Old assumptions about the value of projects and industries to Scotland are under scrutiny.
A case in point is the Scotch whisky industry, a hallowed presence in the Scottish business landscape. Perhaps anticipating closer examination after being dragged into the political context at January's referendum launch by the First Minister, last Wednesday the industry's 100-year-old trade body, the Scotch Whisky Association (SWA), published a report Scotch Whisky – The Jobs, The People. It highlights the range of skills and training opportunities that whisky provides from the Northern Isles to the industrial estates of the central belt.
But the success of the industry is not beyond question. Although there have been breakthroughs, particularly in the BRIC markets, the volume of sales of whisky – a better gauge of success than sterling value – have grown sluggishly at best in recent decades, and in 2010 (the last year fully-reported by the SWA) declined (by 2%) for the third year in a row.
Growth has been dramatically outpaced not only by rival spirits such as vodka (see graph), but by comparable whiskies from around the world. Recorded jobs in the industry actually decreased in 2010, by 6%. And oddly for a product that, by definition, plans for the long-term production actually decreased in 2010 by 29 million litres.
"There are two big questions about the whisky industry in Scotland that need to be answered," according to John Kay, the UK's most influential business economist, and a former member of the Scottish Government's Council of Economic Advisers.
"One is how well is this industry actually doing and the other is how much does it contribute to the Scottish economy. I suspect the answer to the second is very little. There needs to be a proper debate about this, not just the usual self-congratulation to which we Scots are prone."
In a chapter in a recent book Scotland's Economic Future (ed. Sir Donald Mackay), Professor Kay, currently leading the Kay Review of equity markets for Business Secretary Vince Cable, writes: "Value added from Scotch whisky is reported as around £3 billion – about 2.5% of Scottish GDP – but this figure reflects essentially arbitrary transfer prices and export valuations. Wages and salaries and purchases of goods and services used in whisky production amount to only about £400 million. To this should be added the returns to beneficial Scottish ownership of whisky-related assets. With retail sales of whisky around the world totally perhaps £25bn, the Scottish economy appears to derive modest benefit from its most famous product."
Although others believe Kay's £400m figure is too low, his claim that only 2% of the global sales value of whisky ends up in Scottish pockets is an arresting one, especially as First Minister Alex Salmond hints that the export value of Scotch will be a strong bargaining chip with a post-independence UK.
But more than 80% of the whisky distilled in Scotland is foreign-owned (see graph), and the value of the vast majority of leading brands accrues overseas, from the Caribbean, to Paris, to Tokyo. Whether or not it is "Scotland's oil", it is mostly not Scotland's whisky.
The figure that counts, Kay argues, is not a global gross value added one (GVA) but "GNI" – gross national income. This number would combine the earnings of those who work in the industry, plus Scotland's negligible pro-rata share of UK corporation tax on profits on whisky (the big companies avoid paying much of it), plus the dividends and retained earnings of multinational drinks producers accruing to residents of Scotland. No such figure for the whisky industry has been produced.
The industry can point to whisky's relentless conquest of new markets (it sells in 200 countries); also its incalculable value to "brand Scotland". According to new SWA figures, 2010 saw big increases in sales to important new markets like Russia (volumes up 63%), China ( 23%), India (up 40%), and Brazil (18%). Global volume figures appear to be substantially up for 2011, and last week Diageo, owner of Johnnie Walker and many other iconic brands, announced that volume growth in Scotch was up by 8% and net sales up of 14%.
Such increases attest to the talents of whisky's global marketers and logisticians, plus the skills of the SWA's brand protection and protectionism-busting operations in Edinburgh.
To disprove Kay's point that the GVA of Scotch (£3.9bn according to a recent Verso Economics report) has "no significance whatever from the point of view of the Scottish economy" and to make a case for whisky's future contribution to an independent Scotland requires more clarity about the amount of tax paid by the multinational booze behemoths. But Scottish ministers appear to have no more idea as to how the economics of whisky would actually help independent Scotland than anyone else.
Diageo for example, does not "split out corporation tax geographically". The company claims to pay £1.1bn in taxes though because of "commercial confidentiality" it is cagey about what they are, and what proportion represents Scotch and other categories.
Only semi-jokingly, Kay suggests that, like Sheikh Yamani in the 1970s, Scotland should wise up to the fact that "lots of governments are making lots of money out of whisky – just not ours".
