also something that would need to be policed extensively by HMRC and the Scottish Revenue Authority, because these authorities would want to be sure that transactions are being passed from one jurisdiction to the other at full economic value, and that the highest taxable profits will not be taken in the lowest tax jurisdiction falsely. That could be quite an expensive thing to do, and it would be expensive for companies as well. Here is an example, and it is only one example, of a different jurisdiction introducing costs into business that are not welcome. That is two of the three. What was the third one?

Q24 Mr Walker: It was really balancing out those two. I just wondered, are most of your members taking the view that, in the event of independence, overall taxation in business would be higher or lower?

Iain McMillan: We don’t know. What we do know is that the cost of servicing the two tax regimes will inevitably be higher, for the reasons that I have mentioned.

Q25 Mr Walker: Does anyone else want to come in on the tax point?

Gordon MacIntyre-Kemp: Yes. Basically, Scotland has, for the last 30 years, almost every single year-in fact, I think every single year-contributed more tax to the UK in percentage terms than it has received. Last year, for instance, 9.9% of tax revenues versus 9.3% of public spending. I also saw a lovely headline in, I think, The Telegraph a few months ago, where it said, "North Sea bonanza will give a £25 billion boost to George Osborne", and I thought that was quite interesting because I would quite like to see some of that money spent in Scotland because I think we have underspent for many years. In terms of the point about taxation having sufficient revenues on-going, I think only independence really fully guarantees that.

We can talk about barriers as well in terms of taxation variances, including barriers. Actually, under advanced forms of devolution, those barriers still exist in the existing form of devolution, and I don’t think they are barriers at all. I think they are opportunities. If there was a tax cut, for instance, that had the effect of reducing the overall income that Scotland got, the only reason for applying that is that it stimulated the economy and got more and more people into work and contributing to the economy, and therefore I don’t think that cutting one tax necessarily means that the overall revenue will fall. If we can boost the economy, overall revenue should go up, and I think corporation tax, used in the right way as part of a suite of perks, is one of the things that can have that effect.

Jo Armstrong: Can I possibly come back on that?

Chair: Quickly.

Jo Armstrong: I think it is very important we do not get caught on the fact that from 1980 to now, it is a 30-year period, which is when the North Sea revenues kicked in-life started before 1980. The future for North Sea tax revenues is downward, not necessarily for North Sea jobs or North Sea output, but for North Sea taxes it is downwards. Tax competition currently exists. I cannot believe that at this point George Osborne is currently struggling with Google et al, but that issue exists at the moment, let alone that it might or might not stop happening in Scotland. Scotland’s productivity, as with the UK’s, has improved by 10 percentage points in the last 10 years, when we have had massive boosts to public spending. That is still taking us to the top of the third quarter in the OECD, so we are woefully behind the curve on productivity, and if tax competition is the route to improving productivity, which is where it is needed to grow economic growth, then we have interceded probably, because if we drop taxes in Scotland, they are definitely going to drop taxes in the rest of the UK.

Gordon McIntyre-Kemp: I would have to disagree with that.

Chair: The next question is being directed to you, so perhaps you will have a chance to incorporate your response in that.

Q26 Ann McKechin: I want to talk about corporation tax. I anticipate perhaps most of the members that you represent do not pay corporation tax, because most SMEs do not. What other key decisions and tax regulation do you believe is necessary to deliver that boost to the Scottish economy, which you have been talking about passionately this morning? Is it a lower income tax regime? Is it more business taxes? You mentioned that that had not been lowered in Scotland. What other levers do you think we should be using to achieve that level of growth and productivity that Jo was just referring to?

Gordon MacIntyre-Kemp: I think this is the key issue here, that there still are economic problems in Scotland, and one of the things that people say of the Scottish Government-regardless of what party is in charge-is "Why hasn’t the Scottish Government managed to solve all of those things?" If a really good golfer plays a not very good golfer, and the really good golfer only has a sand wedge and the not very good golfer has the full set of tools, then I know who I am betting on. I did actually use Tiger Woods versus myself in that example, somebody pointed out I might not still be able to beat him.

Basically, there are significant powers and economic tools that would come to Scotland as a result of independence, ones we can use. I think I have mentioned air passenger duty before. There are tobacco duties, inheritance tax, alcohol duties, vehicle excise duty, all these sort of things.

Q27 Ann McKechin: Would it be lower or higher? Can I just ask you? What do you think the general trend would be? Do you think it would be a lower tax economy that you would be looking for in your group?

Gordon MacIntyre-Kemp: The referendum is a referendum. It is not an election. Whether the taxes are higher or lower depends on who Scotland votes into government, and I personally believe that, regardless of who we vote into government, having a government that is answerable only to the people of Scotland will make better decisions for Scotland and be able to use these tools better, so I do not particularly care who governs Scotland afterwards.

Q28 Ann McKechin: Increased taxes for their members, they have increased tobacco taxes. Your members will be quite happy with that?

Gordon MacIntyre-Kemp: Let me just give you an example. When we launched, a few people said, "Look at all these right-wing supporters of independence. They were (inaudible 11:09:15) councils and so on". Then, one after the other, when our members stood up to introduce themselves, they all talked about the distribution of wealth, the inequality of opportunity and so on, so I think my members are more motivated by improving Scotland and see the independence not as an end but the beginning of something better.

Q29 Ann McKechin: What kind of tax incentives or regulatory incentives would be different, then, from that which already exists in the rest of the UK? Are you talking about a higher taxation system with improved public services or are you talking about, which would certainly be an issue, focusing the budget on the business sector? I think it is fair to know where we stand.

Gordon MacIntyre-Kemp: The point is that it depends on who we elect as to whether or not we will have that.

Q30 Ann McKechin: I am not asking who you elect. I am just asking your view.

Gordon MacIntyre-Kemp: The view of Business for Scotland members is that if we reduce some taxes as part of an overall strategy, which will improve the economy, then we support that. If we increase our taxes as part of an overall suite of activities, then there is a possibility that we also support that. We are not, unlike some other organisations, just dead against all sorts of tax raises or for tax cuts. What we are for is coming up with an economic policy that is driven by the needs of Scotland, not the needs of the UK, which has a radically different economy to Scotland in many respects.

Jo Armstrong: It doesn’t have a radically different economy to the rest of the UK. Scottish economy mirrors the UK, by and large.

Ann McKechin: Thank you.

Chair: Thanks. Last question. Just a moment. We need to conclude this session. We are running over time. Just Caroline Dinenage, and I would be grateful if you could give a very quick summary of the response to it.

Q31 Caroline Dinenage: Thank you very much, Chair. Yes, it is quite a simple question, but quite a complex answer, probably. What would be in your view the implications of the ownership, assets and liabilities of businesses that are either wholly or partly owned by the UK Government in the case of independence?

Iain McMillan: That is a very good question, and I think it would be a very complex answer. There are some assets that would be reasonably straightforward to negotiate and to maintain, but there would be other assets that would be extraordinarily difficult to do that. For example, how would you disaggregate the UK’s defence command and control system between Scotland and the rest of the UK? It would be almost impossible, and in fact Scotland would probably have-

Q32 Chair: Can I just intervene at this point and suggest that, by all means give a fairly off-the-cuff answer, but you might want to think of this in more depth and give a written response after further consideration? I do appreciate that it is a complicated question. Jo?

Jo Armstrong: Again, it seems to me it is coming down a negotiated position, as it is in many of these things, which calls into question if split negotiation is possible, because if you cannot clearly articulate what it looks like now, then, as you get into negotiation with civil servants-sorry to the civil servants in the room-it takes longer, not a shorter time.

Gordon MacIntyre-Kemp: I buy into the principle that an independent Scotland would have a percentage share of the assets and take a percentage share of debts and so on as well. I believe, I agree with Jo, it is down to negotiation, and it depends on what the two Governments-the Government of an independent Scotland and the Government of the rest of the UK-believe, but I am sure there would be a mutually beneficial agreement coming out of that.

Chair: Thanks very much. This is a huge subject that perhaps we could have spent all day discussing. I am conscious of the fact that I have listed a whole lot of supplementaries that I would have liked to ask, but resisted the temptation in view of the shortness of time. I think we will follow up with some further questions that we would like to ask you, and we will be grateful for your responses. In some of those, if you feel there is a question that we should have asked you but did not and you would like to reply to, we would prefer you to give your evidence in supplementary written form, and it will be given appropriate consideration. Thank you very much. That is extremely helpful. Could we have our next panel, please?

