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The UK hasn't shown the will for consensual Brexit

By John Simpson

The Scottish Government has consistently argued that, even if the UK Government has decided to withdraw from the EU, Scottish interests should be protected by finding a mechanism for Scotland to remain within the European Single Market. The Scottish Government drafted and published a compromise scheme to allow this to happen.

The critical starting point is a belief in Scotland that a UK Brexit will seriously damage the Scottish economy.

Last autumn, the Scottish Government published a detailed assessment of the options. At that time, the Scottish Government's first choice was that the UK would negotiate to remain in the single market and customs union in what would have been a 'soft Brexit'. As a second best option, the Scottish Government suggested a model of how Scottish interests might be protected if the UK adopted a more radical Brexit negotiating stance. That has, in Scottish Government eyes, now happened.

In an effort to protect the continuing political entity of the UK, the Scots offered a compromise that introduced differentiated EU-type policies applying specifically to Scotland, or Scotland and any of the other devolved nations that took up the suggestion, such as Northern Ireland and Gibraltar.

As recent UK events have confirmed, the Scottish differentiated option has not been discussed with the UK. The absence of a serious discussion of the differential ideas (even to show that they might be impractical) has now provoked the ambition for another Scottish referendum.

The Scottish compromise was an attempt to pre-empt the disagreement which has now emerged. The ideas possibly merited greater attention than they have been given either in London or Belfast. Even if the differentiated proposals remain 'off the table', there are aspects which will be quoted in the months of negotiations that have now commenced.

The Scottish proposals centred on arrangements to give a defined geographical region which is part of a larger state, such as Scotland in the UK, a deal which allows that region to have differentiated status linked to the EU.

The deal would embrace large parts of the EU acquis on social policy but, particularly for the Brexit negotiations, would avoid the damaging effects on the trading relationships of falling outside the customs union and the single market.

Central to the Scottish proposals was the expectation that the existing arrangements for the European Economic Area (the EEA) would be adapted to allow Scotland (and/or possibly Northern Ireland), as sub-national units to be accepted as being within the EEA and therefore competent to be allowed to trade in goods and services as a member of the EEA, as already happens for Norway and Iceland. Scotland could, therefore, remain within the EU Single Market although falling outside the customs union.

There would need to be a special international agreement that the EEA could operate on this differentiated basis. The Scottish model would also open the way for other areas such as the Faroe Islands and Greenland, normally linked to Denmark.

The Scottish proposal depended critically on a revised understanding of the scope of the EEA and also on the Scottish conclusion that the proposed arrangement could function without also creating a customs frontier within the UK, between Scotland and England since that frontier could potentially destroy the existing internal single market economic advantages of unfettered trade and payments systems within the UK. The avoidance of an internal economic border within the UK is a critical unproven assumption.

The bid for a second Scottish referendum is a consequence of the failure to reassure the Scottish National Party that the Brexit negotiations would keep Scotland within the larger EU single market. If there was a 'will' by the UK Government to find a mechanism to apply the EEA model then the Brexit negotiations might be more consensual. Now, a one-UK less flexible approach has been accepted.

Company report: Mutual Energy

Mutual Energy is a ‘not for profit’ mutual organisation with a number of individual members. Mutual Energy Ltd owns three key parts of the Northern Ireland energy infrastructure: (i) the Moyle electricity inter-connector from Islandmagee to Scotland, (ii) the natural gas pipeline from Scotland to Ballylumford, and (iii) the natural gas transmission pipelines to Belfast from Ballylumford.

The financial performance of Mutual Energy is heavily dependent on the functioning of the Moyle interconnector. For most of 2015-16, the interconnector was working at reduced capacity whilst a major repair to restore full capacity was completed in January 2016. Unhappily, a new major fault has recently caused the inter-connector to reduce capacity to 250mw.

Of the total group revenue of £68.1m, £34.6m was earned by the Moyle inter-connector, £26.4m was attributed to the natural gas pipeline to Scotland and £7.1m was attributed to the Belfast area gas pipelines.

The operating and pre-tax profits of the group were seriously affected by the financial impact of extra costs and impairment charges linked to the Moyle inter-connector. An overall pre-tax loss of nearly £42m emerged after unusual charges of £58m were brought into the accounts. These converted an operating profit into a pre-tax loss. The overall performance was also eased by the effect of the support arrangement agreed by the Regulator which added over £12m to the Moyle revenue.

The large impairment losses of over £55m taken into the accounts were a consequence of a decision to reduce the estimated useful economic life of the interconnector down from 40 years to 30. Because the contracts to operate the physical assets give assurance on the continuing flow of revenue and, in part, with certain guarantees of funding to meet any losses by passing on possible extra costs to electricity customers, the subsidiary companies are able to borrow funds at keen modest interest rates. Mutual Energy points out that these lower finance charges represent a significant benefit to NI consumers.

The largest expenditure item each year is interest on borrowed capital. In the year to March 2016, interest costs were £14.3m.

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