AS the Saudis realised with oil, clawing back from foreign owners even a small proportion of the value of a golden goose-industry through increased export tax (others have suggested a tax on water for whisky) is a game-changer. Such suggestions horrify CBI Scotland as much as it does the SWA, and Secretary of State for Scotland Michael Moore points out that whisky, "much as I would wish it otherwise", is not an essential commodity like oil, and has less price elasticity.
Richard Marsh, of economic analysts 4-consulting, is far more bullish than Kay about the benefits of Scotch to Scotland, and authored a report for the SWA. Like that body, he argues that the £25bn global figure represents worldwide retail mark-ups that are beyond the control of producers themselves. By his calculation the total annual taxes paid by the industry in Scotland are £282m, which at 6.5% of turnover, is four times the Scottish average.
He also points out that average wages in the whisky industry are around £43,000 compared to the Scottish average of £21,000. If true (there is some dispute), this is an impressively high figure given the industry's blue-collar component.
Marsh also thinks the industry is already taxed disproportionately to the rest of the private sector; to generate extra taxes to boost the national exchequer would be a bad move, regardless of big alcohol's ability to pay.
"Many of these whisky businesses were sold to foreign companies openly for a good price on the market. It seems slightly churlish that once the money is in our pockets we begin to change the rules of the game because we now think we shouldn't have sold out."
Marsh also makes the point that the global success of the industry is largely due to the multinational reach and barrier-busting capacity of the drinks giants. Even if native ownership is relatively small, Scotland relies on the branded consumer goods way of doing business, with its logistical muscle and economies of scale, to grow the Scotch pie worldwide.
"It's very hard to see how Scotch whisky could have advanced as well as it did without [multinational companies] being involved," Marsh says. This benign view of the international drinks giants is not shared by Donnie Blair, a former head of strategic affairs for Diageo, and an established critic of the performance of the industry and its cost in uncreated jobs. Asserting that 40,000 extra Scottish jobs should have been created in a better-run industry, his forensic analysis of whisky as "a great Scottish success story" is largely backed by Professor Kay.
"Sadly only the word 'story' in that phrase is true. The industry is neither Scottish nor a success," he says.
Analysing SWA statistics, Blair is incensed at what he sees as spin and complacency, as well as the disengagement of well-paid civil servants with responsibility for drinks exports. His collection of fob-off letters supports his case.
The SWA is a Rolls Royce operation but its priorities are not interchangeable with Scotland's. Membership is dominated by multinational giants for whom whisky is one category among many, and which are answerable primarily to shareholders, mostly outside the UK,
WHEN interviewed by the Sunday Herald, neither Cabinet Secretary responsible for food and drink Richard Lochhead nor Michael Moore appeared aware that full-year export results for the year 2010 showed that global volumes of Scotch fell by almost 1.9m cases in 2010, a cumulative decline of almost 7%, over 6.8m cases, since 2007. Both politicians pointed to increases in the value of sales increases, which although undoubtedly real growth, are seen by many in the industry – also John Kay – as a less reliable indicator of performance due to the effects of inflation and foreign exchange fluctuations
Global GDP has grown 10 times faster than the number of bottles of Scotch sold worldwide, despite Scotch's appeal to the new middle classes. Meanwhile non Scotch-whiskies such as Irish, bourbon, Canadian and Japanese, have grown 26 times faster.
Blair does not trust multinationals, with more profitable spirits in their portfolios to maximize Scotch for the benefit of Scotland, and is unmoved by statistics about millions invested in new distilleries and other plant – £1bn in four years according to the SWA.
"Investments in Scotland are always presented as some kind of favour or gift to the Scottish people," Blair says. "In fact they are a normal cost of doing business, designed to generate even greater profits from Scotch. What we don't know is if these profits are re-invested in promoting Scotch whisky so that it catches up with rival categories. They could go to promoting more spirits that are easier and cheaper to produce, like vodka, gin and rum."
Blair, who quotes Burns's "facts are chiels that winna ding and canna be disputed", has been accused of making criticisms without offering solutions. It is a fair point, but not quite an answer to the comparative underperformance of Scotland's spirit. Now, with the debate on the nation's future underway, scrutiny of the contribution that whisky does actually bring to Scotland's economy is fair game for detailed and disinterested analysis.