Examination of Witnesses

Witnesses: Robin Parker, President, NUS Scotland, Mr Alastair Sim, Director, Universities Scotland, and Ms Mary Senior, Scottish Official, University and College Union Scotland, gave evidence.

Q33 Chair: Good morning and thank you. I do appreciate your willingness to contribute to this inquiry. You may have been in earlier when I made my introductory remarks to the previous panel, but in case you were not I will repeat them. Please do not feel that you have to reply in total to every question if there is nothing more that you wish to add to anything that a previous speaker has said. Equally, if you feel there is something to add or subtract, please feel free to do so. Again, if we could start by just asking you to introduce yourselves, starting with you, Robin.

Robin Parker: Robin Parker. I am the President of the National Union of Students in Scotland.

Alastair Sim: I am Alastair Sim. I am the Director of Universities Scotland, representing an organisation for Scottish higher education institutions.

Ms Senior: Hello. I am Mary Senior. I am the Scottish Official for the University and College Union.

Q34 Ann McKechin: This is for all the panel, but it is based on the submissions from Universities Scotland. On page 5 of the submission, Alastair, you referred to the estimate by your technical working group of the amount of income stream that Scottish universities are receiving from the rest of the UK students, and you are estimating that by the academic year 2014/2015, that would rise to £62 million, which is obviously a very considerable figure. If the scenario is that Scotland becomes independent, and if the UK and Scotland are still remaining members of the European Union, that would clearly have a very significant impact on the financial viability of universities in Scotland. I just wonder if you could comment about that income stream, and also what would impact that would have-perhaps for Robin-on Scottish students in terms of competition for places.

Alastair Sim: I think that is an extremely important issue, and I think it is one where we need to have absolute clarity before we have to make a choice. We have been exploring this on our own behalf and have submitted advice to the Scottish Government. The advice that our lawyers have come up with through a very careful trawl through European Court of Justice case work is that it may be possible to construct a case where there is objective justification based on residence for EU citizens who are normally resident in Scotland to benefit from a particular fees or no-fees regime and for EU citizens resident elsewhere to be treated differently if there is an objective justification for that.

Q35 Ann McKechin: That is a difficult case, because I understand that the two governments that are trying to make an exemption in Austria and Belgium were both unsuccessful.

Alastair Sim: On the basis of the objective justification, which had failed to prove.

Q36 Ann McKechin: It was quite a tough test.

Alastair Sim: Yes, it is a tough test. I think what I am really trying to say here is that it is an important issue where we have made a contribution trying to clarify the issues, and where I think the ball is now in the court of the proponents of the different constitutional options to say, on the basis of their analysis and evidence, how they would deal with the issue.

Q37 Ann McKechin: As I understand, quoting from an article by the Glasgow Herald on 31 May about your legal advice, it said, "More relevant for the Scottish Government is that the advice goes on to say it might, as an alternative solution as we are proposing, fit more easily with EU, if Scotland charged all students fees, including to Scots, and then it fed grants back to its domestic students." Have you had any conversations with the Scottish Government about that scenario?

Alastair Sim: Not specifically. I think the conversations that we have had with the Scottish Government have been really along the lines that they have welcomed certainly our legal advice. They now know that their job is to go and do the due diligence and to work out what their evidence position is about what would happen to students from the remnant United Kingdom in the event of Scotland becoming independent.

Q38 Ann McKechin: Thank you. Robin, do you want to comment on that?

Robin Parker: Yes. Just by way of starter, really, just to say obviously NUS Scotland is a democratic organisation. Our position on the constitutional debate is that our current stance is very much that we see ourselves as neutral in terms of the yes/no question, and very much our role is that we particularly welcome that 16- and 17-year-olds can vote in this referendum, and hope they can do in future elections. We see our question as first of all making sure that particularly our members contribute to this as it being an informal debate, and that particularly we get questions from both campaigns about the various implications of different scenarios that might result from the constitutional debate that is happening.

I think this question about the EU and the rest of the UK, the student situation, is one of the really important ones. I suppose fundamentally we come at this from, as NUS Scotland, a position where we don’t think it is right that any students pay tuition fees in order to study their education in Scotland, and we represent all students in Scotland, no matter where they are from.

There is that question, and then there is the question of making sure that the higher education in Scotland is well funded for all the benefits that that brings. I think you have already the discussed the question and we do not have any legal advice that we can contribute to this, but it does seem that a large portion certainly of the legal advice suggests that it would not be possible to charge tuition fees to any students from the EU. There are two important questions to the pro-independence campaign, firstly around that funding that does not come from SCUK students any more, where that funding does come from. Secondly, around what really happens in terms of student numbers, and making sure that-because currently the Scottish Government can set the number of places for Scottish and EU students, but cannot-

Ann McKechin: Cannot discriminate between them.

Robin Parker: The balance between the two. I think there is a second really important question to the pro-independence campaign about how we make sure that there are sufficient places for Scottish students and for Scottish would-be students, wherever that may be, and that does not necessarily just have to be in Scotland. It could be anywhere, I think.

Equally, on the other side, with the Better Together campaign, there is just as much a question about continuing to contribute to how the Scottish Government continues to fund a well-funded higher education system, particularly when the potential for Westminster Government to continue an austerity agenda and the proposed tension and implications of that for the Scottish Government’s block grant. I think there is a really strong willingness from the Scottish public to see a well-funded higher education system in Scotland, so I think there is just as much a question for the Better Together campaign about how that continues in future.

Q39 Ann McKechin: Just very quickly on that, you have probably heard that there has been some suggestion the Treasury have talked about privatising the student loan company, which is obviously owned jointly. I just wondered to what extent you would be concerned if the student loan book in Scotland had to be basically hived off separately in terms of its direct sustainability.

Robin Parker: I think that is new news, as it were, and it is an issue that I am still trying to get my head fully around in terms of the implications for this, and it is potentially something I can get back to you on.

Ann McKechin: Perhaps if you come back to us on that matter.

Robin Parker: But just to say that I think, from NUS’ point of view, and particularly NUS across the UK, it is extremely worrying that this is an option that is being considered by the UK Government and it is extremely alarming that it would even be considered.

Ann McKechin: Thank you. Mary.

Ms Senior: Yes, thank you. Like NUS, the University and College Union does not have a fixed position and is not intending to take a position in terms of constitution options. However, we do think it is important to raise issues of concern to our members in terms of the debate. I think I really very much agree with the points that Robin has made. First importance is public funding of higher education in Scotland and what will each constitutional settlement mean for the future of public funding of higher education, and also in terms of access for students from wherever they live.

One point that has not been raised already is the situation in terms of Scotland’s position in relation to the European Union should Scotland be independent, because I think there are many questions as to what the position would be if there was a yes vote for independence. That is an issue that needs to be answered by each of the sides.

Q40 Chair: Yes. We will be talking about that in a moment. Can I just come in with a question to Universities Scotland, part of which I think you have touched on in your previous answer? In your evidence, you highlight "The sustainable access to appropriately qualified learners", and again, "Quality and quality assurance of teaching" as areas that we secured. What risk do you think independence poses to this?

Alastair Sim: I don’t think I would necessarily express it as a risk. I think we need to have quality assurance arrangements that are at least as good as what we have at the moment. What we have at the moment is extraordinarily highly devolved. While the quality assurance agency exists as a UK entity, there is a distinctly different regime in Scotland called enhancement-led institutional review, which, as Robin might want to comment on, has a much greater degree of student participation in quality assurance and a much greater emphasis on constant improvement in quality. What our paper says is, if you are proposing a particular constitutional option, you need to have a credible answer for how you would be able to have a regime that ensures the quality of degrees, but there are all sorts of ways you can do that.

Robin Parker: In terms of quality assurance, I can only echo what Alastair said, but I think we have in some ways across many of these things-I suppose access is another area-the higher education system in Scotland has a very good story to tell, and I would almost argue it is one of the biggest successes of devolution across all different governments that we have had in Scotland. Higher education has been an incredible success in devolution.

Q41 Chair: Mary?

Ms Senior: I don’t really have anything to add.

Q42 Mike Crockart: We heard more about that point of Scottish higher education being an immensely successful partner in the successful UK industry. One of the major points about that of course is the research funding. As it stands at the moment, Scottish higher education from the Scottish Funding Council receives £242 million in funding. On top of that, it manages to access £356 million through the Research Councils, which is significantly greater than its population share. The question really is, how do you see that continuing in the event of independence? Would there be any issues around that?

Alastair Sim: I think first of all I would like to say yes. We have been asked to be participants in multiple levels of what I have described as the research ecosystem. It is essential. At the moment, Scottish universities are extraordinarily strong leaders at multiple levels, as in we have an extraordinary level of success in competitively bidding for Research Council projects on the basis simply of the quality of what has been done here. We also have very high levels of success in bidding for European resources and competing internationally and in attracting resources from charities and from industry. That is on the basis of our quality.

Our position is that the proponents of difference constitutional elections must be coming forward with solid proposals for how they would enable us to have at least as good an ability to sustain that research infrastructure. I think, for proponents of independence, the idea is that we are discussing, could you maintain some sort of common research area? I think the challenge is with them to articulate that in full in the approach to referendum so that we see from them and from the proponents of a lot of constitutional options how we need to sustain our ability to be part of that multi-levelled research ecosystem.

Robin Parker: Just to add only a couple of things to that, there are two other elements that are important. One of them is about the money element and simply how research funding is an important part of how universities are funded, and so I think there is an important question there to the Yes campaign about how the disproportional amount of funding that comes from UK Research Councils, which is won on the merit of success, where that money comes from in future.

There is another really important issue, and I suppose I obviously talked a bit about how the Scottish HE system has experience and ability of going wider in terms of research funding. First of all, from our point of view, it is incredibly important that all universities have an element of research. That is something that makes a university a university.

Then there is something about, as well, using research funding to stimulate particular areas of the economy that are nationally important. I think there was a question to the Better Together campaign about, if the current sentiment continues or something like it continues, is there a way that could be found? How would you find a way to direct the more Scottish-specific areas or national sectors that might want to be stimulated? There has been a suggestion that one of the benefits of independence might be that you could tie the research funding towards particular interests or particular areas of development you might want to make. I suppose the question arises for the Better Together campaign about how you might do something similar to the current situation.

Ms Senior: I would just add that you are right to talk about the disproportionate research funding in terms of population count, but when you look at the proportion of academic staff in Scotland, that is less disproportionate because we do have a strong academic sector in Scotland. I suppose I just want to bring in the issue of academic freedom and what each constitutional settlement will mean for academic freedom and having our academics able to further the bounds of knowledge and pursue different research interests. From UCU’s perspective, our concern is the impact the market and different Government structures has on higher education and that really determines how universities are able to further issues around academic freedom.

Q43 Mike Crockart: Can I just come back to one thing that Alastair said? He talked about proposals around a common research area. That is not something that I have come across before. Is that thinking that you would somehow manage to continue with Research Councils in their present format and be able to do research on a UK-wide basis, and what would be the legal implications of trying to do that between independent countries?

Alastair Sim: I think that is something for the Scottish Government to articulate, but it is a matter of discussion at the moment as to, in a sense, a common service arrangement where you might maintain some element of super-national research infrastructure, but really it is for proponents of constitutional options to be developing their ideas of how one would take that forward, so I think that is a question that is best directed at the Scottish Government.

Q44 Mike Crockart: But it is certainly something that would need to be figured out from your perspective because there is such a large swathe of funding that comes from a UK-wide institution as it stands at the moment.

Alastair Sim: Yes. That is exactly the approach we have taken. We are setting up a healthy, proactive and important discussion (inaudible 11.32.03) and inviting the proponents of all constitutional options to articulate how we would be able to incarnate those policies that would maintain our successful contribution to Scotland and develop it further.

Mike Crockart: Thank you.

Q45 Katy Clark: Universities also receive research funding from the private sector and indeed also from private charities such as Wellcome, a lot of which are, I believe, down south. How do you think separation will affect this funding flow?

Alastair Sim: Again, I think this is really a question that the proponents of the options have to articulate answers for themselves on. I would say, as a background to that, that we are still in an extraordinarily strong position in terms of quality and in terms of our capacity to attract funding from industrial and charitable sources. In the last year, for which I have figures available, we attracted 14% of all the UK charitable investment in universities, so we are extraordinarily strong there. I think charities are drawn within the UK and across boundaries internationally to where the best research is that is going to solve the problems we are interested in solving, but I do think it is up to the proponents of the constitutional options to see how, within their options, they could ensure that we have infrastructure that is supportive of this cross-border flow.

Q46 Katy Clark: If we think of, for example, private companies, at least in England or down south, or charities that are based down south, do they invest overseas? The sector, how does it work? Are they less likely to invest in Scotland if Scotland is independent?

Alastair Sim: I think, generally, people who want to solve a problem will go to where the problem is best solved. To give an example, the German Fraunhofer institute, has just set up a large investment in Scotland, a lot of university investment with the University of Strathclyde at its core in applying for funding, so they are also establishing the UK headquarters at the University of Strathclyde. That is a good example of cross-border operation, and it is cross-border operation that is drawn here because we have the expertise and the quality of research that is going to solve the problems that they want solved. I think the world of research and world of ideas is something that works pretty robustly across boundaries as long as you are able to facilitate the operation of that multi-layer ecosystem.

Q47 Chair: Thanks. Can I just go back to the EU issue slightly different from that posed by Ann earlier? In what ways do you think the lack of certainty of EU membership affects the ability of Scottish universities to attract overseas students? Do you think it is an issue?

Alastair Sim: It has not been an issue up until now. As far as our competitiveness in international markets for students is concerned, really the barriers that we faced-I think barriers this Committee has commented on-have been barriers to do with the immigration policies as they have been perceived by the UK Border Agency. That has put us in a difficult competitive position in relation to other countries such as Australia, Canada and the United States, which are competing very aggressively for international talent. We have seen declines in the UK year on year of about 25% in students from India and Pakistan, for instance. I, certainly, from my members, have detected absolutely no sign that the EU debate has been of relevance to international recruitment, but we have faced other policy obstacles.

Robin Parker: Just to agree with Alastair, I think the biggest issue in terms of international recruitment is Home Office policy, and I think that does relate to the constitutional question in a couple of ways. There is, first of all, an obvious question to the Yes campaign about what kind of structures and what kind of policies would exist where Scotland has become independent as regards to immigration generally, but to student immigration in particular. Equally, there is a question to the Better Together campaign, because wherever we are coming from with this, and yes, Scotland wants to see a strong, successful higher education system in Scotland, and having a diverse student population is an incredibly important part of that. How you could find improvements to the international student immigration system under a devolved settlement is an important question there, and it is also potentially not without precedent. There has been in the past, with the Fresh Talent scheme, flexibility for Scotland in terms of international student immigration, so there are important questions that need to be answered there as well.

Q48 Chair: I was going to say, have you seen any indication that an independent Scotland would have a more permissive international student visa regime?

Alastair Sim: If I could just comment, from conversations that we have had across political parties in Scotland as we have been dealing with the issues caused by the UK Border Agency, the cross-party consensus in Scotland has been that UKBA have been getting it wrong in a way that has been disadvantageous to our international standing. I have no idea what is possible, but I would certainly represent a strong cross-party consensus that the current UKBA line is not right and is not competitive.

Ms Senior: Alastair is absolutely right. There is a strong consensus that UKBA is hindering universities, but I think it would be helpful to have more clarity from both the Yes campaign and the No campaign as to a future immigration policy for Scotland or what is possible within greater devolution.

I wanted to go on to say that the UKBA is problematic for staff too. We operate in an international context in terms of universities in Scotland. We have an international labour market, and UKBA also prevents staff from crossing borders and coming from overseas to work in Scotland.

Q49 Chair: If I can just pursue this a little more, as we stand at the moment, the parties collectively in Scotland can blame the Westminster Government for this particular regime. However, if they were independent, those parties would have to implement their own and would potentially be subject to the same political pressures as prevail in the Westminster Government. Have you seen any indication that it might result in a slight change of attitude?

Alastair Sim: I think there is a slightly different political environment that probably informs that cross-party consensus in Scotland. It is a consensus that I would characterise from conversations that we have had with politicians as being one based on the shared recognition that Scotland is stronger for attracting international talent across borders, and I think, certainly from conversations that we have had, we are very much about making sure that we are open to talent. Everybody has seen that as being consistent with the shared aspirations across parties as to what sort of outward looking country we want to be.

Q50 Caroline Dinenage: The Institute of Physics raised concerns about the effect of independence on access to European facilities, things like the CERN, the European Organisation for Astronomical Research, the European Space Agency, and the ability to raise sufficient funds to secure their access. I know we have spoken a little bit about Research Councils UK, but this is not currently facilitated by RCUK. Who would ensure and finance this kind of access in the future?

Alastair Sim: First of all, these are incredibly important projects and incredibly important networks to be involved in. The networks where I do not necessarily think our constitutional future is-I think whatever the constitutional future is, that we can participate in these networks. Looking at the membership of CERN and looking at the membership of European Southern Observatory, it is not a membership restricted to EU. Switzerland and Norway, for instance, are active participants and financial contributors to these.

It really comes down, if there was to be independence, to a political choice by the post-independence Government. Do you wish to continue to participate in these networks, which we think are extremely important? If so, how do you finance it? Do you finance it directly from Scotland, as, for instance, Norway does? Do you finance it as part of some sort of shared super-national funding infrastructure? I do not think a different constitutional settlement is a showstopper in terms of being able to participate. Looking at CERN in particular, I was interested that very quickly after the breakup of the Czechoslovakia Republic, both the Czech Republic and Slovakia Republic came back as members of CERN.

Q51 Caroline Dinenage: Physics is such a crucial area to Scottish universities. Have you had any indication from either of the two campaigns as to how to approach this?

Alastair Sim: No. I think really this is in the area where we, as I think I have said before, have tried to set out as clearly as we can what the policy priorities of Scottish universities are, and I think the period between now and the referendum is one where we would wish to see clear, evidenced proposals from the proponents of all constitutional ways forward.

Caroline Dinenage: Thank you.

Q52 Paul Blomfield: Can I return to the position of Scottish universities in a post-independence scenario in terms of student perception, putting aside the issues of the problems with the current visa regime, which this Committee, along with all other committees of the Commons and the Lords, has made strong representations upon? Robin, looking at it in terms of student perception, the UK universities brand has strong draw internationally. If you disaggregate the brand, what perception do you think students would have, both internationally and students from the rest of the UK, in terms of the perception of Scottish universities as institutions of choice?

Robin Parker: I think my own view would be one that there is a strong perception-it almost sits to the side of the constitutional debate-of a Scottish higher education system that is a welcoming one, that is one that is very successful, has a very good story to tell and provides a very high standard of teaching and learning. We have already talked a bit about the quality assurance system in Scotland as distinctive as one that strongly embraces partnership. Scotland has its own student partnership and framework. We have our own system that is based around enhancement, and there have been efforts from Universities Scotland about taking a collective Scottish approach to talking about Scottish higher education internationally. My view is that it is something that in any constitutional situation we can take advantage of having a good story to tell.

Q53 Paul Blomfield: I certainly agree that Scottish higher education does have a great story to tell. Whether that is recognised, I guess, is behind my problem-what if you disaggregate Scottish higher education from UK higher education, which is second only in the world to the United States?-in terms of perception, whether you think that would make any real difference.

Robin Parker: I suppose in some ways it is already, certainly in the mindsets of some students, for sure, already disaggregated from the UK system. If you look at some of the contrasts between an approach in England that is being driven more and more towards a consumerist approach to education and contrast that with one that is much more about partnership and is about collaboration and so on in Scotland, there is a disaggregated system, and I would argue that the approach we are taking in Scotland is a much better one.

If you also contrast it today with the report from Aaron Porter around fair access and the role of higher education in terms of social mobility, for a long time Scotland has had a worse rating in terms of widening access, but the kinds of initiatives that are happening right now, right across the spread, I think are really now UK-leading in terms of the approach that is being taken to widening access and making access fair. There is the approach of outcome agreements where each university is having to set out what it is doing around fair access. The Scottish Government has introduced a whole number of extra places. There is a student support system that now is better than the student support system in England. There are a whole number of things that are happening in Scotland, which I think credit a stronger higher education system, and that leads to a stronger perception among students.

Q54 Ann McKechin: Can I just ask you this, Robin? You will have the recent reports about social mobility and students in Scotland, and the evidence unfortunately seems as if it is going in the opposite direction. Although there are incentives, the test would be whether or not you could make a sustained change for the next five years. Do you think that these changes are going to achieve that? Particularly given, as we have been talking today about perhaps a very substantial drop in budget, unless the Scottish Government comes up with a huge amount of additional money if it becomes independent. How does it intend to maintain that?

Robin Parker: I think it is important to say, in terms of the financial situation, I can probably speak for the rest of the panel-maybe I shouldn’t be too sure about that-there is a strong agreement that the higher education system in Scotland is as well funded, if not better funded, than the English higher education system just now.

Q55 Ann McKechin: What I am saying is that it would have to be a lot higher if we were independent because of the loss of income stream from English students, so potentially there would be a gap in terms of research funding that would have to be made up. Would you be expecting and anticipating that any independent Scottish Government should make up the balance?

Robin Parker: As I said earlier, on the one hand you have the question to the Yes campaign about how, for example, in the case there are less UK student fees, how that funding is substituted, but equally there are questions on the other side. First of all, there are the potential block grant pressures on the Scottish Government that result from a different economic approach and one that certainly my own organisation disagrees with. There is also a question, I suppose, that is about-fundamentally I think it is wrong that the students in the rest of the UK are paying tuition fees to come to Scotland. That is an unfair situation-

Q56 Ann McKechin: I know that, but I am just saying that this is what the impact of our independence would be on Scottish higher education, and there would be a substantial gap that would have to be filled. Otherwise there would have to be far less students.

Robin Parker: Probably across all of the things we are talking about, my own view would be that ultimately what NUS Scotland wants to see is a fair, well-funded, flexible, free education system, and the problem in the main-there are some really important issues that we are discussing-is that this is ultimately about political choices. I was listening to some of the previous Committee discussion talking about the attractiveness of investment of Scotland. A big proportion of that is about the skills of our population, and a huge amount of that comes from investment in higher education, equally, in further education, and I think ultimately that is about political choices, and you can make those political choices under any constitutional situation.

Alastair Sim: Just on a factual level, I think it would probably be useful if I wrote to the Committee, because I think if you look at what has been happening in widening access it would be wrong to characterise it as going backwards. It is not moving forwards as fast as one would like, but I think I would want to clarify the record on that.

Robin Parker: Also, a lot of the new initiatives that have come out over the last couple of years and we have not seen the full result of statistics and so on. Hopefully we can all be hopeful about that.

Q57 Chair: I just emphasise that this is not just about UK students and improving access for them. It is about the brand for overseas students. Do you think Scotland has benefited from the collective, positive brand, Britain, that there is with education? How well do you think you could sustain that as an independent country?

Alastair Sim: It has worked both ways. I think the brand of UK higher education is extraordinarily strong, and absolutely rightly so. There have also been some opportunities from there being a little bit of subtlety around that brand for Scotland. For instance, when we had a Fresh Talent regime back in the middle of the last decade, which improved post-study work options for overseas students relative to that of the rest of the kingdom, maybe in recognition of a different demographic and skills challenges.

Overseas markets were pretty quick to pick up that there was a distinctive offer in Scotland. There was assured quality of universities, firstly that there was a distinctive offer, but we were interested in and would pursue. Likewise, as Robin referred to, we have been developing brand propositions for Scotland based around a lot of the quality of experiences students have and the role of the four-year degree fits in better with international degree frameworks than typically the three-year degree does.

While we have benefited from being part of a very strong brand, I think there are also ways in which we can see Scotland has something distinctive that is an offer on top of that.

Q58 Mr Walker: Just to come on that. Before I joined this Committee, I spent some time on the Welsh Affairs Select Committee, and as part of that we visited Brussels to look at how Wales is marketing itself. We heard a lot of very positive feedback about how successfully Scotland was marketing itself on the universities front and on the UKTI front using the UK diplomatic network both in the EU and beyond. As part of the discussion here, very importantly, there is that enormous diplomatic network currently available to Scotland to sell that brand and sell its universities on the back of it, and there is a risk in the move towards independence of having a much smaller diplomatic network on which to piggyback that very strong offer.

Alastair Sim: I think that there are issues. Would the relationship, for instance, with British Council, and we work on a couple of projects and do have staff at British Council to promote the brand representation of Scottish universities. If a different constitutional option is chosen, there is thinking to do about how you best have a network that represents Scotland internationally, but I do think we do it from the basis of having a really world-class product and that discerning consumers worldwide are pretty good at sniffing out world-class products.

Chair: Thank you very much. I will repeat what I said to the previous panel. It may well be that there will be further questions that we feel we should have asked but did not, and we will write to you and be grateful for your response. Equally, you may feel that there are questions that we should have asked but did not and that you would like to reply to, so please feel free to send us any further evidence. That is extremely helpful, and thank you very much for your contribution. Can I have the next panel?

Examination of Witnesses

Witnesses: Trisha McAuley, Director for Scotland, Consumer Futures, Robert Hammond, Director of Postal Policy and Regulation, Consumer Futures, John Brown, Scottish Regional Officer, Communications Workers Union, Paul Hook, Head of Policy and Communications, National Federation of Subpostmasters, Jonathan Millidge, Company Secretary, Royal Mail, and Mike Granville, Head of Stakeholder Relations, Post Office Limited, gave evidence.

Q59 Chair: Good morning. It still is morning, just. Thank you for agreeing to give evidence at this inquiry. I would just start with the advice that I gave the previous panellists. In fact, looking at the members that we have in front here, I would particularly emphasise, if your views are reflected in the contributions of the previous speaker, please do not feel that you need to repeat them, otherwise we could be here for a very long session. We will not think ill of you if you forego the right to speak on every issue. Equally, of course, if you wish to disagree or whatever with another speaker, please feel free to do so.

I will start, as I did with the others, by just asking you to introduce yourself for transcription purposes, starting with you, Mike.

Mike Granville: I am Mike Granville from Post Office Limited.

Jonathan Millidge: Hello. I am Jon Millidge. I am Company Secretary from Royal Mail Group.

Paul Hook: I am Paul Hook from the National Federation of Subpostmasters.

John Brown: I am John Brown, Regional Secretary of Scotland for the CWU.

Robert Hammond: I am Robert Hammond from Consumer Futures, and I am the Director of Postal Policy and Regulation.

Trisha McAuley: I am Trisha McAuley. I am the Director for Scotland for Consumer Futures.

Q60 Chair: Thank you very much, and I will start with a fairly general question. Once again, I will repeat, because it is a general question, I would be grateful if people did not talk infinitely on it. Both Post Office and Royal Mail are facing huge challenges. How does the question of independence for Scotland affect your planning, and do you see it as a risk or an opportunity? Who would like to lead on that? No one. Paul, you have the widest smile, so I will let you go first.

Paul Hook: I will probably limit my response to this question to the impact on the post office network, rather than Royal Mail. Clearly, the answer is both. It is a hypothetical situation. There are risks and there are opportunities. I think it is important to understand, as the Chair has alluded to, the fact that the status quo is not great for the post office network in Scotland or across the rest of the UK. There is a very significant proportion of post offices that are operating on the very edge of financial viability. Clearly, the Scottish network has a higher than average proportion of rural post offices. It has a higher than average proportion of urban deprived post offices compared with the rest of the UK. I don’t have access to the data of exactly how the subsidy is spent, but on the face of it it is probably a fair assumption that those rural and urban deprived offices are going to command a greater element of the subsidy than others.

That is not to say that there are not opportunities in there for an independent Scottish Government to use the political wheel and their imagination and determination to maintain existing services through an independent Scottish network to drive new services through it and make a hypothetical independent Scottish post office network less dependent on subsidy than it currently is.

Q61 Chair: Have you any indication that an independent Scottish Government might be prepared to invest more in sustaining the network than perhaps the current Westminster Government?

Paul Hook: No, but we have not asked the question of them either. Certainly the current devolved Scottish Government has shown its support for the post office network in the form of two sets of grant funding, both of £1 million given to a total of around 100 post offices in 2010 and 2011 to help them diversify their business and thereby become more sustainable. It is not necessarily, I don’t think, about spending more. Some members of the Committee may be aware that there was an independent report conducted by the then postal services regulator a few years ago, which found that post offices provided a net social value to the UK of £2 billion that could be better invested, and post offices were saving a significant amount of money in other areas, whether that is support for rural communities or support for small businesses. It could be through indirect support, so, rather than just increasing the level of subsidy, it could be through facilitating and encouraging Scottish local authorities to make more services available through post offices, and thereby make post offices more financially viable and sustainable. That is a very long answer to a fair question. The answer to the question is no but I do not think it is simply a question of having to increase the subsidy. I think there are a lot of options out there to make an independent Scottish network financially viable that are not necessarily entirely dependent on an increasing subsidy.

Q62 Chair: Previous Committee inquiries have looked at the range of options that are available and would not necessarily disagree with that. But I think what we would be asking is if there is any indication that in an independent Scotland this would happen. Is there any evidence yet?

Paul Hook: I do not see any evidence for or against that because it is a hypothetical situation.

Q63 Chair: I am going to ask Royal Mail now, given that you are the other part of the industry and it has particular significance for you.

Jonathan Millidge: As you will understand, we have a huge undertaking in Scotland. We have about 11,700 employees who deliver to 2.5 million addresses, so it is a big undertaking. We have not done any specific planning looking at what would be the impact should the Scottish people choose to go for independence. It clearly is a big undertaking that is part of UK-wide network, so our universal service obligation is UK wide and the Scottish element of it is an integrated part of that. So it would take a lot of detailed planning and a lot of thought to see if that was separable from the rest of the UK network.

Q64 Chair: You say it would take a lot. Do you not feel you should be doing it?

Jonathan Millidge: Not at the moment. We have not had any discussions with Government either in Westminster or in Holyrood on what might happen on this. The Scottish people will have their vote in 2014 and at that point there might be a bit more clarity once legislators and Governments have determined how they would want a postal service to operate in an independent Scotland.

Q65 Chair: I personally find that quite astonishing. This is a huge business of crucial significance to the people in the UK and in Scotland in particular. Do you not feel that there should be rather more preparatory planning given the fact that the referendum is going to happen?

Jonathan Millidge: As you say, the referendum will happen and there will then be decisions by Governments as to how they want to provide postal services. So what could Royal Mail do in the short term other than try to anticipate what the respective Governments would wish to provide by way of a postal service within an independent Scotland? There is a whole range of different options that could be put in place. It is not for Royal Mail to second guess what an independent Government might want to do.

Q66 Chair: It may not be but it would be reasonable for Royal Mail to list the options for the Government.

Jonathan Millidge: If we are asked by the Government to look at the options then of course we will have those discussions with them at the time.

Q67 Chair: Do you not think you should have them anyway?

Jonathan Millidge: As I said, I think it is up to legislators in the potential independent Government to decide what service it is and how they would like to offer it. Of course we will participate in discussions on that.

Chair: I have probably laboured the point enough.

Q68 Caroline Dinenage: Largely on that same point and continuing to Royal Mail, in a business situation if you were facing potentially massive change you would look at the potential facing you and you would work out your future strategy. Are you saying that you have not done that at all?

Jonathan Millidge: No. We have not had any discussions with the Government about what a postal service in an independent Scotland would look like.

Q69 Caroline Dinenage: Is that because you are anticipating that the vote will be no? Or is that because you are taking a lackadaisical attitude about how it is all going to pan out?

Jonathan Millidge: With respect I do not think it is either of those things. I have no view as to which way the referendum vote will go. It is not my place to take such a view. But there is a range of different options that would be available to a new independent Scotland and it is up to the legislators there to determine how it is that they would want to run a postal service within that independence.

Q70 Caroline Dinenage: Bearing in mind that Royal Mail are like to be privatised by 2014, should you not be setting out your stall and preparing a business case for how you might then potentially sell yourself to a future independent Scotland?

Jonathan Millidge: That is jumping the gun a bit into presuming an outcome of a referendum. At the moment we are waiting to see what happens on that. We will have discussions with the Government in Westminster and the Government in Holyrood, if there is a vote for independence, and we will make a decision then. It does not form part of our case around any future ownership of the company.

Q71 Katy Clark: Both Royal Mail and Post Office are UK entities and therefore organise their finances at that level. But can you give some indication of the financial health of both organisations in Scotland?

Jonathan Millidge: For Royal Mail we do not look at Scotland as a profit centre at all. We have an integrated network; we have the same obligations for delivering mail in Scotland as we do in the rest of the country. So we do not look at separating out the cost of Scotland because it is all integrated. There are networks that go between Scotland and England and Wales and Northern Ireland and so on and we do not disaggregate those. We have an obligation to deliver mail at a uniform price everywhere across the UK. We do not separate out the cost for Scotland in doing that.

Q72 Katy Clark: But you know the demographics and the terrain in Scotland are very different. For example, I represent a number of island communities and have a very rural constituency and we know that it must be more expensive to deliver mail in those kinds of environments. So even if you do not have the data, if you do not do the accounting in that way, could you inform the Committee of the general position regarding how Scotland compares and its financial health? For example, is it more expensive to provide services in Scotland?

Jonathan Millidge: We do not break down how much it costs to provide a service in the different parts of the UK. We do have a massive undertaking there. We have 10,000 post boxes in Scotland that we collect from, for example, and 6,174 delivery routes. It is true that it is more expensive to deliver in rural areas than it is to deliver in urban areas. There are massive rural areas in Wales, for example, and also in England and Northern Ireland. So I could not give you a breakdown of what it is in Scotland. We do deliver about three times as much mail in Scotland as is posted in Scotland. So Scotland is a net importer of mail and that mail obviously then is delivered throughout the 16 postcodes that make up Scotland. But I am afraid I cannot say what the profitability of Scotland is. The universal service obligation that we deliver costs us £6.7 billion across the UK and it is profitable and we deliver in Scotland as we do elsewhere in the UK. I am afraid we do not have a breakdown of much it costs to deliver mail within Scotland.

Q73 Katy Clark: For the services it is generally accepted-and indeed the Barnett formula demonstrates it-that Scotland is a more expensive place to provide services because of the large rural areas and the fact that it has such a considerable land mass. Do you think that will also be the case for Royal Mail?

Jonathan Millidge: I don’t know that formula. But clearly it is 30,000 square miles, so it is a big area; and rural areas in general are more expensive to deliver to than urban areas. But I am afraid I cannot help you on that formula. It is not one I am familiar with.

Q74 Chair: Paul, you wish to supplement that.

Paul Hook: Mike, did you wish to say something?

Mike Granville: With respect to Post Office Limited, the position is that similarly we integrated across the whole of the UK. In Scotland we have just over 1,400 post offices. Of the post offices in Scotland-this is a point Paul made earlier-about two thirds of them would be classed as rural; another 10% would be seen as urban-deprived; the others urban. In terms of our economics, clearly we have Government-support funding, £1.34 billion, which I am sure this Committee has looked at in the past. It is a combination of network-subsidy funding and investment funding. If you take the network-subsidy funding for 2011-2012, that was £180 million. Is it more costly to operate in Scotland? I think perhaps the way to look at it is that it stands to reason that small, rural offices are more costly to operate and Scotland has a high proportion of those than is the case in the rest of the UK. Similarly, as with Royal Mail, we do not separately account across different parts of the country.

Q75 Katy Clark: Would you be able after today to write to us with what information you do have on numbers of rural post offices and so on so we are working with accurate information?

Mike Granville: Absolutely. I can give you a breakdown of the post offices.

Paul Hook: We recently undertook a survey of our members and their income and we have just undertaken a Scottish cut of that data. I am happy to provide the Committee with that in writing. Some headlines there are that over the course of the last year, 4% of subpostmasters of Scotland said they had seen their pay increase, compared to 59% who said their overheads had increased and 39% who said their staff costs have increased. So they are operating in a very difficult environment. As a result, the pay that our subpostmasters in Scotland receive from Post Office Limited is just under £2000 a month from which they have to pay their outgoings. They have to pay their staff costs; they have to pay their utility bills, their rent and their rates. That results in average personal drawings-so, the money that is left for them to live on-for Scottish subpostmasters of £643 a month, equivalent to an employees’ gross annual income of £7,716 a month. Most worryingly within our survey, 25% of subpostmasters in Scotland said they took no salary, no income, at all, from their post office. So essentially they are living on income from an associated retail business; they are living on a partner’s income; or they are living on savings or pensions, and clearly that situation is not sustainable. I think it clearly demonstrates that the Post Office network in Scotland is currently operating under extreme pressure.

Q76 Chair: John, did you have anything?

John Brown: Yes. I was just going to say that I hope you received a submission that came from our research department.

Chair: Yes.

John Brown: We broke down the number of post offices for you. Points 30 and 31: we indicated that there were 1,425 post office branches in Scotland and that of those branches opened in 2012; 67.6% were in rural areas; 21% in urban areas; 10.5% in deprived urban areas. Obviously as a trade union we do not organise in all the post offices. We only organise in the Crown post offices. Most of the other post offices are either individual franchises or are elements of other shops where it is very difficult for us to get (inaudible 12:14:19) cross-subsidisation in many of those offices. Also, a lot of those smaller post offices that operate as the delivery office for the rural areas. So there is a substantial amount of income coming to those subpostmasters from Royal Mail to help make sure the deliveries are made in those areas and those small post offices are not necessarily in massive outside rural areas. I can take you 10 miles from here and I can take you to three of them in the Blane Valley, in the G63 postcode area.

Q77 Chair: Can I just pick up a point that Jonathan made earlier? I am not sure if I have the figures exactly right. I think you said that basically Scotland was a huge net exporter of deliveries rather than an importer of deliveries.

Jonathan Millidge: Net importer. They deliver three times as much mail in Scotland as is posted in Scotland.

Q78 Chair: Yes. So superficially that would seem to me to mean that the cost that would be associated with the delivery would be disproportionately high and the income associated with exporting the mail would be relatively low. Am I right in saying that compared to the rest of the UK, the service is disproportionately expensive?

Jonathan Millidge: What that figure tells you is that big businesses would typically print the mail that they want distributing in Scotland elsewhere and it gets taken up to Scotland and delivered from there. We do not have a Scottish profit and loss account where the Scottish business looks at income and expenditure but whenever mail moves from one country to another country, say, mail moving from the UK to Ireland, you would look at having a negotiation with the Irish postal service about how much it would cost them to deliver the mail and we would pay them. The idea is that people receiving mail are not out of pocket from the fact that it has come from another country. They would charge that other country for the delivery of that mail.

Q79 Chair: Again, do you not think it would helpful to have some assessment of the profit and loss?

Jonathan Millidge: While we operate a universal service across the country I do not think it would give us any useful information to know how much it costs to deliver in one particular village versus how much it costs to deliver in another village.

Q80 Chair: I am talking about collectively, not village by village.

Jonathan Millidge: Again, at the moment it would not provide us with any useful information. Were there to be a vote in favour of independence and there to be a change in the arrangement, then that would be worth looking at and the appropriate discussions would take place at that time.

Q81 Katy Clark: I want to ask about the universal service obligation. Both the CWU and Consumer Futures have highlighted uncertainty over the status of the universal service obligation. Given that the contrast between urban and rural areas in Scotland and the fact that demographically more people live in rural areas and they have a very large land mass, is the universal service obligation financially viable for an independent Scotland or would a great deal more subsidy be required?

Jonathan Millidge: That would be a decision for a future Scottish Government but it does raise a lot of problems and a lot of concerns. Just following on from what we heard earlier, if an independent Scotland stayed within the European Union the requisites are that if a universal service is affordable, it is efficient and cost reflective. So therefore at the moment cost reflectivity is looked at as a UK-wide concept. If Scotland were to part from the rest of the UK, then clearly it would need to be looked at purely in Scotland. If some of the concerns that I am hearing from the Committee around the rural nature of Scotland and the cost and the worries about that were to be borne out, then clearly post could become substantially more expensive in Scotland. That in turn would trigger the already declining mail volumes and so the thing is a bit of a spiral. The less people use post, the price goes up. In some of the areas where there is not the broadband penetration that there is in other parts, these people become more and more disadvantaged. Then an independent Scotland would have to think about the quality of service and how they would interpret the European requirements regarding the universal service. Would we stay with the five days and six days for letters? Or would they try to reduce that? Certainly our own research shows broadly that consumers are up for change in terms of what is in the universal service but I have to stress that it is the rural areas that are most affected, that are most dependent on the mail and indeed on post offices. So those are the danger areas.

Q82 Katy Clark: Would you not change?

Jonathan Millidge: A lot of us do not rely on the mail the way that we used to. We use mobile phones; we use emails and social media for our communications. So the letters part of mail is a shrinking pot and that has been going on for years. But what we are relying upon is because we are using the internet more, we are buying things more over the internet. So the mail, the letters, is declining; but the parcels side of it is the growth area. Royal Mail’s own accounts this year showed that is up; the revenue is up; the volumes are up. Our own research in Scotland has shown that that is a growth area.

Q83 Katy Clark: I assure you that I think that if there is any reduction in service there would be outrage in my constituency anyway.

But given that most people want the universal service obligation to continue the way it is, as far as I am aware, is there any further point that anyone else on the panel would want to make in relation to how you could do that in an independent Scotland, given that there are different demographics?

John Brown: May I just add that it is not just rural areas that could seriously suffer if the USO was attacked in any way, shape or form. I am talking about major urban areas across our major cities where quite clearly if there was no USO then there would be lots of those areas that would be lucky if they were getting mail once a week. An example that you saw in London not far away when one of the competitors, TNT, was trying to deliver mail once or twice, three times a week, whatever it was, it shows what can happen in those areas. It is not just a concern particularly for the CWU of the rural areas, it is the major urban areas as well. The majority of the research, and the majority of information that is coming out of the EU is that if there is a minimum standard of five days a week, if Scotland were independent and were allowed to become a member of the European Union, then the indication is that they would expect Scotland to provide that five-day a week service and extrapolating from some of the very little information that is about, then postage costs in Scotland would be quite substantial. Of course that affects all of the online purchases immediately and once again the reflection between the rural and the urban, those are the areas that use the online services most of all, where they have access to broadband, and they would suffer terribly. There are practical examples out there of companies refusing to deliver to Scottish islands and to areas in the Highlands of Scotland and the Lowlands and the Borders. So it is a major worry for Consumer Scotland, and I am sure for Royal Mail, certainly for the Subpostmasters Federation and most particularly for us, the CWU, because it would affect the jobs of our members.

Trisha McCauley: One of the things that we would expect the Scottish Government to do is to do whatever it can to make sure that the people we have just spoken about who are going to be picking up the burden of any increased costs and any upward pressure on prices and are going to be the people who are in these communities who are the most disadvantaged, and to look at different ways of sustaining this absolutely critical lifeline service and not to just let it be an upward pressure of prices on vulnerable consumers. An independent Scotland with fiscal autonomy would be able to look at different ways of sustaining these communities and of sustaining the service in these communities. So we would expect it to be very, very clear about protecting vulnerable communities and vulnerable consumers in them and to look at other ways of using the other income it has under its control to help sustain these communities.

Q84 Paul Blomfield: A brief follow-up on that discussion that takes us back to the discussion with the first panel: how far do we need to have some certainty over Scotland’s future status in the European Union to resolve the questions in relation to the universal service obligation? I would welcome your views on that.

Trisha McCauley: European law is going to heavily influence branches of all this conversation in terms of the scope and the scale of the universal service obligation and whether Scotland sits within the EU will make a critical difference to this. So yes, I think certainty over that position would help.

Q85 Chair: Any other views?

Robert Hammond: I would agree totally with what Tricia was saying. I would also say that certainty within the UK as far our position vis à vis the EU would clearly help as well. They make a lot of fuss about the organisation of the Royal Mail and the Post Office because that is an element of the doubt as well and irrespective of the vote in 2014, if we have a vote in 2015 or 2017, whatever it could be, that would have a major impact upon the services that are provided by our members across Scotland and across the UK.

Q86 Ann McKechin: In your evidence, John, the CWU state the financial position of the post office network in Scotland is precarious and I think probably Paul’s evidence has confirmed the problems, particularly in the rural areas and in deprived urban areas. I wonder what would need to change if a Scottish Government was independent. What would it need to change? Would it have to give far more money to maintain a similar level of service that we enjoy now? How would we deal with issues about computer systems, which are currently used in common across the post office network, particularly if there is a different currency, which would obviously be a huge complication? Obviously the Post Office has just announced that it is intending to open bank accounts to its customers. How do you think that could be maintained if Scotland became independent and you had post office customers that you have attracted through the door with bank accounts and then you found the deal was not there? I wonder what people’s views are about the current level of service.

John Brown: Personally I think that if Scotland were to become independent then it would be incumbent upon that Scottish Government to make sure that far more government services were rolled into post offices because it would save, to a great extent, having to make a bigger financial contribution because if they gave that freedom for government services and local government services and also gave freedom to some extent for co-sharing and coterminous type buildings, then that would probably help both local authorities and the post office to ensure they continue.

Q87 Ann McKechin: Has there been much evidence of that kind so far?

John Brown: There does not seem to be too much evidence of that just now. Maybe it is just because we have been thinking outside the box and that the Federation have been thinking outside the box but Governments have not yet followed down that line. Or perhaps it is too difficult. But nobody has ever told us it is difficult, but it is certainly something that we would love to see investigated. Following on from that, broadband provision in post offices would be really helpful to a lot of people because there would be professional assistance from the staff in that post office. We have seen so many surveys just now saying that people are scared of using computers and everything else because they have never done it before. They do not know how to do it or they are scared of it or quite simply they are frightened by technology. By siting those types of elements in post offices and some of the smaller sorting offices in Royal Mail’s possession then there would be professional assistance to help people access those services. More and more things are going online. One of the other departments in the UK Government has decided that everybody who wants to apply for benefits must apply in future online, which is going to have a knock-on effect on post offices. So that is the type of development that we would love to see.

Trisha McCauley: There is a lot of consumer appetite for that. Research that we have done shows a lot of appetite in Scotland for more frontline Government services in post offices.

Q88 Ann McKechin: But that would require a substantial investment to deliver that, presumably, at the start.

Trisha McCauley: Yes.

Paul Hook: Just on that substantial investment point, I do not think that is the case, with respect, Ann, necessarily. I think some of it is just about encouraging it and enabling it to happen. Post Office Limited undertook a trial that we were involved in as well, together with Sheffield City Council, looking at making more council services available through the city’s post offices. The city council closed down its cash centre. As a result they saved £250,000 a year. Sheffield’s post office is more financially sustainable as a result because they have more customers coming in through the door in a local and more convenient environment than having to trek into the city centre to use the cash office. I think some of it is just about joining things up and making it happen.

Ann McKechin: The will to do it.

Paul Hook: That’s right.

Ann McKechin: Thanks. Mike?

Mike Granville: Just on the particular point around front-office for Government-type services, that is something that the Post office is working hard to seek to develop. Again, members of the Committee will be aware of the DVLA contract that was won recently. This was clearly a UK Government position, but that is a free work contract and it does create the ability for other government departments to utilise the same contractual mechanism to go forward. We are talking to councils. Sheffield is a great example of where work has been done. We have been talking to councils up, down and across the UK.

I think though specifically the point you were asking around the interconnectedness of the business: yes, we are connected across the whole of the UK. Probably the way perhaps the way to look at it is that the framework within which we operate is that Post Office Limited is a separate company driven by the 2011 Postal Services Act. It was set up as a company in the public sector as part of the Postal Services Act. It has accessibility criteria, which apply across the whole of the UK, that have been determined by UK Government, originally a Labour administration and the Coalition Government has taken that forward. There is funding from the UK Government, which we have already talked about. What we are doing at the moment is a plan that goes through to 2015, which is to both maintain post offices, grow Post Office business and to invest in post offices; to try to address some of the issues that have been talked about around future sustainability of post offices. So, all that work is under way; that is the plan and the activity that is under way, to maintain the size and importance of the network. The question of what happens to all those elements should there be a referendum vote that leads to a discussion on independence, that is something that would need to be talked about after the referendum. There are quite a few elements there that would need to be picked up.

Q89 Mr Walker: If that referendum vote did take place and did have the effect of creating an independent Scotland there would need to be a model for cross-border postal services. Is there an example elsewhere in Europe or in the world that you say works well and what would you see as the main challenges in developing a model for cross-border postal services?

Jonathan Millidge: There are lots of models for how cross-border services work. There are some standard processes that are governed under what is called the UPU, which is the Universal Postal Union, which is a branch of the United Nations. What that does is as countries are recognised it helps to facilitate mail services between them. There are different models that are then used for negotiating the cost of handing mail over. So if a letter is posted in England and it is going, say, to France, we in England get the money for the stamp, the 88p, and we will have a negotiation with France as to how much we will be paying them to deliver the mail on our behalf. That is a kind of standard model. There a lots of different ways in which it operates between different countries. Some of it is under a standard agreement, which is called REIMS. Some of it is under what are called bi-lateral agreements between different countries. We would pay different countries different levels dependent upon their cost of delivery. A lot would depend on the price, though, that the consumer paid for this. So for example, if you live in Northern Ireland and you want to send a letter by Royal Mail to the Republic, you pay the European rate, as if it is going to France, Germany or any other European country. The Republic of Ireland, however, has an all-Ireland rate whereby you pay exactly the same whether it is going to Northern Ireland or a different part of the Republic. That is something that I think would need to be very carefully looked at in Scotland because it has the potential of driving up the prices quite significantly. There are other arrangements between countries. I understand the Slovak and Czech Republics have an agreement. I understand some of the Benelux countries and the Nordic countries also have arrangements in place. But what we have at the moment is it looks as if Royal Mail would want to charge the European rate for post to come to Scotland. Scotland is a net importer of post; that could have quite a serious effect on the volumes and revenue that derives.

Jonathan Millidge: Can I just clarify? Royal Mail has not said that we would be charging European rates for post coming to Scotland.

Robert Hammond: No, you haven’t. I am just saying if you followed the model that you use for Northern Ireland-and I take your point; if you did that-that is the effect it would have.

Q90 Mr Walker: In your written evidence on the Irish situation you pointed out that as a result there are a lot of people crossing the border to post letters. Presumably that would have quite a big knock-on effect on the sustainability of border post offices, on the Scottish side of the border.

Paul Hook: Yes. In the Northern Ireland instance, I was talking to one of our members, a subpostmaster in Crossmaglen, obviously just on the UK side of the border with the Republic, about this situation, which Consumer Futures described in the written submission. I think from his perspective it is very much a case of swings and roundabouts. I think it is quite inconvenient from a customer perspective, having to cross the border in order to undertake certain transactions more cheaply than others. But from the subpostmaster’s perspective, what he loses out on in terms of people in Northern Ireland going across the border to the south to post, he gains by people from the south coming north to his post office to post to Great Britain. Therefore there is no reason to believe that a situation between Scotland and the rest of the UK would automatically be any different.

Mr Walker: Although if you end up with a different pricing structure-

Paul Hook: Yes. But if there was a real determination on both sides to address those issues in advance, then that need not be the case.

Q91 Mr Walker: But how would you suggest they go about addressing those issues?

Paul Hook: I could not aspire to such negotiations. I don’t know.

Q92 Mr Walker: Does anyone want to make any suggestions for if there is a cross-border, how do you avoid that divergence in terms of pricing, in terms of encouraging customers to game the system? Are there any mechanisms for doing that?

Robert Hammond: I think if you have a uniform rate, quite honestly, our research in Northern Ireland found that a lot of people did not have a clue how much the postage was when they were sending things to the Republic, and indeed most of the time they were sticking on an ordinary first class stamp thinking that would suffice and I dare say in many cases it does suffice and the mail gets there. But I think if you do have a uniform rate it cuts out all that uncertainty that could exist where traditionally you have just had a one-price-goes-anywhere system. So that would be my recommendation.

Q93 Mr Walker: Royal Mail, you said, you have to wait and see the outcome of any referendum before you can answer this, but given the point that Caroline mentioned that there are plans for Royal Mail to be given access to private sector funding over the coming years and given the political differences north of the border and south of the border potentially, have you looked at the possibility that you could end up with the Royal Mail being renationalised in an independent Scotland, while a private company is in existence south of the border?

Robert Hammond: No, we have not looked at that. We are going through the process at the moment of getting capital into the company. But no, we have not looked at the possibility of renationalisation.

John Brown: I do think in answer to the point that had been raised earlier that there is a possibility for a universal service price if Scotland were to become independent and they were to ask Royal Mail to be the franchisee to deliver the service. That would be something that governments would have to negotiate and sort something out about. But if the will was there to deliver, it could be delivered, but Royal Mail would ask a heavy price of the Scottish Government to franchise the service, given the quite clear variants there are between deliveries in Scotland and deliveries in the rest of the UK. Even though there are large rural areas in Northern Ireland and Wales and in the south west of England, Scotland does have the majority of them and I think there would be a heavier price. But there is a possibility there. People will have to think imaginatively, I suspect. It is just surprising that a company like Royal Mail has not at least made some provisional movements towards Scottish Government to talk about what could possibly happen given that there is the best part of 12,000 staff employed by Royal Mail in Scotland, close to 11,000 of whom we organise. I have talked about that, but c’est la vie.

Trisha McCauley: One thing that may help all the issues we have talked about is if the Scottish Government thought about maintaining a single market. I don’t know what their thoughts are in terms of post, but they have already been quite clear publicly that with regard to energy, that is what they plan to do. They will obviously have to negotiate that with the UK Government and the devil of that will be in the detail as to how regulation would work and how that whole system would work across the UK. But it could be something that they may be considering in terms of post.

Q94 Mike Crockart: Westminster at the moment is looking at a Pensions Bill and my question is about the pensions implications of Royal Mail and Post Office in the event of independence. If Post Office and Royal Mail did become separate organisations in Scotland, what is your view of where the pension liabilities would lie for those, because there would be significant pension liabilities for significant numbers of staff? What would the implications be for that?

Jonathan Millidge: At the moment our pension scheme is fully funded. Last year the UK Government took on the historic liabilities and assets that were in the scheme. So all of the service up until 31 March 2012 is backed by the Government. Then there is the Royal Mail Pension Plan, which covers the costs of service being built up going forward. That is fully funded so I do not see any big complications arising from that scheme.

Mike Granville: The Post Office situation is very similar in terms of historic position and the implementation of the Postal Services Act. The position up to April 2012 is the same as Royal Mail. Going forward the Post Office scheme is a separate scheme linked to the Royal Mail plan. So it is exactly the same situation.

Q95 Mike Crockart: So no worries, no concerns? Is that the position of the CWU?

John Brown: I would certainly not agree to that.

Mike Crockart: I didn’t think you would!

John Brown: Of course a lot of that would be subject to any negotiations but quite clearly if you have a separate Post Office and separate Royal Mail bucket, whatever you wish to call it, Scottish Mail, whatever else, post-referendum, if favourable, there would be serious knock-on issues for our membership. Not just for the members just now but those who have retired; those who have taken retirement in the last few years, whose life could be seriously affected if the pensions do not continue as is. We are awaiting and looking forward to seeing the Scottish Government Yes Scotland campaign come out with some definitive answers on the questions you have on pensions because there are not just people from our industry but people from lots of industries whose pensions are usually late and who are seriously looking for answers from the Scottish Government on this and what their future provision is on it and in many cases that will decide how they cast their vote. But we need to know and we need to know (inaudible 12:43:39) what their proposals are if Scotland were to be separate insofar as the pensions of our existing and current pensioner members are. There are probably in the region of 4,000 to 5,000, maybe even more, retired Royal Mail and Post Office people who currently benefit from the Royal Mail pension plan and former Post Office pension plan. So it is not just the live members just now, it is the members out there and I can tell you my retired members’ committee just last month were getting rather uppity about it because they were not any answers from anywhere.

Q96 Mike Crockart: What discussions have you had with the Scottish Government on the management of Royal Mail or Post Office?

John Brown: Scottish Government have said they are amenable to talks but they have not made any connection yet at all to talks about it. We would love to sit down with them and find out what their plans are. Likewise Yes Scotland and likewise the Better Together Campaign as well because if the vote is no, we need to know what the provisions and proposals are in the future for Scotland, whether it is privatising in Royal Mail’s case; how Post Office is going to continue; and what type of services are going to continue post 2015, the next Westminster election and beyond that.

Q97 Chair: I think that concludes our questions. Can I thank everybody and repeat what I have said to the previous panellists? If you feel that you wish to add anything to the answers that you have given already, please submit them in supplementary written evidence. Equally, if we feel there are questions arising out of the evidence that you have given us that we would require further clarification on, then we will write to you and hope for a response

Thank you very much. That has been incredibly helpful. Thank you.

Prepared 25th June 2013